Comprehensive Journal Entries and Balance Sheet Analysis for XYZ Limited

A detailed breakdown of share issue, forfeiture, reissue, and financial extract

Key Insights

Structured Journal Entries: Detailed accounting for application, allotment, calls, forfeiture and reissue.
Balance Sheet Impact: Extracts show changes in share capital, premiums, and reserves after adjustments.
Clear Treatment of Forfeited Shares: Emphasis on adjusting accounts for non-payment and subsequent reissue transactions.

Introduction

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 (including ₹2 premium).
• First and final call: ₹6 per share.

Due to non-payment by certain shareholders, shares held by Mr. Das (50 shares) and Mr. Pal (80 shares) were forfeited. Specifically, Mr. Das did not pay the allotment and call money, while Mr. Pal did not pay the call money. These forfeited shares were later reissued at ₹17 per share. The procedure involves several steps and corresponding journal entries in order to accurately reflect these transactions in accounting records. Below is a comprehensive analysis including all journal entries and an extract of the balance sheet adjusted for these events.

Detailed Journal Entries

Step 1: Receipt of Application Money

Transaction Details

For the issue, 10,000 shares were subscribed and the application money was collected at ₹4 per share. The journal entry recorded on receipt of application money is as follows:


  Bank A/c                      Dr.   ₹40,000
      To Share Application A/c          ₹40,000
  (Being application money received for 10,000 shares @ ₹4 each)

Step 2: Allotment of Shares

Transaction Details

Once the application money is adjusted, the allotment stage requires payment of ₹7 per share. Out of this, ₹2 per share represents premium. The journal entry on allotment is split into transferring amounts to the share capital and premium accounts.


  Share Application A/c         Dr.  ₹40,000
      To Share Capital A/c               ₹40,000
  (Being application money transferred to share capital as adjustment)
  
  Bank A/c                      Dr.   ₹70,000
      To Share Allotment A/c            ₹70,000
  (Being allotment money received for 10,000 shares @ ₹7 each)
  
  // Allocating the allotment received:
  Share Allotment A/c           Dr.   ₹70,000
      To Share Capital A/c              ₹50,000   (10,000 shares x (₹15 - ₹4 - ₹6) i.e., remaining face value adjustment)
      To Securities Premium A/c         ₹20,000   (10,000 shares x ₹2 as premium)
  (Being allotment adjusted into share capital and premium)

Note: The above step also acknowledges that from the share’s face value (₹15), the application amount has already been credited. The allotment splits the remaining balance (₹11) into share capital portion and premium portion (₹2). However, for simplicity, the journal entry above segregates the cash receipt from the subsequent transfer to the corresponding accounts.

Step 3: Receipt of First and Final Call Money

Transaction Details

The first and final call requires payment of ₹6 per share for all 10,000 shares except where defaults occur. The entry for receipt of call money (assuming full receipt initially) is:


  Bank A/c                      Dr.   ₹60,000
      To Share Call A/c                ₹60,000
  (Being first and final call money received for 10,000 shares @ ₹6 each)

However, adjustments are needed considering defaults by Mr. Das and Mr. Pal.

Step 4: Adjustments for Non-Payment and Forfeiture

Defaults by Specific Shareholders

Non-Payment by Mr. Das and Mr. Pal

• For Mr. Das (50 shares):
   Failure to pay:
   – Allotment money: 50 × ₹7 = ₹350
   – First and final call money: 50 × ₹6 = ₹300
   Total not received = ₹650

• For Mr. Pal (80 shares):
   Failure to pay first and final call: 80 × ₹6 = ₹480

These defaults lead to forfeiture of the corresponding shares. The journal entries should transfer the amounts due into a forfeiture account.

Forfeiture Journal Entries

Recording Forfeiture for Mr. Das

In Mr. Das’s case, the shares (50 in total) are forfeited due to non-payment of the allotment and call amounts. The entries record debit adjustments for the share allotment and call accounts and credit a forfeiture account:


  // For Mr. Das's 50 shares:
  Share Allotment A/c           Dr.   ₹350
  Share Call A/c                Dr.   ₹300
      To Share Forfeiture A/c           ₹650
  (Being forfeiture of 50 shares for non-payment of allotment and call money)

Recording Forfeiture for Mr. Pal

For Mr. Pal, default on the call money for 80 shares results in a similar entry:


  // For Mr. Pal's 80 shares:
  Share Call A/c                Dr.   ₹480
      To Share Forfeiture A/c           ₹480
  (Being forfeiture of 80 shares for non-payment of first and final call money)

This results in a total of 130 forfeited shares (50 + 80) with cumulative defaults amounting to ₹1,130 (₹650 from Mr. Das and ₹480 from Mr. Pal).

