Meaning of Pro Rata Allotment
The word "pro rata," which comes from Latin and means "per the rate" or "proportionally," is usually used when somebody pays or fees a specific amount based on how much they have to do with a business or service. The pro rata allotment forfeiture and reissue are easy for figuring out short-term or partial profits and payouts, mainly if you only realise the final payment or fee.
Defining the Meaning of Pro-Rata Allotment
Share forfeiture: We all know that if a company doesn't pay its calls, this can lose its shares. Before the company can take away an investor's shares, it must give them a clear 14-day notice that the money owed plus interest is due. The shares will be lost if the money isn't paid by the date shown. When a company makes pro-rata allotments, it gives out the lost shares at face value or a higher price.
Forfeiture and Reissue of Shares Type
The entry for forfeiture of shares that have been given initially out on a pro-rata basis is identical to that for normal allotment. The only difference is that the forfeited shares account is credited with the application money obtained from pro-rata allottees based on the number of shares they applied for. The share allotment account is also credited with the sum not received from pro-rata allottees after adjusting allotment cash received in advance.
Share reissue: The company is selling shares the court has taken away. After shares are lost, the company has to get rid of them. For the company to re-issue lost shares, its Board Meeting must pass a resolution. Re-issuing lost shares is just another way for the company to sell shares. A firm does not give out these shares.
The situation of pro-rata-based forfeiture and reissue of shares type occurs:
Shares were lost and reissued at a discount when they were first issued at par.
If shares were first issued at par, they could be reissued at par or a premium.
Forfeited shares are reissued at par, at a discount, or at a premium after being first issued at a premium.
Forfeited shares initially sold at a discount were reissued at par, at a discount, and at a premium.
Examples of Pro Rata Allotment
Suppose anybody buys an insurance policy that is quoted at a specific price for a full year of coverage and only signs up for half a year. In that case, they will pay the insurance firm on a pro-rata rate basis, which would come out to half the entire policy. It would be because they only had coverage for half as many days as the total list price said they would. Whereas if the procedure costs INR 5000 for the whole year, the buyer will pay INR 2500 in insurance premiums based on how much time is left in the year.
Some shareholders may not be able to pay some or all of the payments, which can be allotment cash or call money. When this happens, the shares are forfeited. In this case, the firm can revoke the shares' allotment by forfeiting them.
After the shares are lost, the company can give them out again. This is called "re-issuing forfeited shares" or "re-issuing shares." For pro-rata allotment forfeiture and reissue, the company can put the shares up for auction and sell them. The shares can be reissued at any cost; a rule says the total money made from shares should not be below the share price held in arrears.
Practical Question Solved
On June 1st, 2018, Arihant Ltd. Co. issued 100,000 equity shares with a face value of 10 each at a 20% premium. Listed below are the terms of payment:
June 1st, 2018: On Application ₹2
July 1st, 2018: On Allotment including Premium ₹7
September 1st, 2018: On the First and final call ₹3
The company receives applications for 285000 shares. As such, it handles them as follows:
The entire 25000 share allocation is given to those who apply for it.
On a pro-rata basis, each applicant for 225,000 shares will get one for every three requested shares.
The requests for 35,000 shares are denied.
The company receives the total amount as it should. Make the appropriate entries in the journal.
Journal Entries in the Books of Arihant Ltd
Any time a pro-rata payment is needed, the way to figure it out is the same, even if the situation details differ. In accounting, this implies that income, expenses, assets, debts, and other things are split up among the group members fairly. A participant can be a person or a group. The Pro-rata term can be used in several situations, such as when a business is sold and the money is split among the common shareholders depending on how many shares each person owns.
FAQs on Pro Rata Allotment
1. When are shares allotted on a pro-rata basis?
If too many people want to sign up, the spots are given out on a pro-rata basis. Pro rata allotment means that shares are given in proportion to their value. When something is given to investors or stockholders on a pro-rata basis, it signifies that each individual gets a specific amount based on how much of the whole they made up. The pro rata allotment occurs when more shares are requested than are available and shares are distributed proportionally.
2. When would you utilise pro-rata?
For example, if you take as, if you own 15% of a building, you could be entitled to 15% of the rent collected from tenants. As seen above, salary or familiar places to use a pro-rata calculator. Yet, dividend payments, interest rates, and insurance premiums are only some of the financial scenarios that might benefit from these computations. Dividends are payments made to shareholders of a corporation that are directly proportional to the number of shares owned by the shareholder.
3. When to use pro-rata?
Pro rata can be used in several different ways. Some of the most common times when an individual or company might use pro rata are:
Dividends are cash payments made to stockholders of a company.
Figuring out the actual sum of an insurance policy's premium payment made in a partial insurance term.
Making monthly payments instead of yearly loan payments.
Costs are split between a particular group of individuals for a certain amount of time.