Pro-Rata Allotment, Forfeiture, and Reissue at a Discount or Premium
Sunrise Ltd issued 1,00,000 equity shares of ₹10 each at par. Applications were received for 1,60,000 shares and allotment was made pro-rata. Application money was ₹3 per share, allotment ₹4 per share, and the first and final call ₹3 per share. Excess application money was adjusted against allotment. A shareholder who had applied for 8,000 shares was allotted 5,000 shares on pro-rata basis but failed to pay both the allotment and the call. The company forfeited all 5,000 shares. The board then reissued the forfeited shares at ₹8 per share, fully paid. The company secretary is unsure how much of the forfeited amount can be transferred to capital reserve and whether the reissue at a discount should be debited to the share forfeiture account or to the statement of profit and loss. The board also asks what would change if the reissue price were ₹11 per share instead of ₹8. No calls in advance were received.
1. Calculate the application money received, the excess adjusted on allotment, and the net allotment money due. Pass the entries for application and allotment, ignoring the defaulting shareholder at this stage.
Read the worked answer
Applications 1,60,000 for 1,00,000 shares means 5 shares allotted for every 8 applied. Application money received = 1,60,000 × ₹3 = ₹4,80,000. Application money due on 1,00,000 shares = ₹3,00,000. Excess application money = ₹1,80,000. Allotment due = 1,00,000 × ₹4 = ₹4,00,000. Net allotment due after adjustment = ₹4,00,000 − ₹1,80,000 = ₹2,20,000.
Entries: Bank A/c Dr ₹4,80,000 To Share Application A/c ₹4,80,000 Share Application A/c Dr ₹4,80,000 To Share Capital A/c ₹3,00,000 To Share Allotment A/c ₹1,80,000 Share Allotment A/c Dr ₹4,00,000 To Share Capital A/c ₹4,00,000 Bank A/c Dr ₹2,20,000 To Share Allotment A/c ₹2,20,000
The excess is not income; it is application money belonging to applicants, adjusted against a later call. Only the net allotment balance is collected from the general applicants.
2. Pass the forfeiture and reissue entries for the defaulting shareholder. Calculate the amount transferred to capital reserve and explain why the credit to share forfeiture is ₹24,000 rather than ₹50,000.
Read the worked answer
Defaulting shareholder: applied 8,000 shares, allotted 5,000. Application money received = 8,000 × ₹3 = ₹24,000. Excess application = 3,000 × ₹3 = ₹9,000. Allotment due on 5,000 shares = ₹20,000; net after excess = ₹11,000. Call due = 5,000 × ₹3 = ₹15,000. Total calls in arrears = ₹11,000 + ₹15,000 = ₹26,000.
Forfeiture entry: Share Capital A/c Dr ₹50,000 To Share Forfeiture A/c ₹24,000 To Calls in Arrears A/c ₹26,000
Reissue at ₹8: Bank A/c Dr ₹40,000 Share Forfeiture A/c Dr ₹10,000 To Share Capital A/c ₹50,000
Forfeiture balance = ₹24,000 − ₹10,000 = ₹14,000 transferred to Capital Reserve.
The credit to share forfeiture is the amount actually received from the defaulting shareholder, ₹24,000. The remaining ₹26,000 was never received and is cancelled by crediting Calls in Arrears. Crediting ₹50,000 to forfeiture would recognise a gain that the company never received. The discount on reissue is borne by the forfeited amount because it is a loss connected with the defaulting shares.
3. If the forfeited shares were reissued at ₹11 per share instead of ₹8, calculate the capital reserve and explain the treatment of the premium on reissue.
Read the worked answer
Reissue at ₹11: Bank A/c Dr ₹55,000 To Share Capital A/c ₹50,000 To Securities Premium A/c ₹5,000
No discount arises, so the share forfeiture account is not debited. The full ₹24,000 received from the defaulting shareholder remains in the forfeiture account and is transferred to Capital Reserve. Capital reserve = ₹24,000.
The ₹5,000 premium is not capital reserve. It is a securities premium received on the fresh issue of shares and must be credited to Securities Premium. Capital reserve arises from the forfeiture, not from the reissue premium. Total cash received is ₹24,000 from the original applicant plus ₹55,000 on reissue = ₹79,000; this is represented by share capital ₹50,000, securities premium ₹5,000 and capital reserve ₹24,000.