Unlocking the Forfeiture and Reissue Puzzle!
A detailed guide to journal entries and balance sheet extraction for XYZ Limited's equity share issues.
Key Highlights
- Comprehensive Journal Entries: Detailed steps for recording application, allotment, call dues, forfeiture, and reissue transactions.
- Integrated Treatment of Share Forfeiture: Clear explanation on adjusting forfeited amounts and their transfer to capital reserve if applicable.
- Balance Sheet Extract: A structured manner to reflect changes in share capital, reserves, and arrears post-transactions.
Introduction
In accounting for the equity share issue of XYZ Limited, a structured approach is required to record the series of transactions—from receiving the application money to handling defaults by shareholders and finally to the reissue of forfeited shares. In this guide, we will address the full cycle of such accounting events. Specifically, we will cover:
- Recording receipts from share application, allotment, and first and final call.
- Calculating defaults on share allotment and call payments leading to share forfeitures.
- Recording the journal entries for the forfeiture of shares held by Mr. Das and Mr. Pal.
- Passing the journal entries for the reissue of these forfeited shares at a premium.
- Drafting an extract from the balance sheet that reflects these transactions.
Issue Details and Transaction Overview
XYZ Limited issued 10,000 equity shares of ₹15 each. The payment pattern was structured as follows:
- Application money: ₹4 per share
- Allotment money: ₹7 per share (which includes a premium of ₹2 per share)
- First and Final Call: ₹6 per share
However, default occurred in the case of two shareholders:
- Mr. Das: holding 50 shares, defaulted on both the allotment money and the first and final call.
- Mr. Pal: holding 80 shares, defaulted on the first and final call payment.
Due to these defaults, the shares were subsequently forfeited and later reissued at ₹17 per share. The following sections will detail how these transactions are recorded.
Part 1: Journal Entries
A. Recording Payment Receipts and Dues
Prior to considering defaults, the company receives funds in three stages: Application, Allotment, and Call. For each share:
- Application Receipt: ₹4 per share
- Allotment: ₹7 per share (including ₹2 premium which will be routed to the Securities Premium account)
- First and Final Call: ₹6 per share
The journal entries for the payments made by the shareholders (for the majority who pay in full) are typically recorded as:
i. Application Money Received
Entries when application money is received for 10,000 shares:
// Debit Bank and Credit Share Application Account
Bank A/c ........................................ ₹40,000 (10,000 × ₹4)
To Share Application A/c .......................... ₹40,000
ii. Transfer of Application Money
When these funds are later transferred to Share Capital:
// Debit Share Application A/c and Credit Share Capital A/c
Share Application A/c ....................... ₹40,000
To Share Capital A/c ............................ ₹40,000
iii. Receipt of Allotment Money
For allotment money from fully paying shareholders:
// Debit Bank and Credit:
Bank A/c ........................................ ₹70,000 (10,000 × ₹7)
To Share Allotment A/c ......................... ₹70,000
iv. Receipt of First and Final Call Money
For call money receivable:
// Debit Bank and Credit:
Bank A/c ........................................ ₹60,000 (10,000 × ₹6)
To Share Call A/c ................................. ₹60,000
B. Handling Defaults: Forfeiture of Shares
Due to defaults in payment by Mr. Das and Mr. Pal, specific journal entries must be passed for the forfeiture of their shares. The procedure is twofold:
- Remove the credit balance for the share capital related to the defaulted shares.
- Transfer the amounts already received into a Forfeited Shares Account.
i. Forfeiture of Mr. Das's Shares (50 Shares)
Calculation:
- Total value of 50 shares @ ₹15 each = ₹750.
- Received on application = 50 × ₹4 = ₹200.
- Due but not received on allotment and call = ₹350 (allotment) + ₹300 (call) = ₹650.
Since only ₹200 was received, the forfeiture is based on the total share capital value:
// Forfeiture Entry for Mr. Das:
Share Capital A/c ............................... ₹750 (Crystallizing nominal value)
To Forfeited Shares A/c ......................... ₹750
// Note: The available received amount (₹200) is adjusted against the amount due.
ii. Forfeiture of Mr. Pal's Shares (80 Shares)
Calculation:
- Total value of 80 shares @ ₹15 each = ₹1,200.
- Received on application and allotment = (₹4 + ₹7) × 80 = ₹880.
- Default on the first and final call = 80 × ₹6 = ₹480.
The journal entry reflects the forfeiture:
// Forfeiture Entry for Mr. Pal:
Share Capital A/c ............................... ₹1,200
To Forfeited Shares A/c ......................... ₹1,200
C. Reissue of Forfeited Shares
After forfeiture, the company reissues the cumulative 130 shares (50 + 80) at ₹17 per share.
- Total Received on Reissue: 130 shares × ₹17 = ₹2,210.
- The face value of the shares is ₹15 per share, so the portion credited to Share Capital is 130 × ₹15 = ₹1,950.
- The premium on reissue is calculated as ₹2,210 - ₹1,950 = ₹260, which goes to the Securities Premium Account.
// Reissue Entry:
Bank A/c ........................................ ₹2,210
To Share Capital A/c ............................ ₹1,950
To Securities Premium A/c ........................ ₹260
D. Transfer of Forfeited Amount (If Any Excess Remains)
Sometimes, any remaining balance in the Forfeited Shares Account after reissue is transferred to the Capital Reserve to recognize the profit on reissue. Based on our entries noted above:
- Aggregate amounts previously credited to Forfeited Shares Account = ₹750 (Mr. Das) + ₹1,200 (Mr. Pal) = ₹1,950.