Step 5: Reissue of Forfeited Shares

Reissue Transaction Details

Reissue at ₹17 per Share

Once the shares are forfeited, the company reissues the 130 shares at a price of ₹17 each. The calculation and journal entries reflect the receipt of cash and adjustment of share capital and forfeiture accounts.

Calculation: 130 shares × ₹17 = ₹2,210 received on reissue.


  Bank A/c                      Dr.   ₹2,210
      To Share Capital A/c              ₹1,950    //(130 shares × ₹15 face value)
      To Securities Premium A/c         ₹260      //(130 shares × (₹17 - ₹15) premium received)
  (Being reissue of 130 forfeited shares at ₹17 per share)

Alternatively, if the forfeiture account originally holds a balance from defaults, any excess of reissue price over the credited amount in the forfeiture account may be transferred to a Capital Reserve. In our integrated approach, the entire reissue is adjusted through the capital and premium accounts directly.

Extract of Balance Sheet

Impact on Shareholders' Funds

Share Capital and Reserves

The balance sheet extract reflects adjustments resulting from the entire sequence of transactions. Below is a simplified extract showing the position of share capital, share premium, and any reserves after considering the forfeiture and reissue.

Assumptions and Adjustments

• Total authorized and issued share capital for 10,000 shares @ ₹15: ₹1,50,000.
• The application money (₹4 per share) and the allotment money (₹7 per share including ₹2 premium) have been fully adjusted.
• The call money received for the remaining shares (except the defaults) is in the Share Call A/c.
• Forfeited shares amounting to 130 shares have been eliminated from the share capital on account of non-payment and later reissued at a premium.

Balance Sheet Extract Table

Liabilities	Amount (₹)
Equity Share Capital (Issued 10,000 shares @ ₹15)	1,50,000
Less: Adjustment for Forfeited Shares (130 shares)	(1,950)
Add: Adjustment for Reissued Shares (@ Face Value 130×₹15)	1,950
Net Issued Share Capital	1,50,000
Securities Premium (Allotment premium on 10,000 shares @ ₹2 plus premium on reissue)	₹20,000 + ₹260 = ₹20,260
Capital Reserve from Forfeiture (if any adjustments are required)	May be nil or as adjusted
Total Shareholders' Funds	Approximately ₹1,70,260

This table provides an overview of how share capital and associated premium have been affected. The exact figures in a full balance sheet would include other liabilities and assets, and additional disclosures about the forfeiture and reissue transactions would be made in the notes.

Step-by-Step Workflow Summary

A Logical Walkthrough

1. Share Issuance

The process began with the receipt of ₹4 per share on application, generating an initial cash inflow. This amount was then adjusted against the share capital as the allotment phase began. The allotment money of ₹7 per share (which included a premium of ₹2) was received and broken down into the capital and premium components.

2. Call Money Collection

Following the allotment, call money of ₹6 per share was collected. However, due to defaults by Mr. Das and Mr. Pal, not all anticipated funds were received. These defaults necessitated the creation of a forfeiture process.

3. Forfeiture of Shares

The non-payment for 130 shares (comprising 50 from Mr. Das and 80 from Mr. Pal) was recorded as a forfeiture. This ensured that the unpaid amounts were properly tracked, and the corresponding shares were marked as forfeited in the books, preventing them from being counted as fully paid-up share capital.

4. Reissue of Forfeited Shares

The company then reissued the 130 forfeited shares at ₹17 per share, leading to an additional cash inflow and adjustments in the share capital and premium accounts. The reissue was recorded so that the face value was again recognized as share capital and the excess received was treated as premium.

Additional Considerations and Accounting Nuances

Accounting for Forfeited Shares

Principles Involved

In accounting for forfeited shares, it is crucial to note that the unpaid amounts on these shares are not automatically written off. Instead, the accounts record the amounts due by debiting the corresponding allotment and call accounts and crediting the Share Forfeiture account. Upon reissue, any discrepancy between the reissue price and the initial amounts due is adjusted either through securities premium or transferred to a Capital Reserve.

Significance of Accurate Journal Entry

Ensuring Consistency

Proper recording of the transactions guarantees accurate reflection in the financial statements. The balance sheet not only shows the outstanding share capital but also details the premium and any reserves arising from the forfeiture and reissue process.

Potential Adjustments in Practical Scenarios

Reconciliation with Bank Statements

While the above entries reflect the theoretical process, in practice, companies may have additional reconciliation steps including verifying actual receipts and ensuring that the share forfeiture and reissue figures reconcile with the bank statements and the ledger balances. Such attention to detail avoids discrepancies during audits.