Surya Ltd: pro-rata allotment, calls in arrears and forfeiture
Surya Ltd invited applications for 2,00,000 equity shares of ₹10 each at par, payable ₹3 on application, ₹4 on allotment, ₹2 on first call and ₹1 on final call. Applications were received for 5,00,000 shares. The board allotted 2,00,000 shares on a pro-rata basis to all applicants and decided to adjust the excess application money against allotment and then against the first call, rather than refund it. All money due was received except from a shareholder who had applied for 12,500 shares and was allotted 5,000; he paid nothing after allotment. After due notice the company forfeited his 5,000 shares and later reissued 4,000 of them at ₹8 per share, fully paid. The secretary asks you to compute the amounts in respect of calls-in-arrears and share forfeiture at each stage, and to advise whether the balance left in the forfeiture account after the reissue may be treated as capital reserve before the remaining 1,000 shares are dealt with.
1. Work out the amounts received, the arrears, and the journal entries for forfeiture and reissue.
Read the worked answer
Application and allotment. Application money received: 5,00,000 × ₹3 = ₹15,00,000. Retained on 2,00,000 allotted shares: ₹6,00,000. Excess = ₹9,00,000.
Allotment due: 2,00,000 × ₹4 = ₹8,00,000. Adjusted from excess → nil received; balance of excess ₹1,00,000 carried forward to the first call.
First call due 2,00,000 × ₹2 = ₹4,00,000, less ₹1,00,000 already in hand = ₹3,00,000 receivable. Final call ₹2,00,000.
The defaulting shareholder. He applied for 12,500 shares (ratio 5:2) and got 5,000.
| Stage | Working | ₹ |
|---|---|---|
| Application money on 5,000 shares | 5,000 × 3 | 15,000 |
| Excess application money on his 7,500 unallotted shares (7,500 × 3 = 22,500) | 20,000 to allotment, 2,500 to first call | 22,500 |
| Allotment due 5,000 × 4 | 20,000 | |
| First call due 5,000 × 2 = 10,000, less 2,500 adjusted | 7,500 due | |
| Final call due 5,000 × 1 | 5,000 due | |
| Total received on these shares | 15,000 + 20,000 + 2,500 | 37,500 |
| Calls-in-arrears | 7,500 + 5,000 | 12,500 |
Check: 37,500 + 12,500 = ₹50,000 = 5,000 shares × ₹10.
Forfeiture (after notice): Share Capital A/c Dr 50,000; To Calls-in-Arrears A/c 12,500; To Share Forfeiture A/c 37,500
Reissue of 4,000 shares at ₹8, fully paid: Bank A/c Dr 32,000; Share Forfeiture A/c Dr 8,000; To Share Capital A/c 40,000
Transfer to capital reserve: forfeiture relating to 4,000 shares = 37,500 × 4/5 = ₹30,000, less discount on reissue ₹8,000 = ₹22,000: Share Forfeiture A/c Dr 22,000; To Capital Reserve A/c 22,000
Balance left in Share Forfeiture A/c = ₹7,500 (relating to the 1,000 shares still forfeited).
2. Advise whether the ₹7,500 left in the forfeiture account may be transferred to capital reserve now.
Read the worked answer
No. The ₹22,000 transfer was permissible only because those 4,000 shares had actually been reissued and the gain had crystallised - the company had recovered, in cash, more than the amount credited as paid-up. The remaining ₹7,500 relates to 1,000 shares that are still forfeited. Nothing has been realised on them, and three outcomes are still open:
- They may be reissued at a discount, which would consume part or all of the ₹7,500 (the maximum permissible discount on reissue is the forfeiture amount: ₹7.50 per share here, so a reissue as low as ₹2.50 is legally possible under Table F).
- They may be reissued at a premium, in which case the whole ₹7,500 becomes capital reserve.
- They may never be reissued, in which case the balance stays in the forfeiture account, shown under 'Share Capital' in the balance sheet as a note, until the articles permit cancellation.
Treating it as capital reserve now would anticipate a profit not yet earned and would overstate reserves - the exact objection to creating secret reserves.
Other presentation points. Calls-in-arrears is a deduction from subscribed capital, and after forfeiture it is nil. The forfeited shares are disclosed as a note ('1,000 equity shares forfeited; ₹7,500 forfeited'). The ₹22,000 capital reserve is a capital profit and is not available for dividends.
Legality. Forfeiture is valid only if the articles permit it (Table F in default) and the notice gave 14 days, stated the amount due and warned of forfeiture. Absent a valid notice, the entire forfeiture - and the ₹22,000 transfer - is void.
3. The board also considered simply refunding the entire excess application money of ₹9,00,000. Compare that choice with the adjustment route and state which is better for the company.
Read the worked answer
Both routes are lawful, but they produce very different cash flows and results.
Refund route. The company returns ₹9,00,000 immediately, keeps only ₹6,00,000 (application money on the allotted shares), and must then collect the full allotment of ₹8,00,000 within the notice period. It ends the year having collected ₹14,00,000 and then calls for the full first and final calls (₹4,00,000 + ₹2,00,000). Cash is tight, and the full allotment must be chased from 2,00,000-plus allottees, many of whom applied for small lots.
Adjustment route (adopted). The company retains the ₹9,00,000, sets it against the ₹8,00,000 allotment, and carries ₹1,00,000 into the first call - so nothing is collected on allotment and only ₹3,00,000 of the first call is called. Cash is in hand earlier, collection costs are far lower, and the risk of small shareholders defaulting on allotment is removed.
The adjustment route is therefore better operationally, provided the articles authorise it and the board's resolution records the order of adjustment (allotment first, then calls). Without that authority the excess must be refunded and any adjustment is an irregular call.
The cost of the adjustment route is that it hides defaults: the ₹12,500 default only surfaced at the first call. The auditor should therefore vouch the application-to-allotment reconciliation, confirm that the calls-in-arrears analysis agrees with the share register, and satisfy himself that the forfeiture was properly resolved and noticed.