COMPANY ACCOUNTS PART 2

FORFEITURE AND REISSUE OF SHARES

Forfeiture of shares :

The shares allotted to a subscriber who has defaulted in paying any call due on his shares can be forfeited by decision of the Board of Directors if empowered by the articles of the company after giving due notice to the defaulting shareholders. This power of Board of Directors has to be applied bonafide and in the interest of the company.

Journal Entries for Forfeiture

Share Capital A/c                                                          Dr.

[No. of share forfeited '×' Amount called up per share]

To Calls in Arrear [total amount of dues not collected on forfeited shares] To Share Forfeiture A/c [amount collected on forfeited shares]

If forfeited shares are issued at a premium and such premium is not received then the entry should be :

Share Capital A/c	Dr.
Share Premium A/c	Dr.
To Calls-in-arrear A/c
To Share Forfeiture A/c

Re-Issue of forfeiture A/c – accounting entries.

1)

Bank A/c Dr. (Amount actually received)

Share Forfeiture A/c Dr. (Discount on Reissue) To Share Capital A/c (Face value of share)

2)        If balance of Share Forfeiture A/c exceeds discount on Reissue, the Balance should be treated as a Capital profit which is computed on follows :–

Amount forfeited × No. of shares reissued - Discount on No. of forfeited shares reissued.× no. of shares.

The Journal Entry will be :

1)	Share Forfeited A/c	Dr.
	To Capital Reserve

Note:

The forfeited amount on unissued shares will be shown in Balance Sheet as an addition to share capital.

Prorata Allotment

In case of over subscription the company can either reject the excess applications or make proportionate allotment to all applicants. The second case is called prorata allotment. The excess money received on application is adjusted against subsequent calls :

Entries

Share Application A/c                                                    Dr.

To Subsequent Calls A/c

Illustration 2 :

Kamnasib Ltd. issued 400000 equity shares of Rs. 10 each at a premium of Rs. 20 per share. The amounts were receivable as follows :

On	Capital	Premium	Total
	Rs.	Rs.	Rs.
Application	1	9	10
Allotment	2	8	10
Final call	7	3	10
	10	20	30

All members except Mr. Unfortunate paid the amounts due to allotment and call. Mr. Unfortunate who was allotted 300 shares failed to pay call money. His shares were forfeited after due compliance with law.

These shares were reissued to Hopeful at a price of Rs. 25 per share. You are asked to pass the journal entries on :–

(a)       Forfeiture

(b)       Reissue

Also show the presentation in balance sheet before and after forfeiture and after reissue.

Solution :

							Dr.		Cr.
							Rs.		Rs.
1)		Equity Share Capital (at Rs. 10/-).				Dr.	3,000
		Share Premium (at Rs. 3)				Dr.	900
		To Share Final Call (at Rs. 10)							3,000
		To	Forfeited Shares A/c.						900
		(Being forfeiture of 300 shares numbered... to... held
		by Unfortunate for non payment of final call of Rs.
		10, the amount received on capital account on
		application (Rs. 1) and allotment (Rs.2) being credited
		to Forfeited Shares A/c vide Board Resolution dt.)
2)		Bank.				Dr.	7,500
		Forfeited Shares				Dr.	900
		To Equity Share Capital							3,000
		”	Share Premium						900
		”	Capital Reserve						4,500

(Being reissue at Rs. 25 per share of 300 Equity Shares numbered to Hopeful vide board resolution dt....)

Extract from Balance Sheet (before forfeiture)

	Rs.	Rs.
Equity Share Capital
Issued : For cash
400000 Equity Shares of Rs. 10 each fully Called up.		40,00,000
Less : Calls-in-arrear		2,100
		39,97,900
Reserves and Surplus :	80,00,000
Share Premium.
Less : Calls in-arrear	900	79,99,100
Extract from balance sheet (after forfeiture)
	Rs.	Rs.
Equity Share Capital :
Issued : For Cash.
399700 Equity Shares of Rs. 10 each fully paid		39,97,000
Add : Forfeited shares.		900
		39,97,900

Reserve and surplus :
Share Premium.
As per last Balance Sheet.		79,99,100
	Rs.	Rs.
Extract from balance sheet (after reissue)
Equity Share Capital :
Issued : For cash.
400000 Equity Shares of Rs. 10 each fully paid.		40,00,000
Reserve and surplus :
Capital Reserve :
Profit on reissue of forfeited equity shares.		4,500
Share Premium :
As per last balance sheet.	7999100
Add : Received on reissue of
forfeited shares.	900	80,00,000
		80,04,500

Illustration 3 :

ABC Limited offered for public subscription 2,000 Equity shares of Rs. 100 each at a premium of Rs. 20 per share on the following terms :

(a)       Applications money to be paid before 30th June, 2000; Rs. 40 per share..

