Dive into Equity Shares Forfeiture and Reissue Accounting
Comprehensive Journal Entries and Balance Sheet Extraction Explained
Key Highlights
- Journal Entries Integration: Detailed entries covering application, allotment, call money, forfeiture, and reissue phases.
- Forfeiture Process Nuances: Specific treatment for non-payment cases by Mr. Das and Mr. Pal with subsequent reissue entries.
- Balance Sheet Extract: Detailed extract showcasing adjustments in Equity Share Capital, Securities Premium, Forfeited Shares, and Capital Reserve accounts.
Introduction
In the scenario presented, XYZ Limited issued 10,000 equity shares with a face value of ₹15 each following a staged payment process: ₹4 per share on application, ₹7 per share on allotment (with ₹2 per share constituting the premium), and ₹6 per share on the first and final call. Due to the default in payments by two shareholders – Mr. Das (50 shares) and Mr. Pal (80 shares) – certain shares were forfeited and subsequently reissued at ₹17 per share. The journal entries and the balance sheet extract below detail the complete accounting treatment for this event.
Step 1: Accounting for Initial Share Issue
A. Receipt on Application
When the company receives the application money for 10,000 equity shares at ₹4 per share, the entry is recorded as:
Journal Entry – Application Money
Dr. Bank A/c ₹40,000 /* (10,000 x ₹4) */
Cr. Share Application A/c ₹40,000
Once the application money is received and subsequently adjusted against the share capital, the entry is:
Dr. Share Application A/c ₹40,000
Cr. Equity Share Capital A/c ₹40,000
B. Receipt on Allotment
The allotment money is due at ₹7 per share, which includes a premium of ₹2 per share. This means that from the ₹7 received for each share, ₹5 is credited to the nominal share capital and ₹2 to the Securities Premium Reserve. Hence, for 10,000 shares:
Journal Entry – Allotment Money
Dr. Bank A/c ₹70,000 /* (10,000 x ₹7) */
Cr. Share Allotment A/c ₹50,000 /* (10,000 x ₹5; applied to Share Capital) */
Cr. Securities Premium A/c ₹20,000 /* (10,000 x ₹2 premium) */
C. Receipt on First and Final Call
The first and final call brings in ₹6 per share for the 10,000 shares:
Journal Entry – First & Final Call
Dr. Bank A/c ₹60,000 /* (10,000 x ₹6) */
Cr. Share First and Final Call A/c ₹60,000
Step 2: Forfeiture of Shares Due to Non-payment
Certain shareholders defaulted on their call payments. Specifically, Mr. Das holding 50 shares did not pay both the allotment and the first and final call money, while Mr. Pal holding 80 shares did not pay on the first and final call.
A. Detailed Non-payment Analysis
To break down the effect:
- For Mr. Das: 50 shares missed payment for both allotment (₹7 per share) and first & final call (₹6 per share). Under the allotment, the components are split into ₹5 toward share capital and ₹2 toward premium.
- For Mr. Pal: 80 shares missed the payment of the first and final call (₹6 per share).
This default triggers the forfeiture process. The amounts that should have been received are first recorded as “Calls in Arrears” and then transferred to a Forfeited Shares account upon finalization of the forfeiture.
B. Forfeiture Journal Entries
The accounting treatment for forfeiture involves reversing the amounts already credited or expected, and transferring them to a Forfeited Shares account.
For Mr. Das (50 Shares)
For Mr. Das, the following amounts were expected:
- Allotment Money per share: ₹7 (comprising ₹5 to share capital and ₹2 to premium), total for 50 shares = ₹350 (₹250 to share capital + ₹100 premium).
- First & Final Call per share: ₹6, total for 50 shares = ₹300.
Accordingly, the combined arrears for Mr. Das amount to ₹350 (allotment) + ₹300 (call) = ₹650.
Dr. Equity Share Capital A/c ₹250 /* For 50 shares, for share capital portion of allotment */
Dr. Securities Premium A/c ₹100 /* For 50 shares at ₹2 per share premium */
Dr. Share First and Final Call A/c ₹300 /* For first and final call missed */
Cr. Calls in Arrears A/c ₹650
(Being calls in arrears recorded for Mr. Das)
For Mr. Pal (80 Shares)
For Mr. Pal, only the first and final call was defaulted:
- First & Final Call per share: ₹6, hence for 80 shares = ₹480.
Dr. Share First and Final Call A/c ₹480
Cr. Calls in Arrears A/c ₹480
(Being first and final call money not received from Mr. Pal)
Subsequently, the Calls in Arrears account is cleared by transferring the combined arrears for forfeited shares to the Forfeited Shares account.
Dr. Forfeited Shares A/c ₹1,130 /* (₹650 from Mr. Das + ₹480 from Mr. Pal) */
Cr. Calls in Arrears A/c ₹1,130
(Being transfer of arrears for forfeited shares)
Step 3: Reissue of Forfeited Shares
Once shares are forfeited, the company can reissue these shares. In this case, the total forfeited shares are 50 (by Mr. Das) + 80 (by Mr. Pal) = 130 shares. These shares are reissued at ₹17 per share.
