What is Subscribed Share Capital?
Subscribed Capital or Subscribed Share is the share capital that the investors promise to invest when they are issued. When the company issue a new share to raise fund, they have to find investors who are willing to purchase the share. However, subscribed share capital is the shares that investors are waiting to buy, the company does not need to find investors to buy.
Subscribed shares are the sharing part of an Initial Public Offering (IPO). It is mostly the institutional investors who are willing to purchase the share the moment they go public. The company receives the application form in which investors promise to purchase the shares. It means the investors are interested in company shares.
It is very challenging for the company to find investors before going public. If the IPO is not going as planned, it will impact the whole company’s valuation. It may even become a disaster when the share price falls below the expected value. Most companies will look for potential investors and sign a deal with them. It will make sure all the shares will be purchased by those investors at a contract price. The market will determine the share price in the secondary market.
The institutional investors or whale will purchase a huge share before they are released to the public. They look for the potential company and purchase the share then sell them back to the public after IPO.
Subscribed Share Capital Example
Company ABC has 1,000,000 authorized common shares with a par value of $1. The company already issue 400,000 shares to the market, the remaining 600,000 shares classified as treasury shares.
During the year, company receives an application form from a bank and an institutional investor who is willing to purchase the remaining share. The total number of shares that investors will purchase up to 800,000 shares which are more than the treasury share the company has.
Subscribed Share Capital = 800,000 share x $1 = $ 800,000
Accounting Entry for Subscribed Share
In real life, some investors sign the contract and pay a down payment to show commitment toward the company. It is called the share subscription contract which investors promise to pay the full amount within a set of times.
For example, Company XYZ signs a contract to sell 100,000 shares with a par value of $1 for $5 per share. The investor promise to pay the full amount within 2 months. On the signing date, the investor pays $ 200,000 as the down payment.
| Accounts | Debit | Credit |
|---|---|---|
| Cash | 200,000 | |
| Subscription Receivable | 300,000 | |
| Common Stock Subscribed | 100,000 | |
| Paid In Capital | 400,000 |
The transaction will record cash $ 200,000 which the investors already make payment. Subscription receivable will present as current assets on balance, it will increase by $ 300,000.
The common stock subscribed is the equity component on balance sheet. It represents the amount of stock that has not yet been issued but has already been subscribed by the investors.
The common stock subscribed balance will transfer to common stock when the investor paid the full amount.
When the investors pay for the remaining balance, the company needs to record cash and eliminate the subscription receivable.
The journal entry is debiting cash $ 300,000 and credit subscription receivable.
| Accounts | Debit | Credit |
|---|---|---|
| Cash | 300,000 | |
| Subscription Receivable | 300,000 |
Cash will increase $ 300,000 as the investors make the final payment. Subscription receivable will be decreased from balance sheet.
At the same time, company must move the subscribed common stock to the common stock account. The journal entry is debiting common stock subscribe and credit common stock.
| Accounts | Debit | Credit |
|---|---|---|
| Common Stock Subscribed | 300,000 | |
| Common Stock | 300,000 |
This transaction just makes a movement of equity items. Company needs to move common stock subscribed to normal stock as they already issued to the investors.
Unsubscribed Share Capital
Unsubscribed Share Capital is the number of shares that were not purchased ahead of the initial public offering (IPO). Opposite from the subscribe share, unsubscribed share will depend on the public to purchase at the initial release.
The share may be not really interesting, so it does not attract the institutional investors who usually buy the share prior to release. Moreover, the initial price may be too high which does not make sense for the big investors to purchase prior to release. They will wait for the price to drop in the market and buy if they want.
The company does not make the promotion to the initial investors before the public. They have strong confidence in the IPO which they bet on the market to determine the price. The company may be able to receive higher capital if the market has a high demand for the share.
On the other hand, the price may be lower than their expectation and they receive lower capital. The investors may not interested in their share which is the reason that big investors do not subscribe to the share.