(b)       Allotment money to be paid before 20th September, 2000; Rs. 50 per share including Rs. 20 premium.

(c)        First and final call money to be paid before 31st December, 2000; Rs. 30 per share. Applications for 4,000 shares were received, the Company decided to :

(i)       Allot in full 200 shares to 4 applicants who had applied for the same.

(ii)      Reject the application for 1,400 shares applied for by persons suspected to be agents of a rival company

(iii)      Allot the balance number of shares proportionately, to the remaining applicants, and to apply the excess money paid towards the allotment money dues.

Ravi who had applied for 100 shares and who was allotted all the shares applied for could not pay allotment money. Ruby who was allotted 60 shares on the proportion basis could not pay the final call. After due notices all such shares were forfeited and reissued at a discount of 20% of the face value of the share of Mr. Reddy.

Pass the necessary journal entries to record the above transactions in the books of the Company.

Solution :

Working Notes :

1.  Issue of 2,000 equity shares of Rs. 100 each at Rs. 20 premium.

For application of Rs. 40
Amount received =		4000 × Rs. 40 = Rs. 1,60,000
Application		Allotment
200		200
1,400		Rejected
2,400	(4:3)	1,800
4,000		2,000

2.  For Allotment :
Refund of application		=	1,400 × Rs. 40		=	Rs. 56,000
Excess application amount			= 600 × Rs. 40		=	Rs. 24,000
Amount due	=	2,000 × Rs. 50		=	Rs. 1,00,000
Amount received :
				Rs.
Amount due				1,00,000
Less : Already received				24,000
				76,000
Less : Calls in arrears (Ravi) (100×50)				5,000
Amount received				71,000

3.        For first and final call : (Rs. 30)

Amount due = 2,000 × 30 = Rs. 60,000

Amount received

Amount due	60,000
Less :Calls in arrears :
Ravi (100×30)	3,000
Ruby (60×30)	1,800
Amount received	55,200

In the books ABC Ltd.

JOURNAL

		Particulars			Dr. (Rs.)	Cr. (Rs.)
1.	Cash/Bank A/c			Dr.	1,60,000
	To Share Application A/c					1,60,000
	(Being application money received)
2.	Share Application A/c			Dr.	1,60,000
	To Equity Share Capital A/c					80,000
	To Cash/Bank A/c					56,000
	To Share Allotment A/c					24,000
	(Being application money received transferred to
	various latter A/c as per Board Resolution No. ...,
	dated ... )
3.	Share Allotment A/c			Dr.	1,00,000
	To Equity Share Capital A/c					60,000
	To Security Premium A/c					40,000
	(Being allotment of shares as per Board Resolution
	No. ..... dated .......)
4.	Cash/Bank A/c			Dr.	71,000
	Calls in-arrear A/c			Dr.	5,000
	To Share Allotment A/c					76,000
	(Being amount received on allotment and calls in
	arrear on allotment of shares)
5.	First and Final Call A/c			Dr.	60,000
	To Equity Share Capital A/c					60,000
	(Being first and final call made as per Board
	Resolution No. ..... dated ..... )
6.	Cash/Bank A/c			Dr.	55,200
	Calls in-arrear A/c			Dr.	4,800
	To First and final call A/c					60,000
	(Being amount received and calls in arrears on first
	and final call)

7.	Equity Share Capital A/c			Dr.	16,000
	To Calls in arrears A/c				9,800
	To Share Forfeiture A/c				6,200
	(Being entry for forfeiture of 160 shares as per Board
	Resolution No..... dated ...)
8.	Cash/Bank A/c			Dr.	12,800
	Share Forfeiture A/c			Dr.	3,200
	To Equity share capital A/c				16,000
	(Being forfeited shares reissued at a discount of
	Rs.20 as per Board’s Resolution No. Dated....)
9.	Share Forfeiture A/c			Dr.	3,000
	To Capital Reserve A/c				3,000
	(Being profit on reissue transferred to Capital
	Reserve account)

