Journal Entries for Super Star Ltd. Equity Share Issue

A comprehensive breakdown of journal entries for share subscription, forfeiture and reissue

corporate building and shareholders meeting

Key Highlights

Pro-rata Allotment & Application Adjustments: 12,000 applications reduced to 10,000 allotted shares with adjustment of excess application money.
Handling of Calls & Forfeitures: Detailed entries for 1st call, subsequent forfeiture of 400 shares and second call arrears of 200 shares are provided.
Reissue of Forfeited Shares: 250 of the forfeited shares reissued with corresponding adjustments to share capital and premium accounts.

Introduction and Transaction Overview

Super Star Ltd. proposed the issue of 10,000 equity shares of ₹100 each with a premium of ₹20 per share. The issue was structured with multiple payment stages, namely:

On Application: ₹10 per share
On Allotment: ₹40 per share (including premium)
On 1st Call: ₹20 per share
On 2nd Call: ₹30 per share
On Final Call: ₹20 per share

Although applications were received for 12,000 shares, only 10,000 shares were allotted on a pro-rata basis. Due to non-payment, 400 shares did not meet the 1st call and were subsequently forfeited. Furthermore, during the 2nd call, while payments were received in full by most, one holder (200 shares) defaulted on the payment, which later was settled along with the final call. Eventually, 250 of the forfeited shares were reissued at ₹50 per share, with the reissued ones being credited with ₹80 paid.

Stepwise Journal Entries and Detailed Explanations

Step 1: Receipt of Application Money and Allotment

(a) Application Money Receipt

The company received application money for 12,000 shares at ₹10 per share. Total application money received is:
₹10 × 12,000 = ₹1,20,000.


// Journal Entry for Application Money Receipt
Dr. Bank A/c                              ₹1,20,000
     Cr. Share Application A/c             ₹1,20,000

(b) Adjustment for Pro-rata Allotment

Since only 10,000 shares were allotted out of the 12,000 applications, the excess application money corresponding to 2,000 shares is refunded or adjusted. The application money actually adjusted is:
10,000 shares × ₹10 = ₹1,00,000.


// Adjusting Application Money for Allotment
Dr. Share Application A/c                  ₹1,00,000
     Cr. Share Allotment A/c                ₹1,00,000

The excess application money:


// Refund or adjustment of extra received application money
Dr. Share Application A/c                  ₹20,000   //(2,000 shares × ₹10)
     Cr. Bank A/c                           ₹20,000

(c) Allotment Money Demand

Allotment money is called at ₹40 per share (inclusive of premium on share issue). For the allotted 10,000 shares:
Total allotment money = 10,000 × ₹40 = ₹4,00,000.


// Allotment money due entry (demand for allotment)
Dr. Bank A/c                              ₹4,00,000
     Cr. Share Allotment A/c                ₹4,00,000

Step 2: Receipt of Call Money and Forfeiture Adjustments

(a) First Call

The first call, at ₹20 per share, is levied on the 10,000 shares allotted giving an expected amount of:
₹20 × 10,000 = ₹2,00,000.

However, 400 shares defaulted on the call. Payment was received only for:
10,000 - 400 = 9,600 shares (or ₹20 × 9,600 = ₹1,92,000). The amount not received (₹20 × 400 = ₹8,000) is recorded as calls in arrears.


// Journal Entry for first call receipt and recording arrears
Dr. Bank A/c                              ₹1,92,000
Dr. Calls in Arrears A/c                     ₹8,000
     Cr. Share First Call A/c               ₹2,00,000

(b) Forfeiture of Shares

Following the due notice and subsequent non-payment, the 400 shares defaulting on the first call are forfeited. In recording forfeiture, the amounts received on these shares are reversed out from their respective accounts – usually, the amounts received on application, allotment, and the first call. Here their breakdown per share (assuming per share values) is as follows:

Per Share Received before Forfeiture:
Application received: ₹10
Allotment received (adjusted via share application): ₹40
First Call received: ₹20? (but ₹20 was not received for these 400 shares, so their value being considered is what was credited already or expected – often the entire paid-up share including defaults are reversed).

