Mastering Share Forfeiture & Reissue Accounting
A Detailed Guide on Journal Entries and Balance Sheet Extracts for XYZ Limited
Highlights
- Clear Journal Entries: Comprehensive steps for share forfeiture by Mr. Das and Mr. Pal and subsequent reissue at a premium.
- Accurate Balance Sheet Presentation: Detailed extract showing adjusted share capital, reserves, and surplus accounts.
- Regulatory Compliance: Emphasis on disclosure as per accounting standards with proper treatment of forfeited shares and premium.
Understanding the Transaction Background
XYZ Limited issued 10,000 equity shares of ₹15 each, with the payment structure divided into three components: an application payment of ₹4 per share, an allotment payment of ₹7 per share (including ₹2 as premium), and a first and final call of ₹6 per share. In this scenario, two shareholders defaulted on their calls: Mr. Das, holding 50 shares, did not pay for both allotment and call money, while Mr. Pal, holding 80 shares, defaulted on the call money payment. Consequently, the shares held by these two shareholders were forfeited and later reissued at ₹17 per share.
Step-by-Step Journal Entries
1. Recording Initial Share Issue Transactions
Although the core of our discussion focuses on the forfeiture and reissue entries, it is important to be aware of the underlying transactions of application, allotment, and call money. These entries ensure that the share capital process is appropriately recorded.
a. Receipt of Application Money
The company receives ₹4 per share for 10,000 shares:
// Journal Entry for Application Money Receipt
Bank A/c Dr. ₹40,000
To Share Application A/c ₹40,000
b. Receipt of Allotment Money
The allotment payment of ₹7 per share is received on issue, where ₹2 of this is considered as premium. The breakdown is:
// Journal Entry for Allotment Money Receipt
Bank A/c Dr. ₹70,000
To Share Allotment A/c ₹70,000
c. Receipt of Call Money (First and Final Call)
The final call money of ₹6 per share is received:
// Journal Entry for Call Money Receipt
Bank A/c Dr. ₹60,000
To Share Capital A/c ₹60,000
2. Journal Entries for Forfeiture
When shareholders default on payments, the company forfeits their shares. The following are the distinct entries for the two cases:
Forfeiture of Mr. Das's Shares (50 Shares)
Mr. Das failed to pay both the allotment (₹7 per share) and the call money (₹6 per share). The original value per share is ₹15. For 50 shares:
Calculations:
- Total amount originally payable: 50 shares x ₹15 = ₹750
- Amount received on application: 50 shares x ₹4 = ₹200
- Amount not received (Allotment + Call): 50 shares x (₹7 + ₹6) = ₹650
The accounting entry will transfer the unpaid amounts from the respective accounts:
// Journal Entry for Forfeiture of Mr. Das's Shares
Share Capital A/c Dr. ₹750
Securities Premium Reserve A/c Dr. ₹100 // Adjustment for premium portion already received on allotment (₹2 x 50)
To Share Allotment A/c ₹350 // (50 x ₹7) received partially from other shares excluding default
To Share Call A/c ₹300 // (50 x ₹6) default on call
To Forfeited Shares A/c ₹200 // Balancing figure
Note: The actual distribution in the entry may vary as the company’s internal records detail the flow of funds from Application, Allotment, and Call. Here, the adjustment reflects the premium element and unpaid de facto balance.
Forfeiture of Mr. Pal's Shares (80 Shares)
Mr. Pal defaulted on the first and final call money only. For 80 shares:
Calculations:
- Total original payable amount: 80 shares x ₹15 = ₹1,200
- Amount received on application & allotment: Application received = 80 x ₹4 = ₹320 and Allotment received = 80 x ₹7 = ₹560
- Amount not paid on call: 80 x ₹6 = ₹480
The journal entry will record the default:
// Journal Entry for Forfeiture of Mr. Pal's Shares
Share Capital A/c Dr. ₹1,200
To Share Call A/c ₹480 // Call money default on 80 shares
To Forfeited Shares A/c ₹720 // Balancing figure representing uncalled funds
3. Journal Entry for Reissuing Forfeited Shares
Once the shares have been forfeited, the company reissues all 130 shares (50 from Mr. Das and 80 from Mr. Pal) at ₹17 per share.
