Pro-Rata Allotment and Forfeiture at Ludhiana Fabrics Ltd
Ludhiana Fabrics Ltd has an authorised capital of ₹20,00,000 divided into 2,00,000 equity shares of ₹10 each. The company issued 80,000 equity shares of ₹10 each at par, payable as ₹3 on application, ₹4 on allotment and ₹3 on the first and final call. Applications were received for 1,20,000 shares, and the directors made a pro-rata allotment to all applicants in the ratio of 2 : 3, adjusting the excess application money towards the amount due on allotment. Paramjit applied for 9,000 shares and was allotted 6,000 shares. He paid the application money but failed to pay both the allotment and the call money, and his 6,000 shares were forfeited after the call. The company then reissued all 6,000 forfeited shares to Kiran at ₹8 per share, fully paid. The accountant has proposed transferring ₹27,000 to Capital Reserve, arguing that this is the entire amount the company received from Paramjit, and to charge the ₹12,000 difference to the Statement of Profit and Loss as a loss on reissue.
1. Compute the amount Paramjit paid on application, the excess adjusted towards allotment, and the amount in arrears on allotment and on the call.
Read the worked answer
Step 1 – Shares applied for and allotted
Pro-rata ratio 2 : 3 means each applicant received 2 shares for every 3 applied for.
Paramjit: applied 9,000 → allotted 9,000 × 2/3 = 6,000 shares; rejected 3,000 shares.
Step 2 – Money received and adjusted
| Item | Working | ₹ |
|---|---|---|
| Application money paid (on 9,000 shares) | 9,000 × 3 | 27,000 |
| Due on the 6,000 shares allotted | 6,000 × 3 | 18,000 |
| Excess application money adjusted to allotment | 27,000 − 18,000 | 9,000 |
Step 3 – Arrears
Allotment due = 6,000 × 4 = ₹24,000, less excess adjusted ₹9,000 = ₹15,000 in arrears on allotment (₹2.50 per share).
Call due = 6,000 × 3 = ₹18,000 in arrears on the call (₹3 per share).
Total unpaid = 15,000 + 18,000 = ₹33,000.
Reasoning to state. Application money is never refunded when a pro-rata allotment is made and the applicant has applied for more shares than allotted; the surplus is applied against the next instalment due, because the shareholder has already shown an intention to take up shares. The consequence is that when the shares are forfeited, Paramjit is treated as having already paid ₹2.50 of the ₹4 allotment. Total received by the company from him = 18,000 (application on allotted shares) + 9,000 (excess used on allotment) = ₹27,000, i.e. ₹4.50 per share.
2. Pass the journal entries for the forfeiture and the reissue, and compute the amount to be transferred to Capital Reserve.
Read the worked answer
Entry 1 – Forfeiture of 6,000 shares
Share Capital A/c Dr 60,000 To Share Allotment A/c 15,000 To Calls-in-Arrears A/c 18,000 To Share Forfeited A/c 27,000
(Shares forfeited for non-payment of allotment ₹15,000 and call ₹18,000; ₹4.50 per share already received transferred to Forfeited Shares Account.)
Check: 15,000 + 18,000 + 27,000 = ₹60,000 = 6,000 × ₹10. ✓
Entry 2 – Reissue of 6,000 shares at ₹8, fully paid
Bank A/c Dr 48,000 Share Forfeited A/c Dr 12,000 To Share Capital A/c 60,000
(Discount of ₹2 per share on reissue charged to the Forfeited Shares Account.)
Entry 3 – Transfer to Capital Reserve
| Item | ₹ |
|---|---|
| Amount forfeited (received on the 6,000 shares) | 27,000 |
| Less: Discount allowed on reissue (6,000 × ₹2) | (12,000) |
| Transfer to Capital Reserve | 15,000 |
Share Forfeited A/c Dr 15,000 To Capital Reserve A/c 15,000
Note. After this transfer the Forfeited Shares Account is fully exhausted (27,000 − 12,000 − 15,000 = nil), which is a useful check.
3. The accountant proposes transferring ₹27,000 to Capital Reserve and showing ₹12,000 as a loss in the Statement of Profit and Loss. Evaluate this proposal.
Read the worked answer
The proposal is wrong in both parts.
1. ₹27,000 cannot go to Capital Reserve. The ₹27,000 is not a gain to the company; it is money received against shares whose face value is ₹60,000 and which had to be reissued for only ₹48,000. The company has to make good a ₹12,000 shortfall out of what it collected. Capital Reserve can only take the net benefit, ₹27,000 − ₹12,000 = ₹15,000. Transferring the gross figure would overstate reserves and understate expenditure.
2. The ₹12,000 discount is not a profit and loss item. Forfeiture and reissue are transactions in the company's own share capital. The Companies Act requires that a discount on the reissue of forfeited shares be debited to the Share Forfeited Account, not to the Statement of Profit and Loss - that is precisely why the forfeited amount is parked there rather than being taken to income. A company cannot report a loss on its own capital transactions as an operating expense.
3. Why the two treatments differ in effect. The accountant's approach shows a reserve of ₹27,000 and a loss of ₹12,000, so shareholders' funds are overstated by the same ₹12,000 that is shown as an expense. The correct approach reduces the reserve to a realised ₹15,000 and leaves the Statement of Profit and Loss unaffected, so both the balance sheet and the profit figure are truthful.
4. Additional check. The ₹15,000 credited to Capital Reserve is a capital receipt, permanently retained; it is not available for dividends. The entire ₹27,000 received on the 6,000 shares was received in full and no amount remains payable by Paramjit.