The typical treatment involves debiting the share capital (or related sub-accounts) by the paid-up amount. Here, assuming the share capital value is computed on the basis of the face value (₹100) and the amounts received on earlier calls, the accounting for forfeiture is as follows:


// Journal Entry for the Forfeiture of 400 shares (details depend on amounts credited)
Dr. Share Capital A/c           ₹4,000          //(₹10 per share × 400 shares, representing the face value portion paid)
Dr. Share Allotment A/c         ₹16,000         //(₹40 per share × 400 shares)
Dr. Share First Call A/c         ₹8,000         //(₹20 per share × 400 shares; note that this adjustments reflect the shortfall)
     Cr. Share Forfeited A/c   ₹28,000         //(Aggregate amount forfeited)
// Alternatively, if additional premium or adjustments are present:

Note: Care should be taken to separately handle the premium portion. In many cases, if the premium on allotment had been credited to a separate Securities Premium Account, the forfeiture entry should also reverse that portion if not received. In our case, the premium (₹20 per share) is embedded in the allotment call of ₹40.

(c) Second Call

The second call is set at ₹30 per share. The expected receipt on 10,000 shares is:
10,000 × ₹30 = ₹3,00,000.

However, after the forfeiture 400 shares are no longer eligible, so the actual owing amount comes from the remaining 9,600 shares. Out of these, payment is made in full except for one holder for 200 shares; so:

Payment received on: 9,600 - 200 = 9,400 shares
Amount received = 9,400 × ₹30 = ₹2,82,000
Amount in arrears = 200 × ₹30 = ₹6,000


// Journal Entry for second call receipt with arrears handled separately
Dr. Bank A/c                              ₹2,82,000
Dr. Calls in Arrears A/c                     ₹6,000
     Cr. Share Second Call A/c              ₹2,88,000

The figure ₹2,88,000 represents the total call amount (9,400 + 200 = 9,600 shares × ₹30) for the shares still outstanding.

(d) Final Call

The final call is ₹20 per share on the remaining paid-up shares. Even though there were arrears from the earlier call (i.e., ₹6,000 on the second call), the final call is met in full by the shareholders including the earlier shortfall. For the 9,600 shares (which are active after forfeiture), the final call amount is:
9,600 × ₹20 = ₹1,92,000.


// Journal Entry for final call receipt (including recovery of arrears if applicable)
Dr. Bank A/c                              ₹1,92,000
     Cr. Share Final Call A/c               ₹1,92,000

The entry indicates that the final call money is met in full.

Step 3: Reissue of Forfeited Shares

(a) Background on Reissue

From the 400 shares forfeited due to non-payment at the first call, 250 shares were subsequently reissued. The new issue involves a selling price of ₹50 per share, but the shareholders are credited as having paid ₹80 per share. This essentially means that the reissue is adjusted against the forfeited amount such that the credited amount (₹80 per share) is shown in the books.

For 250 shares:
Amount received on reissue = 250 × ₹50 = ₹12,500.

(b) Journal Entry for Reissue

The reissue entry will involve debiting the bank account for the received amount, allocating part of the amount to adjust the Forfeited Shares A/c and any balancing entry going to Share Capital A/c or Securities Premium A/c as required. The typical entry is:


// Journal entry for reissue 250 forfeited shares
Dr. Bank A/c                              ₹12,500
     Cr. Forfeited Shares A/c              ₹10,000      //(representing the original cost of forfeited shares, e.g., ₹40 per share for 250 shares)
     Cr. Share Capital A/c                  ₹2,500       //(balancing entry if the credited paid-up amount is ₹80 per share credited vs. actual reissue price)

Note: The exact distribution might be subject to how the initial amounts from each call are recorded. Often, if the premium portion is maintained in a separate premium account, that account adjustment may appear in the reissue entry. In this solution, the credited amount of ₹80 per share for reissue is used to offset the previous entries.