Reissue Entries
The reissue entry involves receiving cash at the new issue price and adjusting the share capital and forfeited shares accounts accordingly. Remember that for each share, the face value of ₹15 is maintained while any excess received is treated as premium. Here’s how the entry is made:
Journal Entry – Reissue of 130 Forfeited Shares
Dr. Bank A/c ₹2,210 /* (130 shares x ₹17) */
Cr. Equity Share Capital A/c ₹1,950 /* (130 shares x ₹15, face value portion) */
Cr. Securities Premium A/c ₹260 /* (Balancing figure: ₹2,210 - ₹1,950) */
(Being forfeited shares reissued at ₹17 per share)
Step 4: Adjustments and Transfer to Capital Reserve
If any residual amounts remain in the Forfeited Shares account after reissue, these are typically transferred to the Capital Reserve account. In our scenario, once reissue is complete, it is assumed that the Forfeited Shares account is fully adjusted. However, if there was a balance remaining, the journal entry would be:
Transfer of Balance from Forfeited Shares to Capital Reserve
Dr. Forfeited Shares A/c ₹[Balance]
Cr. Capital Reserve A/c ₹[Balance]
(Being the balance transferred to Capital Reserve)
Typically, after the reissue, the Forfeited Shares account should register a zero balance.
Step 5: Consolidated Journal Entries Summary
For clarity, the journal entries can be summarized in a comprehensive table below.
| Transaction | Debit Account (Amount in ₹) | Credit Account (Amount in ₹) | Description |
|---|---|---|---|
| Application | Bank A/c ₹40,000 | Share Application A/c ₹40,000 | Receipt of application money (10,000 × ₹4) |
| Share Application A/c ₹40,000 | Equity Share Capital A/c ₹40,000 | Application amount adjusted against capital | |
| Allotment | Bank A/c ₹70,000 | Share Allotment A/c ₹50,000 Securities Premium A/c ₹20,000 |
Receipt of allotment money (10,000 × ₹7) |
| First & Final Call | Bank A/c ₹60,000 | Share First and Final Call A/c ₹60,000 | Receipt of call money (10,000 × ₹6) |
| Forfeiture of Shares | Dr. Equity Share Capital A/c ₹250 Dr. Securities Premium A/c ₹100 Dr. Share First and Final Call A/c ₹300 |
Cr. Calls in Arrears A/c ₹650 | For Mr. Das (50 shares) arrears: ₹650 total (₹250 + ₹100 + ₹300) |
| Dr. Share First and Final Call A/c ₹480 | Cr. Calls in Arrears A/c ₹480 | For Mr. Pal (80 shares) arrears: ₹480 | |
| Transfer to Forfeited Shares | Dr. Forfeited Shares A/c ₹1,130 | Cr. Calls in Arrears A/c ₹1,130 | Arrears transferred for total 130 shares forfeited |
| Reissue of Forfeited Shares | Dr. Bank A/c ₹2,210 | Cr. Equity Share Capital A/c ₹1,950 Cr. Securities Premium A/c ₹260 |
Reissue of 130 shares at ₹17 each |
Step 6: Extract of Balance Sheet
The balance sheet extract reflects the positioning of share capital, reserves, and adjustments made due to forfeiture and subsequent reissue. For example, suppose the total authorized share capital remains 10,000 shares of ₹15 each, and the actual shares paid-up after reissue are adjusted accordingly.
XYZ Limited – Balance Sheet Extract (as at Date)
| Particulars | Amount (₹) |
|---|---|
| Equity Share Capital |
Authorized: 10,000 shares of ₹15 each = ₹150,000 Issued and Subscribed: Adjusted for forfeited & reissued shares (e.g., 9,870 or 9,930 shares, as adjustments are made) |
| Securities Premium Reserve |
Balance carried forward includes: - Allotment premium received: ₹20,000 - Adjustments from reissue of forfeited shares: ₹260 (or as applicable) |
| Capital Reserve | Transfer of any residual balance from Forfeited Shares account (if applicable) |
| Forfeited Shares Account | Balance adjusted to nil post reissue (if all forfeited shares are reissued and any balance transferred to Capital Reserve) |
| Calls in Arrears (if any) | Cleared off through transfer to Forfeited Shares account—Net balance zero |
Note: The figures in the balance sheet extract may vary slightly based on the exact number of shares ultimately retained, forfeited, and reissued. The above extract demonstrates that following the reissue at ₹17 per share, adjustments are made such that the Equity Share Capital is credited with the face value of the reissued shares and any premium received (i.e., in excess of the ₹15 face value) is recorded in the Securities Premium Reserve. Additionally, once reissue is complete, any remaining balance in the Forfeited Shares account is transferred to the Capital Reserve account.
Additional Considerations
Clarity in Accounting Treatment
It is critical to ensure that each stage of the share issue process is reflected accurately in the books. The initial entries for application, allotment, and call receipts form the backbone of the share capital formation. Following this, the treatment of non-payment, leading to forfeiture, must be executed with precision in order to reflect the true financial position. The final step of reissuing the forfeited shares at a premium further adjusts the Share Capital and Securities Premium accounts appropriately.
Companies must also update their balance sheet extracts to ensure that the equity section reflects these changes, offering a clear picture of the company’s financial structure. It is imperative that auditors and accountants maintain appropriate documentation to justify each journal entry, while adhering to prevailing accounting standards.
Use of Tables and Numerical Listings
Tables are an excellent way to summarize transactions and provide a clear visual reference, as shown above. They help in ensuring that all stakeholders – be it management, auditors, or regulators – can verify that the accounting treatment for forfeiture and reissue is in alignment with applicable financial reporting standards.
References
- Forfeiture of Share: Accounting Entries - Toppr
- XYZ Ltd. Forfeiture Case - Doubtnut
- Forfeiture and Reissue of Shares - Sarthak S
- XYZ Ltd. Forfeiture Journal Entries - Byju's
- Journal Entries for Equity Shares - Saranextgen
Recommended Related Queries
nios-cms.s3.ap-south-1.amazonaws.com
solveeverythinger.blogspot.com
Last updated March 24, 2025