Comprehensive Accounting for Forfeiture & Reissue of Shares

Step-by-step journal entries and balance sheet extract for XYZ Limited

Key Highlights

Forfeiture Recording: Detailing transactions for shares where payment defaults occurred.
Re-issue Treatment: Re-issuing forfeited shares at a premium and handling resultant transfers.
Balance Sheet Impact: Adjusting share capital, premium, and reserve accounts to reflect these changes.

Introduction

In this document, we will examine the detailed accounting treatment for the forfeiture and re-issue of shares for XYZ Limited. The company initially issued 10,000 equity shares of ₹15 each with a payment schedule split as follows:

₹4 per share on application.
₹7 per share on allotment, which includes a securities premium of ₹2 per share.
₹6 per share on the first and final call.

Due to non-payment by certain shareholders:

Mr. Das, holding 50 shares, failed to pay the allotment and first and final call money.
Mr. Pal, holding 80 shares, failed to pay the first and final call money.

Consequently, all these shares were forfeited by the company and later re-issued at ₹17 per share. We will now pass the necessary journal entries for each stage of the process and prepare a balance sheet extract that reflects the transactions.

Step 1: Original Issue of Shares (Background Information)

Details of the Issue

Before delving into the forfeiture and re-issue process, it is essential to understand the payment schedule and how the share capital was initially recorded:

On application, shareholders paid ₹4 per share. The bank account was debited and the Share Application Account credited.
On allotment, shareholders were called to pay ₹7 per share (of which ₹2 constituted the premium). This increased the share capital, while the Securities Premium Account was credited with the premium amount.
On the first and final call, shareholders were required to pay ₹6 per share.

Although all 10,000 shares were fully subscribed and partly paid, for our treatment, the focus is on the transactions related to defaults by Mr. Das and Mr. Pal leading to forfeiture.

Step 2: Journal Entries for Forfeiture of Shares

A. Calculation of Amounts Due

Mr. Das's Shares (50 Shares)

For each share issued to Mr. Das, the amounts not paid are:

Allotment (₹7 per share) + First and Final Call (₹6 per share) = ₹13 per share.

Total amount due for Mr. Das = 50 shares × ₹13 = ₹650.

Mr. Pal's Shares (80 Shares)

For Mr. Pal, only the first and final call was not paid:

First and Final Call (₹6 per share).

Total amount due for Mr. Pal = 80 shares × ₹6 = ₹480.

Thus, the total amount not received by the company due to non-payment is ₹650 + ₹480 = ₹1,130.

B. Forfeiture Journal Entries

When shares are forfeited, the company writes off the unpaid amounts against the share capital. The following journal entries are passed:

Forfeiture of Mr. Das's Shares

Entry for forfeiture of 50 shares:


// Journal entry for Mr. Das
Forfeited Shares A/c         Dr.   ₹650
     To Share Capital A/c              ₹650
(Being the forfeiture of 50 shares for non-payment of allotment and call money)

Forfeiture of Mr. Pal's Shares

Entry for forfeiture of 80 shares:


// Journal entry for Mr. Pal
Forfeited Shares A/c         Dr.   ₹480
     To Share Capital A/c              ₹480
(Being the forfeiture of 80 shares for non-payment of first and final call money)

Combined, the total debit to the Forfeited Shares Account equals ₹1,130.

Step 3: Journal Entry for Re-Issue of Forfeited Shares

A. Details of the Re-Issue

The total number of forfeited shares is the sum of Mr. Das's and Mr. Pal's shares:

50 (Mr. Das) + 80 (Mr. Pal) = 130 shares.

These 130 shares were re-issued at a price of ₹17 per share. Therefore, the total cash received from the re-issue is:

Total amount received = 130 shares × ₹17 = ₹2,210.

B. Calculation of Premium on Re-Issue

It is important to note that the original share nominal value is ₹15 per share. Hence, when re-issued at ₹17, the excess is considered as a premium. We calculate:

Premium per share = ₹17 (re-issue price) – ₹15 (nominal value) = ₹2.

Total premium = 130 shares × ₹2 = ₹260.

C. Re-Issue Journal Entry

The entire cash received is first recorded and then the Forfeited Shares Account is adjusted. The journal entry for re-issue is:


// Journal entry for Re-Issue of Forfeited Shares
Bank A/c                     Dr.   ₹2,210
     To Forfeited Shares A/c           ₹1,130
     To Capital Reserve A/c            ₹1,080
(Being the re-issue of 130 forfeited shares at ₹17 each, with premium adjustment; note that the premium on re-issue is not just the accounting premium per share. Here, the balancing figure, ₹1,080, represents the profit transferred to Capital Reserve.)

Explanation:

The Forfeited Shares Account originally holds ₹1,130 from the defaulted amounts.
The re-issue fetches ₹2,210, leaving an excess amount of ₹2,210 – ₹1,130 = ₹1,080. This excess amount is treated as a capital profit and is transferred to the Capital Reserve.

Step 4: Extract of the Balance Sheet

A. Impact on Share Capital and Reserves

After the forfeiture and subsequent re-issue, the balance sheet must reflect the changes in the share capital accounts and reserves:

Share Capital: Initially, the share capital is recorded based on the nominal value of shares. Any adjustments due to forfeiture and re-issue affect the reported figure.
Securities Premium: The premium received on allotment (₹2 per share) remains as originally credited.
Capital Reserve: This account is credited with the capital profit arising from the re-issue, which in our case is ₹1,080.

B. Sample Balance Sheet Extract

The balance sheet extract below shows the position after the transactions:

Particulars	Amount (₹)
Issued Equity Share Capital (Nominal ₹15 each)	150,000
Less: Forfeited Shares (amount adjusted for defaults)	(1,130)
Add: Amount from Re-Issuance of Forfeited Shares	2,210
Revised Share Capital	151,080
Securities Premium Account	[Original Premium on Allotment + Adjustments if any]
Capital Reserve (Re-Issue Profit)	1,080
Total Shareholders’ Funds	[Sum of Revised Share Capital + Reserves]

Note: The extraction of share capital here begins with the full nominal value on issue (10,000 shares × ₹15 = ₹150,000) and adjusts the forfeiture and re-issue transactions accordingly. The Securities Premium Account from allotment remains as per the original allotment entries. The Capital Reserve reflects the profit on re-issue (₹1,080).

Additional Considerations

A. Rationale Behind the Entries

The accounting treatment for forfeited shares involves writing off the amounts not received against the shareholders' equity. When these shares are subsequently re-issued at a premium, the excess over the written-off amount is recognized as a capital profit and credited to the Capital Reserve. This methodology ensures that the loss due to non-payment is properly recorded and any recovery is appropriately allocated.

B. Consistency and Accuracy

It is crucial that the journal entries for forfeiture and re-issue are consistent with the underlying accounting policies and the applicable financial reporting standards. Each entry must reflect the nature of the transaction:

The Forfeited Shares Account captures the total amount lost due to technical default.
The Bank Account records the inflow of cash from the re-issue.
The Capital Reserve receives the balancing premium (capital profit) that arises when the re-issue price exceeds the written-off amount.