Forfeiture, reissue and a balance sheet that does not balance
Sunrise Ltd has authorised capital of ₹40,00,000 divided into 4,00,000 equity shares of ₹10 each. It issued 2,00,000 shares at a premium of ₹1 per share. Applications came for 2,60,000 shares; the company allotted 2,00,000 shares on a pro-rata basis and rejected the rest. Application money was ₹3 per share (including premium ₹1); allotment ₹4; first call ₹3; final call ₹1. A shareholder holding 8,000 shares paid application and allotment money but failed to pay both calls; his shares were forfeited. Later, 6,000 of these shares were reissued at ₹7 per share as fully paid. The accountant credited the entire amount received on the forfeited shares to Share Forfeited Account, debited the reissue discount to the Statement of Profit and Loss, and showed only the paid-up capital of 1,98,000 shares in the balance sheet. After part utilisation, Securities Premium shows ₹1,20,000. The board asks whether the reissue discount can be charged against Securities Premium and how the remaining forfeited shares should appear.
1. Pass journal entries for forfeiture and reissue, and compute the amount to be transferred to Capital Reserve.
Read the worked answer
For 8,000 forfeited shares:
- Application received: 8,000 × ₹3 = ₹24,000, of which premium = ₹8,000 and capital = ₹16,000.
- Allotment received: 8,000 × ₹4 = ₹32,000.
- Calls unpaid: first call 8,000 × ₹3 = ₹24,000; final call 8,000 × ₹1 = ₹8,000; total ₹32,000.
- Capital received = ₹16,000 + ₹32,000 = ₹48,000. The ₹8,000 premium already remains in Securities Premium.
Forfeiture
Share Capital A/c Dr ₹80,000 To Share Forfeited A/c ₹48,000 To Calls-in-Arrears A/c ₹32,000
Reissue of 6,000 shares at ₹7
Bank A/c Dr ₹42,000 Share Forfeited A/c Dr ₹18,000 To Share Capital A/c ₹60,000
Transfer to Capital Reserve
Share Forfeited A/c Dr ₹18,000 To Capital Reserve A/c ₹18,000
Capital Reserve = forfeited capital on 6,000 shares (6,000 × ₹6 = ₹36,000) − discount on reissue (6,000 × ₹3 = ₹18,000) = ₹18,000. The remaining Share Forfeited balance is ₹48,000 − ₹18,000 − ₹18,000 = ₹12,000.
2. Show the relevant extract of the balance sheet and correct the accountant's errors.
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Corrected extract
| Equity and Liabilities | ₹ |
|---|---|
| Shareholders’ funds | |
| Share capital: 1,98,000 equity shares of ₹10 each fully paid | 19,80,000 |
| Reserves and surplus: | |
| Securities Premium | 1,20,000 |
| Capital Reserve | 18,000 |
| Share Forfeited Account | 12,000 |
The accountant’s errors are:
- Crediting the entire ₹56,000 received to Share Forfeited overstates it by ₹8,000. The premium of ₹8,000 is already in Securities Premium; only the capital portion ₹48,000 belongs to Share Forfeited.
- Debiting the reissue discount of ₹18,000 to the Statement of Profit and Loss is wrong. It must be set off against Share Forfeited Account.
- Omitting the ₹12,000 balance of Share Forfeited Account and the ₹18,000 Capital Reserve from the balance sheet understates shareholders’ funds. The 2,000 remaining forfeited shares are not shown as paid-up capital.
3. Can the reissue discount be charged to Securities Premium? How should the remaining 2,000 forfeited shares be presented?
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The reissue discount should be debited to Share Forfeited Account, not to the Statement of Profit and Loss and not to Securities Premium while a sufficient forfeited balance exists. The forfeiture account represents the capital received on the forfeited shares and is specifically available to absorb the discount on their reissue. Charging Securities Premium would leave the Share Forfeited Account overstated and would understate the Capital Reserve, so the board’s proposal is not appropriate in these accounts.
The remaining 2,000 forfeited shares are not outstanding paid-up shares. Their forfeited amount is ₹12,000 (2,000 × ₹6). Show this as Share Forfeited Account ₹12,000 separately under Shareholders’ Funds; do not add it to the paid-up capital of ₹19,80,000. If those shares are later reissued, any discount on reissue is first debited to this account, and the balance relating to the reissued shares is transferred to Capital Reserve.