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Accounting Entries on Re-issue of Forfeited Shares

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A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,000 and is divided into 10,000 units of ₹100 each. Each unit of ₹100 will be called a share. To easily identify the shares, it is essential to give them numbers. The share of a company is moveable in nature and can be moved through the process stated by the Articles of Association of the Company. 

According to Indian Companies Act, 2013, “Shares means shares in share capital of the company and includes stock except where the distinction between stock and share is expressed or implied.”

Forfeiture of Shares:

Cancellation of shares of a shareholder who fails to pay the amount due on allotment or on any call within the specific time period is known as Forfeiture of Shares. A company or its directors can forfeit the shares only if its Articles of Association allow for the same. If a company wants to make the forfeiture valid, it has to follow the rules laid down in the Articles of Association. If the Articles of Association is silent about the rules of forfeiture, then the company must give the defaulting shareholder a minimum of 14 days notice requiring him to pay the amount unpaid on his shares with the accrued interest thereon. Besides, the notice must state if the shareholder does not pay the unpaid amount within a certain period, his/her shares will be forfeited. Hence, despite of sending the notice, if the shareholder does not pay the unpaid amount on his/her shares, they may be forfeited by a resolution of the Board of Directors. Once the shares are forfeited, the name of the shareholders is removed from the Registrar of Members. Also, the amount already paid by the defaulter shareholder remains with the company. 

Re-issue of Forfeited Shares:

The sale of Forfeited Shares is known as the Re-issue of Shares. It is not an allotment of shares, and the forfeited shares can be reissued as per the provisions of the Articles of Company. The forfeited shares can be re-issued at par, premium, or discount. The price of re-issued shares must be at least equal to the difference between the paid-up value of re-issued shares and the amount forfeited on re-issued shares. In simple terms, the price of re-issued shares must be less than the amount unpaid on the forfeited shares. 

A company’s Directors have the authority to re-issue forfeited shares according to the provisions of the Articles of Association of the company or the terms that directors find suitable. 

Provisions related to re-issue of forfeited shares:

  1. Forfeited Shares can be re-issued at Par, Premium, or Discount.
  2. If the forfeited shares which were originally issued at par are re-issued at discount, the discount should not exceed the amount earlier received on forfeiture. And the discount will be debited to Share Forfeiture Account.
  3. If the forfeited shares, which were originally issued at a premium are re-issued, then the company does not need to record Securities Premium again on re-issue. However, if the company has not received the premium amount earlier, then it will record the amount on re-issue to the extent it is available. The shares which were originally issued at a premium may be re-issued at discount and are taken to the share forfeiture account. 
  4. The balance of the share forfeiture account is a capital profit; hence, it will be transferred to the capital reserve. 
  5. When a company re-issues only a part of the forfeited shares, then the profit made only on the re-issue will be transferred to capital reserve. 

Journal Entries on Re-issue of Forfeited Shares:

1. When the forfeited shares are re-issued at par:

 

2. When the forfeited shares are re-issued at a premium:

 

3. When the forfeited shares are re-issued at a discount which was originally not issued at discount:

 

Share Forfeiture A/c will be debited with the amount of discount allowed on the re-issue of forfeited shares.

Transferring the Balance of Share Forfeiture A/c to Capital Reserve A/c:

Once the forfeited shares are re-issued, the credit balance left in the Share Forfeiture A/c must be transferred to Capital Reserve A/c. It is because this amount is a capital gain for the company. 

The journal entry to be passed with the balance of Share Forfeiture A/c will be:

 

Note: If all the forfeited shares are not re-issued, then only the part of Share forfeiture A/c, which belongs to the re-issued shares must be transferred to Capital Reserve A/c, and the remaining balance of Share Forfeiture A/c will be shown in Notes to Account under the heading of Share Capital in the Balance Sheet. 

Calculation of Capital Reserve on Re-issue of Forfeited Shares:

 

Re-issue of forfeited shares issued at par:

Illustration 1 (Re-issue at par):

Shreya Ltd. issued 50,000 shares @ ₹10 each payable as ₹4 on Application, ₹3 on Allotment, and ₹3 on First & Final Call. Radhika, who had been allotted 1,000 shares failed to pay the call money. Her shares were forfeited and re-issued at ₹10 per share as fully paid up. Pass the necessary Journal Entries in the books of Shreya Ltd. 

Solution:

 

Illustration 2 (Re-issue at premium):

Vishal Ltd. invited applications for 20,000 shares of ₹10 each payable as under ₹3 on Application, ₹3 on Allotment, ₹2 on First Call, and ₹2 on Second & Final Call. The second & final call was not made by the company. An applicant who had been allotted 200 shares failed to pay allotment and first call money due. Those shares were forfeited after the first call and were immediately re-issued at ₹10.50 per share fully paid up. Pass the necessary Journal Entries in the books of Vishal Ltd.

Solution:

 

Illustration 3 (Re-issue at discount):

Vanshika Ltd. was registered with an authorised capital of ₹5,00,000 divided into shares of ₹10 each. The company invited applications for 30,000 shares payable as ₹3 on Application, ₹3 on Allotment, ₹2 on First Call, and the balance on the Second & Final Call. Astha, who had been allotted 500 shares failed to pay both calls. Her shares were forfeited and re-issued at ₹9 per share to Ambika, as fully paid up. Pass the necessary Journal Entries in the books of Vanshika Ltd.

Solution:

 

Re-issue of forfeited shares issued at premium:

Illustration 4 (Re-issue at par):

Shubham Ltd. issued 50,000 shares of ₹10 each at a premium of ₹2 payable as ₹4 on Application, ₹4 on Allotment (including premium), ₹4 on First & Final Call. All the shares were duly received except on 1,000 shares for First & Final Call money. These shares were forfeited and re-issued @ ₹10 each as fully paid. Pass the necessary Journal Entries in the books of Shubham Ltd.

Solution:

 

Note: Securities Premium Reserve A/c has not been debited at the time of forfeiture of shares because the premium has been already received with allotment money. 

Illustration 5 (Re-issue at premium):

Tarun Ltd. issued 5,000 shares o ₹100 each at a premium of ₹10 each payable as ₹30 on Application, ₹40 on Allotment (including premium), and ₹40 on First & Final Call. All the money was duly received except Allotment and First & Final Call on 100 shares. These shares were forfeited and re-issued immediately @ ₹105 each. Pass the necessary Journal Entries in the books of Tarun Ltd. 

Solution:

 

*1 In the above question, the allotment money on 100 forfeited shares has not been received and as the premium was also due on the allotment, it has not been received. Therefore, Securities Premium Reserve A/c has been debited at the time of forfeiture of shares. 

Illustration 6 (Re-issue at discount):

Kashish Ltd. issued 1,000 shares @ ₹100 each at a premium of ₹20 payable as ₹30 on Application, ₹50 on Allotment (including premium), ₹30 on First Call, and ₹10 on the Second & Final Call. The company did not call the second & final call. All the shares were duly received except the First Call on 100 shares. These shares were immediately forfeited and re-issued at ₹80 each. Pass the necessary Journal Entries in the books of Kashish Ltd.

Solution:

 



Last Updated : 05 Apr, 2023
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