Illustration 4 :

The following particulars are given for the books and records of M/s Arati Ltd. relating to issue and forfeiture of shares and payable as follows :

on application Rs. 3 per share

on allotment Rs. 5 per share (including premium) on first and final call Rs. 4 per share

	No. of shares allotted	No. of shares applied for
Category I	20,000	30,000
Category II	10,000	10,000
Category III	Nil	5,000 (Money refunded)

The book value of each share is Rs. 10. Allotment were made prorata in Category I. Mr. Malay Das who applied for 450 shares in Category I failed to pay allotment and call money and his shares were forfeited by directors. Subsequently 200 forfeited shares were reissued to Mr. Badal as fully paid for Rs. 9 per share.

Show the Journal Entries and Cash Book to record the above transactions. Also prepare the Balance Sheet.

Solution :

In the books of Arati Ltd..

Journal Entries

Date		Particulars			Rs.	Rs.
1.	Equity Share Application A/c			Dr.	1,20,000
	To Equity Share Capital A/c					90,000
	To Equity Share Allotment A/c					30,000
	(Being Application money on 30,000 equity share
	were transferred and excess 10,000 application money
	were adjusted with Allotment as per Board Resolution
	No...... & Dated.....)
2.	Equity Share Allotment A/c			Dr.	1,50,000
	To Equity Share Capital A/c					90,000
	To Share Premium A/c					60,000
	(Being Allotment money due on 30,000 equity share
	of Rs. 5 each including Rs. 2 as premium as per Board
	Resolution No.... Dated.....)
3.	Equity Share 1st Call & Final Call A/c			Dr.	1,20,000
	To Equity Share Capital A/c					1,20,000
	(Being Call money due on 30,000 Equity Share @ Rs.
	4 per share as per Board Resolution No..... Dated.....)
4.	Equity Share Capital A/c			Dr.	3,000
	Share Premium A/c			Dr.	600
	To Share Forfeiture A/c					1,350
	To Share Allotment A/c					1,050
	To Share First & Final Call A/c					1,200
	(Being 450 Equity shares were forfeited after
	nonpayment of Allotment and call money as per
	Board Resolution No..... Dated.....)
5.	Forfeited Share A/c			Dr.	200
	To Equity Share Capital A/c					200
	(Being Discount on Reissue were adjusted)
6.	Forfeited Share A/c			Dr.	700
	To Capital Reserve A/c					700
	(Being Profit on reissue were transferred)

Dr.	CASH BOOK (BANK COLUMN)				Cr.
Particulars	L.F.	Rs.	Particulars	L.F.	Rs.
To Equity Share Application A/c		1,35,000	By Equity Share Application		15,000
(45,000 share @ Rs.3 each)			(Excess appl. on 5,000 share refunded)
To Equity Sh. Allotment A/c (Note No.1)		1,18,950	By Balance c/d		3,59,550
To Equity Share 1st & Final Call A/c		1,18.800
(29,700 share @ 4 each)		1,800			.
To Equity Share Capital A/c
		3,74,550			3,74,550
To Balance B/d		3,59,550
		ARATI LTD..
	Balance Sheet as on .....
Liabilities		Rs.	Assets		Rs.
Share Capital			Current Asset
Issued and paid up Capital			Cash at Bank		3,59,550
29,00- Equity share @ Rs. 10 each		2,99,000
Reserve & Surplus		59,400
Share Premium (60,000–600)
Capital Reserve		700
Share Forfeiture A/c (1,350–900)		450			.
		3,59,550			3,59,550

Working Notes :
1.  Amount Received on Allotment :	Rs.
Amount due on Allotment 30,000 Share @ 5 each	1,50,000
Less : Amount already adjusted	30,000
	1,20,000
Less : Non Receipt of Allotment	1,050
	1,18,950
2.  Non Receipt of Allotment :
Amount due on 300 shares (2/3×450) @ 5 each	1,500
Less : Amount paid in excess on Application (150×3)	450
	1,050
3.  Capital Reserve :
Amount Credited from 200 shares (1,350/300×200)	900
Less : Amount utilised (200×1)	200
	700

Note : Balance amount in Share Forfeiture A/c i.e. (1,350–900) = Rs. 450 kept for further reissue of Balance 100 Equity Shares.