Calculations:
- Total amount received on reissue: 130 x ₹17 = ₹2,210
- The nominal value of reissued shares: 130 x ₹15 = ₹1,950
- Premium on reissue: ₹2,210 - ₹1,950 = ₹260
// Journal Entry for Reissue of Forfeited Shares
Bank A/c Dr. ₹2,210
To Share Capital A/c ₹1,950 // Nominal value of shares reissued
To Securities Premium Reserve A/c ₹260 // Premium received on reissue
4. Journal Entry for Transferring Forfeited Shares Account
After reissue, any remaining balance in the Forfeited Shares Account that represents a capital profit should be transferred to the Capital Reserve. In our example, we assume the balancing figure from forfeiture is now fully resolved upon reissue.
Aggregate Forfeiture Amount:
- For Mr. Das: ₹200
- For Mr. Pal: ₹720
- Total balance in Forfeited Shares A/c = ₹200 + ₹720 = ₹920
// Journal Entry for Transfer from Forfeited Shares to Capital Reserve
Forfeited Shares A/c Dr. ₹920
To Capital Reserve A/c ₹920
Extract of the Balance Sheet
Post the adjustments relating to forfeiture and reissue of shares, the balance sheet extract reflects these transitions within the shareholder’s funds. Below is a simplified extract of the Balance Sheet with key elements pertaining to the share capital, reserves, and surplus.
| XYZ Limited | |
|---|---|
| Extract of Balance Sheet as at March 23, 2025 | |
| Liabilities | Amount (₹) |
| Shareholder's Funds | |
| Authorized Share Capital (10,000 x ₹15) | 150,000 |
| Issued Share Capital (after forfeiture and reissue) | Remaining shares at nominal value* |
| Less: Forfeited Shares (Transferred to Capital Reserve) | 0 |
| Capital Reserve (Transfer from Forfeited Shares Account) |
920 |
| Securities Premium Reserve (₹2 premium on allotment plus ₹260 on reissue) |
Premium from allotment + 260 |
| Profit on Reissue of Forfeited Shares | As adjusted in surplus |
| Total Shareholders' Funds | As calculated |
| Assets | Amount (₹) |
| Total Assets | As per final trial balance |
*Note: The issued share capital reflects the net effect after deducting the shares forfeited and subsequently reissued. The balancing entries ensure that the nominal value of shares remains at ₹15 per share with adjustments accounted for in the premium and capital reserves.
Additional Insights into the Accounting Treatment
The journal entries followed here adhere to common accounting standards for handling share forfeiture and subsequent reissue. The core concept involves removing the amounts that were not collected (due to default) from active share capital accounts and then adequately rectifying these entries when the shares are reissued at a premium. All adjustments are ultimately reflected in the balance sheet under two major heads:
Share Capital
This account reflects the nominal value of shares issued. As the forfeiture entries debit the share capital, the eventual reissue restores part of this account and any excess received over the nominal value is credited to the Securities Premium Reserve.
Reserves (Securities Premium & Capital Reserve)
The Securities Premium Reserve accumulates the additional funds received over par value. Additionally, any profit on reissue – which is essentially the difference between the forfeited shares’ book value and the reissue price – is transferred to the Capital Reserve, reinforcing the company’s net worth.
It is important to note that while preparing these entries, one must ensure strict adherence to the guidelines outlined in the accounting standards, and the entries may be adjusted based on the company’s internal policy and regulatory requirements.
References
- Accounting Entries on Re-issue of Forfeited Shares - GeeksforGeeks
-
Issue, Forfeiture & Reissue of Shares - Toppr
- Forfeiture and Reissue of Shares - Testbook
- Forfeited Share - Investopedia
- Accounting for Forfeited Shares - Brainly
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Last updated March 23, 2025