- Amount adjusted through reissue = ₹260 (recovery against premium), which might be subtracted as per policies. Often, the forfeited shares account will be fully eliminated and the net profit on reissue transferred to Capital Reserve.
For instance, if the forfeited account had a larger balance than recovered on reissue, the journal entry would be:
// Transfer remaining Forfeiture Balance to Capital Reserve:
Forfeited Shares A/c .............................. [Excess Amount]
To Capital Reserve A/c .............................. [Excess Amount]
In our scenario, the key entries revolve around the reissue adjustments as described.
Part 2: Extract of the Balance Sheet
Balance Sheet Presentation
The balance sheet extract under “Equity and Liabilities” will reflect the changes arising out of the forfeiture and subsequent reissue of shares.
A. Share Capital and Reserves
Assume the following details:
- Authorized Share Capital: 10,000 shares @ ₹15 each (₹1,50,000).
- Forfeited Shares: The total of 130 shares has been forfeited and then reissued, thus the nominal share capital keeps on reflecting the face value and adjustments made due to forfeiture entries do not reduce the overall issued share capital.
- Securities Premium Account: Now reflects the additional premium received on reissue (₹260) along with any premium received on allotment from correctly paid shares.
- Calls-in-Arrears: Reflect the amounts not received due to defaults – ₹650 for Mr. Das and ₹480 for Mr. Pal, totalling ₹1,130. These should be shown as a deduction in reserves or disclosed in the notes.
B. Example Extract of the Balance Sheet
A simplified extract for “Equity and Liabilities” could be structured as below:
| Particulars | Amount (₹) |
|---|---|
| Equity Share Capital (10,000 shares of ₹15 each) | 1,50,000 |
| Add: Amount from Reissue of Forfeited Shares (130 shares reissued at ₹15 face value) |
1,950 |
| Less: Forfeited Shares Adjustment (Nominal value of forfeited shares not recovered) |
(1,950) |
| Net Equity Share Capital | 1,50,000 |
| Securities Premium Account (Including reissue premium ₹260 and allotment premium from fully paid shares) |
[Aggregate Premium Amount] |
| Capital Reserve | [If any transfer from Forfeited Shares Account] |
| Less: Calls-in-Arrears (₹650 + ₹480 = ₹1,130) |
(1,130) |
| Total Equity | [Final Computed Amount] |
Note: The exact amounts in the Securities Premium and Capital Reserve accounts depend on the aggregate premiums from both the allotment and reissue transactions and any specific adjustments the company makes. The above table is a simplified representation focusing on the impact of the forfeiture and reissue process.
Summary of Journal Entries
To summarize, the required journal entries are as follows:
- Receipt of Application, Allotment, and Call Money: (Standard entries that accumulate funds from fully paying shareholders.)
- Forfeiture of Shares:
- For Mr. Das (50 shares): Debit Share Capital A/c ₹750 to credit Forfeited Shares A/c ₹750.
- For Mr. Pal (80 shares): Debit Share Capital A/c ₹1,200 to credit Forfeited Shares A/c ₹1,200.
- Reissue of Forfeited Shares:
- Bank A/c is debited for ₹2,210 (130 shares × ₹17).
- Share Capital A/c is credited for ₹1,950 (130 shares × ₹15).
- Securities Premium A/c is credited for ₹260 (balancing premium).
- Adjustment for Calls-in-Arrears and Forfeiture Account Transfer (if applicable): Entry is made to reflect any remaining balance as part of Capital Reserve.
Additional Details and Considerations
Understanding the Flow of Funds
In the overall accounting cycle for share issuance:
- The company receives funds in stages which are initially recorded in designated “receipt” accounts.
- Once funds are confirmed for share allotment, they are transferred to the Share Capital and Premium accounts.
- Defaults by any shareholder necessitate the reversal of credited amounts for the unpaid parts, thus resulting in forfeiture of the shares.
- The forfeited shares’ account holds the amount received till the point of default. Once reissued, this account is adjusted with the new cash inflow and the differential recognized as premium on reissue.
Analytical Table: Transaction Breakdown
| Transaction | Calculation/Detail | Amount (₹) |
|---|---|---|
| Face Value per Share | — | 15 |
| Application Money per Share | — | 4 |
| Allotment Money per Share | Including premium (@₹2) | 7 |
| Call Money per Share | — | 6 |
| Mr. Das’s Shares | 50 Shares at Face Value | 750 |
| Mr. Pal’s Shares | 80 Shares at Face Value | 1,200 |
| Reissue Price per Share | — | 17 |
| Total Reissue Proceeds | 130 Shares × ₹17 | 2,210 |
| Amount credited to Share Capital on Reissue | 130 Shares × ₹15 | 1,950 |
| Premium on Reissue | Reissue Proceeds − (Face Value Amount) | 260 |
References
- Accounting Entries on Re-issue of Forfeited Shares - GeeksforGeeks
- Forfeiture of Shares - Toppr
- Reissue of Forfeited Shares - Vedantu
- Journal Entries for Forfeiture & Reissue - BYJU’S
-
Issue, Forfeiture, and Reissue of Shares - Testbook
Recommended Further Queries
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Last updated March 23, 2025