Mastering Forfeiture and Reissue Journal Entries
Step-by-step explanation for recording forfeiture and reissue transactions
Key Insights
- Detailed Journal Entries: Precise entries are required for share forfeiture, reissue, and transfer to capital reserve.
- Calculation of Amounts: Accurate computation for amounts due at each stage (application, allotment including premium, and call money) is essential.
- Balance Sheet Impact: The extract of the balance sheet shows adjustments in share capital and reserves in line with these transactions.
Understanding the Transaction Details
XYZ Limited has issued 10,000 equity shares of ₹15 each. Each share’s payment is structured into three parts:
Payment Structure:
Application: ₹4 per share
Allotment: ₹7 per share (which includes a premium of ₹2 per share)
First and Final Call: ₹6 per share
Two shareholders have defaulted on payment:
- Mr. Das holding 50 shares failed to pay the allotment and the first and final call amounts.
- Mr. Pal holding 80 shares failed to pay the first and final call amount.
Consequently, the shares held by Mr. Das and Mr. Pal are forfeited. Later, all these forfeited shares (totaling 130 shares) are re-issued at ₹17 per share.
Journal Entries for Forfeiture and Reissue
1. Journal Entries for Forfeiture
a. Forfeiture of Mr. Das’s Shares (50 Shares)
For each share, the amounts are as follows:
- Allotment Money Due: ₹7 per share
- First and Final Call Money Due: ₹6 per share
Total amount not received per share = ₹7 + ₹6 = ₹13
Total for 50 shares = 50 × ₹13 = ₹650
Since the share capital per share is ₹15, but the application money of ₹4 is received on each share, the remaining unpaid part forms the basis of forfeiture entries.
Journal Entry:
// Forfeiture entry for Mr. Das (50 shares)
Dr. Share Forfeiture A/c ₹650
Cr. Share Capital A/c ₹350 <!-- representing the allotment portion (50 x ₹7) -->
Cr. Share Call A/c ₹300 <!-- representing the call portion (50 x ₹6) -->
Note: The application money of ₹4 per share has already been credited to the Share Capital at the time of allotment.
b. Forfeiture of Mr. Pal’s Shares (80 Shares)
Here, Mr. Pal has defaulted only on the first and final call amount:
- First and Final Call Money Due: ₹6 per share
Total for 80 shares = 80 × ₹6 = ₹480
Journal Entry:
// Forfeiture entry for Mr. Pal (80 shares)
Dr. Share Forfeiture A/c ₹480
Cr. Share Call A/c ₹480 <!-- For call default for 80 shares -->
2. Journal Entry for Reissue of Forfeited Shares
The total forfeited shares count is 130 (50 from Mr. Das and 80 from Mr. Pal). These are re-issued at a price of ₹17 per share.
- Total Consideration Received: 130 × ₹17 = ₹2,210
The reissue aims to recover the amount previously not received and any excess is realized as securities premium or profit on reissue.
We assume here that the reissue restores the share capital element and any difference between the reissue price and the original paid-up amounts is adjusted to premium accounts.
Journal Entry:
// Reissue of the 130 forfeited shares
Dr. Bank A/c ₹2,210
Cr. Share Capital A/c ₹1,950 <!-- Credit value of share capital at ₹15 per share (130 x ₹15) -->
Cr. Securities Premium A/c ₹260 <!-- Balancing figure: ₹2,210 - ₹1,950 -->
3. Transfer of Residual Forfeited Amount to Capital Reserve
After reissue, the Forfeited Shares Account will have some balance which represents the difference between the originally forfeited amounts and adjustments made during reissue. This balance is treated as capital profit and must be transferred to the Capital Reserve.
Total amount from prior forfeiture is ₹650 (Mr. Das) + ₹480 (Mr. Pal) = ₹1,130. Considering the reissue adjustments, the balance in the Forfeited Shares Account (if any) after reissue gets transferred.
In our journal entries the reissue has adjusted the Share Capital and Securities Premium; hence, the entire forfeited sum is now reflected appropriately. Nonetheless, the appropriate entry is as follows:
// Transfer balance in Forfeited Shares Account (if any) to Capital Reserve
Dr. Share Forfeiture A/c ₹1,130
Cr. Capital Reserve A/c ₹1,130
This entry ensures that the forfeited sum is not erroneously shown as profit in revenue and is appropriately classified as a capital reserve.
