Share Forfeiture, Pro-Rata Allotment and Capital Reserve
Vardhman Ltd was incorporated with an authorised capital of ₹50,00,000 divided into 5,00,000 equity shares of ₹10 each. It issued 2,00,000 shares at a premium of ₹2 per share, payable as ₹2 on application, ₹5 on allotment (including premium), ₹2 on first call and ₹3 on final call. Applications were received for 3,00,000 shares and allotment was made pro rata. Mr A applied for 12,000 shares and was allotted 8,000. His application money was adjusted and the excess was put against allotment, but he did not pay allotment or either call. His shares were forfeited. Of the forfeited shares, 6,000 were reissued to Mr C at ₹8 per share, fully paid. Mr B, holding 4,000 shares, paid the final call along with the first call. The articles are silent on interest on calls in advance. The board wants to know the amount of capital reserve it can report and whether Mr B can demand interest.
1. Pass the forfeiture entry for Mr A's shares and compute the amount of Calls in Arrears. Explain the treatment of the securities premium.
Read the worked answer
Pro-rata allotment: 3,00,000 applications for 2,00,000 shares = 3:2. A applied for 12,000 and was allotted 8,000. Application money 12,000 × ₹2 = ₹24,000; amount required 8,000 × ₹2 = ₹16,000; excess ₹8,000 adjusted to allotment. Allotment due 8,000 × ₹5 = ₹40,000; unpaid after adjustment ₹32,000. First call 8,000 × ₹2 = ₹16,000; final call 8,000 × ₹3 = ₹24,000. Calls in arrears = ₹72,000.
Forfeiture entry: Equity Share Capital A/c Dr 80,000 Securities Premium A/c Dr 16,000 To Share Forfeiture A/c 24,000 To Calls in Arrears A/c 72,000
The ₹16,000 premium had been credited on allotment although A never paid it; on forfeiture the unpaid premium is reversed. If the premium had actually been received, it would not be debited. Share Forfeiture is credited only with the ₹24,000 actually received.
2. Compute the balance in the Share Forfeiture Account and the amount transferable to Capital Reserve after the reissue. Why is the entire forfeiture balance not transferred?
Read the worked answer
Reissue of 6,000 shares at ₹8 = ₹48,000; share capital to be credited 6,000 × ₹10 = ₹60,000; loss on reissue = ₹12,000, debited to Share Forfeiture.
Balance in Share Forfeiture = 24,000 − 12,000 = ₹12,000.
Capital Reserve = forfeited amount attributable to the 6,000 reissued shares − loss on reissue = (24,000 × 6,000/8,000) − 12,000 = 18,000 − 12,000 = ₹6,000.
The remaining ₹6,000 in Share Forfeiture relates to 2,000 shares not yet reissued and is not a capital profit. Transferring the whole ₹12,000 would overstate the capital reserve.
3. Advise Mr B on interest on calls in advance and on the accounting treatment of the amount he paid.
Read the worked answer
Under Section 50 of the Companies Act, 2013, interest on calls in advance is payable only if the articles authorise it; if the articles are silent, B has no legal right to interest. The ₹12,000 (4,000 × ₹3) must be credited to Calls in Advance, a current liability, and shown separately; it cannot be added to share capital before the call is made, nor set off against another shareholder's arrears. If the articles are later amended to provide interest, it may be paid at a rate not exceeding 12% p.a. for the period from receipt to the due date, and the board must decide the rate within that cap.