When the directors opt to make a proportionate allotment to all applicants, the excess application money received is normally adjusted towards the amount due on allotment. In case, the excess application money received is more than the amount due on allotment of shares, such excess amount may either be: 

Refunded or credited to calls in advance

The correct answer is option 2- Refunded or credited to calls in advance.

In case, the excess application money received is more than the amount due on allotment of shares, such excess amount may either be refunded or credited to calls in advance.

When the directors opt to make a proportionate allotment to all applicants (called ‘pro-rata’ allotment), the excess application money received is normally adjusted towards the amount due on allotment. In case, the excess application money received is more than the amount due on allotment of shares, such excess amount may either be refunded or credited to calls in advance. For example, in the event of applications for 20,000 shares being invited and those received are for 25,000 shares, it is decided to allot shares in the ratio of 4:5 to all applicants. It is a case of pro-rata allotment and the excess application money received on 5,000 shares would be adjusted towards the amount due on the allotment of 20,000 shares. In this case, the journal entries on application and allotment will be as follows-

1) Bank A/c Dr.
  To Share Application A/c
(Application money received on 25,000 shares @ Rs. _ per Share)

2) Share Application A/c Dr.
        To Share Capital A/c
        To Share Allotment A/c
        To Calls in advance A/c
        To Bank A/c
(Transfer of application money to share capital and the excess application money on 5,000 shares credited to share allotment account or refunded or credited to calls in advance account)