Forfeiture and Re-issue of Shares

Detailed Journal Entries and Balance Sheet Extract for XYZ Limited

Key Highlights

• Forfeiture Process: Identification of defaulting shareholders, calculation of dues, and recording the forfeiture.
• Re-issue Process: Re-issuing the forfeited shares at a premium and accounting for the extra amount in the Capital Reserve.
• Balance Sheet Impact: Reflecting changes in Share Capital and Reserves after re-issue.

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Background and Transaction Details

XYZ Limited issued 10,000 equity shares of ₹15 each with the following payment schedule:

• Application Money: ₹4 per share
• Allotment Money: ₹7 per share (which includes a premium component of ₹2 per share)
• First and Final Call Money: ₹6 per share

However, two shareholders defaulted on their payments:

• Mr. Das (50 shares) did not pay the allotment and the first and final call money.
• Mr. Pal (80 shares) did not pay the first and final call money.

Due to these defaults, the corresponding shares were forfeited and later re-issued at a price of ₹17 per share. The following sections detail the necessary journal entries and the extract of the balance sheet after these transactions.

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Step 1: Recording the Forfeiture of Shares

The first step is to record the forfeiture of shares for the defaulting shareholders. The entries consider the amounts that were due but not received.

Forfeiture of Mr. Das's Shares (50 Shares)

For Mr. Das, the following amounts were due:

• Allotment Money: 50 shares × ₹7 = ₹350
• First and Final Call Money: 50 shares × ₹6 = ₹300

The total amount due from Mr. Das was ₹650. Although the application money (₹4 per share) would have been received, the forfeiture entry concerns only the amounts on which the default occurred. In addition, the premium component received on allotment (₹2 per share) is considered separately where applicable.

The journal entry for forfeiting Mr. Das's shares is:

  // Forfeiture of Mr. Das's 50 Shares
  Dr. Share Capital A/c                    ₹750   // (50 shares * ₹15; to remove the entire capital amount)
  Dr. Securities Premium Reserve A/c       ₹100   // (50 shares * ₹2; premium received earlier)
     Cr. Share Allotment A/c              ₹350   // Allotment due not received by Mr. Das
     Cr. Share Call A/c                   ₹300   // Call money due not received by Mr. Das
     Cr. Share Forfeiture A/c              ₹200   // Balancing figure to reflect forfeiture
  

Explanation:

• The Share Capital is debited by the full face value (50 × ₹15 = ₹750) to remove the share from the capital accounts.
• The Securities Premium Reserve is debited by the premium received on allotment (50 × ₹2 = ₹100).
• The amounts credited to the Share Allotment Account (₹350) and Share Call Account (₹300) represent the dues not received.
• The remaining balance of ₹200 is credited to the Share Forfeiture Account as an interim adjustment.

Forfeiture of Mr. Pal's Shares (80 Shares)

For Mr. Pal, only the first and final call money was due:

• First and Final Call Money: 80 shares × ₹6 = ₹480

The journal entry for forfeiting Mr. Pal's shares is:

  // Forfeiture of Mr. Pal's 80 Shares
  Dr. Share Capital A/c                    ₹1,200  // (80 shares * ₹15)
     Cr. Share Call A/c                   ₹480   // Call money not received by Mr. Pal
     Cr. Share Forfeiture A/c             ₹720   // Balancing figure for forfeiture adjustment
  

Explanation:

• The Share Capital is debited by ₹1,200 (80 × ₹15) to eliminate the amount for these shares.
• The call money due of ₹480 is credited to the Share Call Account.
• The remainder of ₹720 is credited to the Share Forfeiture Account to balance the entry.

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Step 2: Re-issuing the Forfeited Shares

After the forfeiture, all 130 shares (50 from Mr. Das and 80 from Mr. Pal) are re-issued at ₹17 per share.

The total amount received on re-issue is:

• Total Amount = 130 shares × ₹17 per share = ₹2,210

The journal entry for reissuing the shares is:

  // Re-issue of 130 Forfeited Shares at ₹17 per Share
  Dr. Bank A/c                           ₹2,210  // Total cash received on re-issue
     Cr. Share Capital A/c               ₹1,950  // (130 shares * ₹15) - original face value
     Cr. Share Forfeiture A/c             ₹260    // Excess received on re-issue (₹2,210 - ₹1,950)
  

Explanation:

• The Bank account is debited with the cash received from re-issuance.
• The Share Capital account is credited with the original capital value of the re-issued shares (130 × ₹15 = ₹1,950).
• The difference of ₹260 (₹2,210 - ₹1,950) is credited to the Share Forfeiture Account, which represents a gain on the re-issue.

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Step 3: Transfer Balance from Share Forfeiture Account to Capital Reserve

After re-issuing, the Share Forfeiture Account will have a balance that represents the aggregate of forfeited amounts less the surplus received on re-issue. The total balance in the Share Forfeiture Account from the forfeiture entries is:

• For Mr. Das: ₹200
• For Mr. Pal: ₹720

Total Forfeiture Balance = ₹200 + ₹720 = ₹920

Since on re-issue, ₹260 was credited back to the Share Forfeiture Account, the remaining balance to be transferred to Capital Reserve is:

₹920 - ₹260 = ₹660

The journal entry for this transfer is:

  // Transfer Balance from Share Forfeiture Account to Capital Reserve
  Dr. Share Forfeiture A/c               ₹660
     Cr. Capital Reserve A/c             ₹660
  

Explanation:

• The remaining balance in the Share Forfeiture Account after re-issue profit is transferred to the Capital Reserve, recognizing the gain on re-issue as a reserve.

