Step 1: Understanding the Concept:
In a pro-rata allotment scenario, an applicant who applied for a larger number of shares is allotted a smaller number of shares.
Example: For every 5 shares applied, only 4 are allotted.
This results in "excess application money" because the applicant paid for 5 shares but only needs to pay for the 4 shares they actually received.
The company now holds this extra money. Instead of going through the administrative hassle and cost of issuing a refund cheque, the company typically retains this amount to cover future payments due from that same shareholder.
The "Share Capital" account only receives the money required for the specific stage (e.g., application stage). Anything above that is held in a temporary state for future use.
Step 2: Detailed Explanation:
The life cycle of a share payment usually follows this order: Application $\rightarrow$ Allotment $\rightarrow$ First Call $\rightarrow$ Final Call.
1. Allotment Money (C): This is the immediate next installment due after the application phase. Naturally, the company first applies the excess application money to satisfy the "Allotment" requirement of the allotted shares. This is the most "general" and primary adjustment made in accounting practice.
2. Final Call (A): If the excess money is so large that it covers the entire allotment money and there is still a surplus, that remaining surplus can be adjusted towards "Calls" (First Call or Final Call). However, this can only be done if the company's Articles of Association allow it or if the shareholder has consented. Without such a clause, the surplus after allotment must be refunded.
3. Share Capital (B): Application money is already moved to Share Capital. The question asks where the "excess" is shifted to. It is shifted to the Allotment account to reduce the shareholder's future debt.
4. Dividend (D): Dividends are payments made by the company to shareholders from profits. Application money is never adjusted towards dividends.
Step 3: Final Answer:
In pro-rata allotment, excess application money is generally adjusted towards Allotment Money, as it is the next consecutive payment due from the shareholder.