Forfeiture, Reissue and Debenture Interest
Sundarban Ltd has an authorised capital of ₹50,00,000 divided into 5,00,000 equity shares of ₹10 each. It issued 2,00,000 shares at ₹12 per share, payable ₹3 on application, ₹5 on allotment (including ₹2 premium) and ₹4 on first and final call. Applications were received for 3,00,000 shares and allotment was made pro rata. Excess application money was adjusted towards allotment. A shareholder holding 5,000 shares failed to pay the call; another holding 2,000 shares failed to pay both allotment and call. All these shares were forfeited. The 2,000 shares were reissued at ₹10 per share fully paid, and the 5,000 shares were reissued at ₹8 per share fully paid. The company also issued 20,000 9% debentures of ₹100 each on 1 July 2024, with interest payable half-yearly on 31 December and 30 June. The accountant has calculated capital reserve by crediting the full amount received on forfeited shares and has charged the reissue discount to Securities Premium.
1. Compute the amount forfeited on each holding and the balance transferred to Capital Reserve after reissue. Show the forfeiture and reissue entries for the 5,000 shares.
Read the worked answer
5,000 shares (call unpaid) The shareholder applied for 7,500 shares: application ₹22,500; excess over 5,000 shares = ₹7,500 adjusted to allotment. Allotment due ₹25,000 − ₹7,500 = ₹17,500 paid. Amount received = ₹22,500 + ₹17,500 = ₹40,000. Forfeiture entry: Share Capital A/c Dr 50,000 To Share Forfeiture A/c 40,000 To Calls in Arrears A/c 20,000 Reissue at ₹8: Bank A/c Dr 40,000 Share Forfeiture A/c Dr 10,000 To Share Capital A/c 50,000 Capital Reserve = ₹40,000 − ₹10,000 = ₹30,000
2,000 shares (allotment and call unpaid) Applied for 3,000 shares: application ₹9,000; excess ₹3,000 adjusted. Unpaid allotment ₹7,000 and call ₹8,000 = calls in arrears ₹15,000. Amount received = ₹9,000. Because the ₹4,000 premium on these shares was credited but never received, Securities Premium is debited: Share Capital A/c Dr 20,000 Securities Premium A/c Dr 4,000 To Share Forfeiture A/c 9,000 To Calls in Arrears A/c 15,000 Reissue at ₹10: Bank A/c Dr 20,000; To Share Capital A/c 20,000. Capital Reserve = ₹9,000.
Total Capital Reserve = ₹30,000 + ₹9,000 = ₹39,000.
2. Compute the debenture interest for the year ended 31 March 2025 and show the year-end accrual.
Read the worked answer
Debentures = 20,000 × ₹100 = ₹20,00,000 Annual interest at 9% = ₹1,80,000 Debentures were issued on 1 July 2024, so interest for 2024-25 runs for 9 months: ₹20,00,000 × 9% × 9/12 = ₹1,35,000
Payment and accrual: Half-yearly payment on 31 December 2024 for 6 months = ₹90,000. Interest for January to March 2025 = ₹20,00,000 × 9% × 3/12 = ₹45,000 accrued but not paid.
Presentation: Statement of Profit and Loss: interest on debentures ₹1,35,000. Balance Sheet: outstanding interest ₹45,000 under current liabilities; 9% debentures ₹20,00,000 under non-current liabilities. The next payment on 30 June 2025 will include this ₹45,000 plus interest for April to June 2025.
3. The accountant proposes to debit the ₹10,000 discount on reissue of the 5,000 shares to Securities Premium. Is this correct? Give reasons.
Read the worked answer
No. The discount on reissue is a loss on the reissue of forfeited shares and is debited to the Share Forfeiture Account. The forfeited amount is the cushion against exactly this kind of loss; after the discount is adjusted, the remaining balance is transferred to Capital Reserve.
Securities Premium is a capital receipt arising on the original issue. Section 52(2) of the Companies Act, 2013, permits its application only for specified purposes, such as issuing fully paid bonus shares, writing off preliminary expenses, and providing for premium on redemption of debentures or preference shares. Charging a reissue discount to Securities Premium is not the prescribed treatment.
There is also a double-counting problem. The ₹40,000 forfeited on the 5,000 shares already includes the ₹10,000 premium received. If the discount were also charged to Securities Premium, the same premium would effectively be used twice and Capital Reserve would be overstated. Correct capital reserve remains ₹30,000 on these shares.