Forfeiture and Reissue: Pro-rata Allotment, a Defaulting Allottee and a Proposed Premium Issue
Sunrise Ceramics Ltd, incorporated in 2019, has an authorised capital of 5,00,000 equity shares of ₹10 each. In April 2023 it issued 2,00,000 equity shares at par, payable ₹3 on application, ₹4 on allotment and ₹3 on the first and final call. Applications were received for 3,20,000 shares and the board made allotment on a pro-rata basis, adjusting the excess application money against allotment. Every allottee paid the allotment money; Roshan, who had applied for 8,000 shares and was allotted 5,000, paid his allotment dues in full but then failed to pay the call on his 5,000 shares even after the statutory notice. On 30 September 2024 the board forfeited those 5,000 shares. On 15 October 2024, 3,000 of the forfeited shares were reissued to Meera at ₹8 per share, fully paid. The company has no securities premium balance and no other equity. In January 2025 the board proposes a fresh issue of 50,000 shares at ₹12 each, and a director suggests crediting the entire ₹12 to Share Capital.
1. Compute the money received on application, allotment and call, and pass the entry for forfeiture. Explain what the credit balance in the Share Forfeiture Account represents.
Read the worked answer
Application. 3,20,000 × ₹3 = ₹9,60,000 received. Only 2,00,000 shares were allotted, so application money earned = ₹6,00,000; the balance ₹3,60,000 (1,20,000 shares × ₹3) is excess, adjusted against allotment.
Allotment. Due 2,00,000 × ₹4 = ₹8,00,000, less excess ₹3,60,000 = ₹4,40,000 received. (Roshan: applied 8,000 × ₹3 = ₹24,000; excess 3,000 × ₹3 = ₹9,000 adjusted; allotment due 5,000 × ₹4 = ₹20,000, paid ₹11,000.)
Call. Due 2,00,000 × ₹3 = ₹6,00,000, less Roshan's arrears 5,000 × ₹3 = ₹15,000 = ₹5,85,000 received.
Forfeiture entry (30 September 2024)
| Entry | Dr ₹ | Cr ₹ |
|---|---|---|
| Share Capital A/c Dr | 50,000 | |
| To Share Forfeiture A/c | 35,000 | |
| To Calls-in-Arrears A/c | 15,000 |
What the ₹35,000 means. It is the amount Roshan actually paid on those shares (5,000 × ₹7), now held by the company without any shares outstanding against it. It is not profit and it is not free reserve: it is a cushion that may be used only to absorb a discount on reissue of those same shares, and any part of it not so used becomes a capital reserve when the shares are reissued. Because the shares were issued at par, no question of premium arises.
Balance sheet presentation: paid-up capital falls by ₹50,000 to ₹19,50,000, and ₹35,000 appears as a separate line, Share Forfeiture Account, within Share Capital.
2. Pass the entries for the reissue on 15 October 2024 and compute the amount transferred to Capital Reserve. State the balance left in the Share Forfeiture Account and why it cannot be transferred yet.
Read the worked answer
Reissue entry
| Entry | Dr ₹ | Cr ₹ |
|---|---|---|
| Bank A/c Dr | 24,000 | |
| Share Forfeiture A/c Dr | 6,000 | |
| To Share Capital A/c | 30,000 |
Workings: 3,000 shares × ₹8 = ₹24,000 received; they must be credited as ₹10 paid up, i.e. ₹30,000, so the ₹6,000 difference (₹2 per share) is a discount charged against the forfeiture balance. The discount is valid because it does not exceed the ₹7 per share originally received on those shares - the ceiling on the discount on reissue is the amount forfeited, ₹35,000 in total.
Capital Reserve
| ₹ | |
|---|---|
| Forfeiture balance relating to the 3,000 reissued shares (35,000 × 3/5) | 21,000 |
| Less: discount allowed on reissue | (6,000) |
| Transferred to Capital Reserve | 15,000 |
Entry: Share Forfeiture A/c Dr ₹15,000; To Capital Reserve A/c ₹15,000.
Balance remaining: ₹14,000 (35,000 − 6,000 − 15,000), which relates entirely to the 2,000 shares still forfeited and unissued. It cannot be transferred to Capital Reserve now because the company has not yet completed the transaction: those shares may still be reissued at a discount, and the ₹14,000 is the only cushion available to absorb it. Only when the last 2,000 shares are reissued (or the capital is reduced) does the residue become a realised capital profit.
3. Advise the board on the proposed issue of 50,000 shares at ₹12, and on a suggestion that the ₹14,000 remaining in the Share Forfeiture Account be transferred to Capital Reserve immediately to strengthen the reserves shown to the bank.
Read the worked answer
The ₹12 issue. A share of face value ₹10 cannot be credited to Share Capital with more than ₹10; the ₹2 is a premium and must go to the Securities Premium Account under Section 52 of the Companies Act, 2013. Entry for the allotment money received in full:
| Entry | Dr ₹ | Cr ₹ |
|---|---|---|
| Bank A/c Dr | 6,00,000 | |
| To Share Capital A/c | 5,00,000 | |
| To Securities Premium A/c | 1,00,000 |
If the director's suggestion were followed and ₹6,00,000 credited to Share Capital, the paid-up capital would exceed the nominal value of the shares, the balance sheet would not reconcile with the register of members, and the Securities Premium Account would be understated by ₹1,00,000. Securities premium is also a restricted reserve: it may be used only for the purposes allowed by Section 52 (issuing fully paid bonus shares, writing off preliminary expenses or the expenses of the issue, providing for premium payable on redemption of redeemable preference shares or debentures, or buying back shares) - it cannot be treated as free reserve or distributed as dividend.
The ₹14,000 transfer. Refuse it. The amount relates to 2,000 shares that remain forfeited and unissued. Until those shares are reissued, a discount on reissue is still possible, and the ₹14,000 is the only balance available to absorb it. Transferring it now would convert an unrealised cushion into a reported reserve, overstate distributable-looking reserves in a balance sheet being shown to a lender, and leave the company with no cover if the remaining shares have to be reissued at a discount. The correct presentation to the bank is the ₹14,000 as Share Forfeiture within Share Capital, with a note that it will be transferred to Capital Reserve only on reissue.