Forfeiture and Reissue at an Invalid Price
Sunrise Ltd issued 10,000 equity shares of ₹10 each at par, payable ₹3 on application, ₹4 on allotment and ₹3 on final call. Applications were received for 12,000 shares and allotment was made pro rata to all applicants; the excess application money was adjusted against allotment. A shareholder who had applied for 600 shares was allotted 500 shares. He paid the application money but failed to pay the allotment and final call. After the final call, the company forfeited his 500 shares. The directors now propose to reissue these shares at ₹6 per share as fully paid. The company secretary warns that the reissue price may not be legally permissible and asks for the forfeiture entries, the maximum permissible discount, and the reissue entries at a valid price.
1. Compute the amount forfeited and record the forfeiture entry.
Read the worked answer
The shareholder applied for 600 shares but got 500, so 100 shares' application money was excess: 100 × ₹3 = ₹300, adjusted against allotment.
Amount received from him: application 500 × ₹3 = ₹1,500 plus excess ₹300 = ₹1,800.
Unpaid allotment: 500 × ₹4 = ₹2,000 less ₹300 = ₹1,700. Unpaid final call: 500 × ₹3 = ₹1,500. Total calls in arrears = ₹3,200.
Check: called-up capital 500 × ₹10 = ₹5,000; amount received ₹1,800; unpaid ₹3,200.
Entry:
Share Capital A/c Dr ₹5,000 To Share Forfeiture A/c ₹1,800 To Calls in Arrears A/c ₹3,200
2. Advise whether reissue at ₹6 is valid, compute the maximum permissible discount, and pass the reissue entry at ₹7.
Read the worked answer
On forfeiture, ₹1,800 is available in Share Forfeiture for 500 shares, i.e. ₹3.60 per share. A reissue at ₹6 would require a discount of ₹4 per share, which exceeds the forfeited amount. Such a reissue is not permissible because the discount on reissue cannot exceed the amount forfeited per share.
Maximum permissible discount = ₹3.60 per share; minimum valid reissue price = ₹10 − ₹3.60 = ₹6.40 per share.
At ₹7, discount = ₹3 × 500 = ₹1,500.
Entry:
Bank A/c Dr ₹3,500 Share Forfeiture A/c Dr ₹1,500 To Share Capital A/c ₹5,000
Balance left in Share Forfeiture = ₹1,800 − ₹1,500 = ₹300, transferred to Capital Reserve.