Forfeiture, Pro-rata Allotment and Calls in Advance
Surya Ltd issued 1,00,000 equity shares of ₹10 each at a premium of ₹2 per share. Application ₹3, allotment ₹5 (including premium ₹2), first call ₹2 and final call ₹2. Applications were received for 1,50,000 shares and allotment was made pro rata. Mr. Ahuja applied for 3,000 shares and was allotted 2,000. He paid application and the net allotment amount after adjusting excess application money, but did not pay either call. His 2,000 shares were forfeited after the final call. Another shareholder, Ms. Bansal, holding 1,000 shares, paid the final call money of ₹2,000 in advance at the time of the first call; interest on calls in advance is 6% p.a. and the amount remained in advance for six months. The board later reissued Ahuja’s forfeited shares at ₹8 per share. The accountant is unsure how much to transfer to capital reserve, whether the premium paid by Ahuja is forfeited, and how calls in advance and interest thereon should be presented.
1. Compute the amounts unpaid by Ahuja, the forfeiture credit and the capital reserve on reissue. Show the journal entries for forfeiture and reissue.
Read the worked answer
Ahuja’s application: 3,000 × ₹3 = ₹9,000. Allotted 2,000 shares; application due = ₹6,000; excess = ₹3,000 adjusted to allotment. Allotment due = 2,000 × ₹5 = ₹10,000; net paid = ₹10,000 − ₹3,000 = ₹7,000. He paid this, so premium of ₹4,000 (2,000 × ₹2) is fully received and remains in securities premium. First call = ₹4,000 and final call = ₹4,000 remain unpaid; calls in arrears = ₹8,000.
Forfeiture: Share Capital Dr ₹20,000; To Calls in Arrears ₹8,000; To Share Forfeiture ₹12,000. The ₹12,000 is the capital amount received (application ₹6,000 + allotment capital ₹6,000). The premium is not forfeited because it was paid and already credited to securities premium.
Reissue at ₹8: Bank Dr ₹16,000; Share Forfeiture Dr ₹4,000; To Share Capital ₹20,000. Capital reserve = ₹12,000 − ₹4,000 = ₹8,000.
2. How should Ms. Bansal’s calls in advance and interest be treated in the financial statements? Would your answer change if she had paid the money as a loan rather than as calls in advance?
Read the worked answer
Ms. Bansal paid the final call of ₹2,000 at the first call. Until the final call is made, the amount is shown as calls in advance under other current liabilities, not as share capital. At the final call, it is adjusted: Calls in Advance Dr ₹2,000; To Final Call ₹2,000. Interest at 6% for six months = ₹2,000 × 6% × 6/12 = ₹60; it is a finance cost and an accrued liability. If the money were a loan, it would be a borrowing, not calls in advance, and interest would be treated as interest on borrowings. The legal character of the amount, not its label, decides presentation.
3. If the reissue price had been ₹11 instead of ₹8, compute the capital reserve and explain why the result differs.
Read the worked answer
At ₹11, Bank = 2,000 × ₹11 = ₹22,000. Entry: Bank Dr ₹22,000; To Share Capital ₹20,000; To Share Forfeiture ₹2,000. The forfeiture balance becomes ₹12,000 + ₹2,000 = ₹14,000, transferred to capital reserve. At ₹8, the discount of ₹4,000 reduces the forfeiture balance to ₹8,000. A reissue at a premium increases the capital reserve; a reissue at a discount uses part of the forfeited amount. The balance remaining in share forfeiture after reissue is a capital profit, not a revenue profit.