Extract of Balance Sheet
The following extract from the balance sheet reflects the impact of the forfeiture and reissue transactions on the company's equity:
Equity and Liabilities
| Particulars | Amount (₹) |
|---|---|
| Share Capital |
|
| Securities Premium Reserve |
Initial premium on allotment = 10,000 shares × ₹2 = ₹20,000 Adjustment on reissue = decrease by ₹260 (credited in reissue entry) Net Securities Premium = ₹20,000 - ₹260 = ₹19,740 |
| Capital Reserve | ₹1,130 |
| Forfeited Shares Account | ₹0 |
Note: The table simplifies the presentation by focusing on the items directly affected by the forfeiture and reissue entries. The actual balance sheet would include additional assets and liabilities.
Detailed Walkthrough
Step 1: Payment Collection and Defaults
The process begins with collecting payments on different calls:
- Application Money: ₹4 per share for 10,000 shares is collected and credited to the Share Application Account. This is then transferred to the Share Capital Account on allotment.
- Allotment Money: ₹7 per share is due, out of which ₹2 per share is treated as a premium. Any default at this stage, as in the case of Mr. Das, is recorded separately.
- First and Final Call: ₹6 per share is demanded, but defaults occur as witnessed with Mr. Das and Mr. Pal.
When defaults occur, the amounts not received are debited to the Share Forfeiture Account and credited to the respective Share Capital / Call Accounts. The entries ensure that the share capital is adjusted by the total amount due on those shares.
Step 2: Forfeiture Process
The forfeiture process involves:
- Recording the unpaid amounts by debiting the Forfeited Shares Account.
- Crediting the Share Capital or relevant call accounts for Mr. Das (₹350 for allotment + ₹300 for call) and for Mr. Pal (₹480 for call only).
This systematic approach ensures proper reflection on the books of accounts and sets the stage for the subsequent reissue.
Step 3: Reissue of Forfeited Shares
On reissuing the forfeited shares at ₹17 per share, the objective is to recover funds for the initial losses. The journal entry credits the Share Capital Account at nominal value (₹15 per share) while the excess received over the nominal value is credited to the Securities Premium Reserve.
The accounting treatment ensures that the share capital remains unaffected as a long-term component of equity while the securities premium is appropriately recorded as an additional reserve.
Step 4: Capital Reserve Treatment
Finally, the balance accumulated in the Forfeited Shares Account, representing the capital profit arising from the forfeiture and subsequent reissue, is transferred to the Capital Reserve. This treatment complies with accounting standards ensuring that such capital gains are not treated as revenue but rather as a permanent component of equity.
Additional Considerations
In practice, while preparing the journal entries and balance sheet extract:
- Ensure that the company’s Articles of Association authorize share forfeiture.
- Maintain clarity on the breakdown of amounts (application, allotment, call) to prevent any misclassification.
- The adjustment for securities premium at reissue reflects the differential between the reissue price and the nominal share value.
- It is essential to reflect all these entries in the notes to accounts for clarity and audit purposes.
Summary Table
| Transaction | Debit (₹) | Credit (₹) | Details |
|---|---|---|---|
| Forfeiture (Mr. Das – 50 Shares) | ₹650 ₹480 |
Share Capital A/c ₹350 Share Call A/c ₹300 |
Unpaid allotment & call for Mr. Das |
| Forfeiture (Mr. Pal – 80 Shares) | Share Call A/c ₹480 | Unpaid call for Mr. Pal | |
| Reissue of 130 Forfeited Shares | Bank A/c ₹2,210 | Share Capital A/c ₹1,950 Securities Premium A/c ₹260 |
Reissue at ₹17 per share |
| Transfer to Capital Reserve | Share Forfeiture A/c ₹1,130 | Capital Reserve A/c ₹1,130 | Capital profit transfer |
References
- Accounting Entries on Re-issue of Forfeited Shares - GeeksforGeeks
- Forfeiture of Share - Toppr
- Reissue of Forfeited Shares - Vedantu
- Journal Entries for Forfeiture and Reissue - Doubtnut
- Forfeiture & Reissue Journal Entries - BYJU'S
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Last updated March 23, 2025