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Summary Journal Entries

The following is a consolidated summary of all journal entries:

1. Forfeiture Entries

Mr. Das (50 Shares):

// Forfeiture of Mr. Das's 50 Shares
Dr. Share Capital A/c                    ₹750  
Dr. Securities Premium Reserve A/c       ₹100  
   Cr. Share Allotment A/c              ₹350  
   Cr. Share Call A/c                   ₹300  
   Cr. Share Forfeiture A/c             ₹200  
  

Mr. Pal (80 Shares):

// Forfeiture of Mr. Pal's 80 Shares
Dr. Share Capital A/c                    ₹1,200  
   Cr. Share Call A/c                   ₹480  
   Cr. Share Forfeiture A/c             ₹720  
  

2. Re-issue Entry

// Re-issue of 130 Forfeited Shares at ₹17 Each
Dr. Bank A/c                           ₹2,210  
   Cr. Share Capital A/c               ₹1,950  
   Cr. Share Forfeiture A/c             ₹260  
  

3. Transfer to Capital Reserve

// Transfer remaining balance from Share Forfeiture to Capital Reserve
Dr. Share Forfeiture A/c               ₹660  
   Cr. Capital Reserve A/c             ₹660  
  

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Extract of the Balance Sheet

The following is an extract of the Balance Sheet of XYZ Limited after the aforementioned transactions. The extract focuses on the Share Capital and Reserves, which are directly affected by the forfeiture and subsequent re-issue of shares.

Particulars	Amount (₹)
Share Capital	--
Authorized Capital (10,000 shares @ ₹15)	150,000
Issued and Paid-up Capital	150,000
Less: Amount Written Off on Forfeiture (eliminated from capital via forfeiture adjustment)	(—)
Net Share Capital	150,000
Reserves and Surplus
Securities Premium Reserve	As per premium received (e.g., additional from allotment entries)
Capital Reserve (from transfer of Forfeiture Balance)	660
Other Reserves and Surplus	(Not affected by these entries)
Total Reserves and Surplus	660 + [others]
Liabilities (Other items as applicable)
Bank (including cash from re-issue)	Increase by ₹2,210 & Adjustments from original issue

Explanation:

The Balance Sheet extract reflects the following adjustments:

• Share Capital: The total paid-up capital remains at ₹150,000. The forfeiture process has resulted in adjustments in the accounts used to record the non-receipt of allotment and call money, which eventually are reversed on re-issue.
• Reserves and Surplus: The Capital Reserve is credited with the remaining balance from the Share Forfeiture Account once the excess on re-issue is accounted for. Note that the Securities Premium remains based on the premium received during allotment.
• Assets: The Bank balance reflects cash receipts including application money, allotment money (after adjustments), call money from compliant shareholders, and the proceeds from re-issuing forfeited shares.

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Additional Insights and Considerations

Accounting Treatment Overview

The procedure adopted for recording forfeiture and re-issue of shares ensures:

• Transparency: Each transaction—defaults on payment, subsequent forfeiture, and the gain on re-issue—is clearly recorded in the books with proper segregation between capital, premiums, and reserves.
• Restoration of Capital: By re-issuing the forfeited shares at a higher price, XYZ Limited not only recovers the capital but also creates a profit component that is transferred to the Capital Reserve. This enhances the net worth of the company.
• Investor Communication: The notes accompanying the Balance Sheet should clearly state these adjustments, ensuring clarity for stakeholders regarding the handling of forfeited and re-issued shares.

Journal Entry Nuances

It is important to consider the following in the journal entries:

• The share forfeiture entries remove the defaulted share amounts from the Share Capital accounts and create a temporary balance in the Forfeiture Account, which is later adjusted upon re-issue.
• The re-issue entry credits the Share Forfeiture Account with any surplus received over the original face value, ensuring that the profit from re-issuance is recognized.
• The residual balance in the Forfeiture Account, after accounting for the reissue surplus, is ultimately transferred to the Capital Reserve, thereby reflecting it in the company’s equity.

Impact on Financial Statements

The above transactions manifest in multiple parts of the financial statements:

• Equity: While the nominal share capital remains unchanged, the internal re-classification between Share Capital, Share Forfeiture, and Capital Reserve indicates the effective recovery and additional gains from re-issuance.
• Assets: The cash inflow from the re-issue of forfeited shares contributes positively to the Bank account, thereby enhancing liquidity.
• Disclosure Notes: Companies are required to illuminate these adjustments in the notes to accounts, providing a full explanation of the forfeiture and subsequent recovery process.

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References

• Forfeiture and Re-issue - Accounting Notes
• Forfeiture of Shares - Toppr
• Re-issue of Forfeited Shares - GeeksforGeeks
• Forfeited Shares - Investopedia
• Issue, Forfeiture & Re-issue of Shares - Testbook

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