Consolidated Summary Table of Journal Entries

Transaction	Description	Debit	Credit
Application Money Receipt	Received for 12,000 shares at ₹10 each	Bank A/c ₹1,20,000	Share Application A/c ₹1,20,000
Adjustment for Allotment	10,000 shares allotted (adjusting application money)	Share Application A/c ₹1,00,000	Share Allotment A/c ₹1,00,000
Refund Excess Application	Excess amount for 2,000 unallotted shares	Share Application A/c ₹20,000	Bank A/c ₹20,000
Allotment Money	Allotment call ₹40 per share for 10,000 shares	Bank A/c ₹4,00,000	Share Allotment A/c ₹4,00,000
First Call Receipt	Received on 9,600 shares; 400 shares in arrears	Bank A/c ₹1,92,000 Calls in Arrears A/c ₹8,000	Share First Call A/c ₹2,00,000
Forfeiture of Shares	Forfeiture of 400 shares (non-payment at 1st call)	Share Capital A/c ₹4,000 Share Allotment A/c ₹16,000 Share First Call A/c ₹8,000	Share Forfeited A/c ₹28,000
Second Call Receipt	Received on 9,400 shares with arrears on 200 shares	Bank A/c ₹2,82,000 Calls in Arrears A/c ₹6,000	Share Second Call A/c ₹2,88,000
Final Call Receipt	Final call met in full for 9,600 shares	Bank A/c ₹1,92,000	Share Final Call A/c ₹1,92,000
Reissue of Forfeited Shares	Reissue of 250 forfeited shares at ₹50, credited with ₹80 paid	Bank A/c ₹12,500	Forfeited Shares A/c ₹10,000 Share Capital A/c ₹2,500

Detailed Explanation and Rationale

Application and Allotment

Initially, the company collects funds from all prospective shareholders via a share application. Even though the interest exceeded the number of shares available (12,000 applications for 10,000 shares), the company applies a pro-rata allotment method. This involves adjusting the share application money such that only the funds corresponding to the allotted shares remain in the books while the excess is refunded or adjusted. This mechanism prevents overcapitalization and ensures that each allotted share is fully supported by the corresponding fund, ensuring accuracy in the share capital records.

Calls and Their Receipts

Throughout the process, the company makes sequential calls on the shareholders to collect the remaining funds. The first call is crucial, as failure to meet the call leads directly to the forfeiture of shares. When 400 shareholders do not remit their first call money, not only is it essential to record the received amount, but it is equally important to record the deficiency through a “Calls in Arrears” account. This account flags the missing amount while preserving the financial integrity of the issue.

Similarly, despite full payment being received for the second call by most shareholders, one holder defaulted on 200 shares. The deficit here is reflected as a call in arrears, ensuring that every monetary movement is fully substantiated by entry.

Forfeiture and Its Implications

Forfeiture of shares is an important corrective action when payment defaults occur. The accounting treatment involves backing out the amounts earlier credited against the defaulted shares, effectively “canceling” these shares. The reversal entails removing amounts from the share capital-related accounts by the amounts received from the respective calls (application, allotment, and first call). This adjustment is crucial as it rectifies the equity structure and ensures that the company’s share capital reflects only those shares that are fully paid.

In our case, the forfeiture of 400 shares is recorded by reversing the amounts credited from the application, allotment, and call money, and channeling the summed amount into a “Share Forfeited” account. This account holds the forfeited values for either reissue purposes or final write-offs.

Reissue of Forfeited Shares

Once shares are forfeited, the company may reissue them if conditions are favorable. The reissue should maintain transparency between the funds recovered and the original amounts forfeited. In the present scenario, 250 of the 400 forfeited shares are reissued at a price of ₹50 per share. However, rather than treating the entry as a simple sale, the reissue is recorded by crediting the reissue price against the forfeited share account and adjusting share capital accordingly. The credit of ₹80 per share signifies that, on reissue, the accounts are adjusted such that the shareholders’ paid-up value reflects the earlier payments received.

This treatment results in a reduction in the Forfeited Shares account and an appropriate adjustment in the Share Capital accounts, ensuring that the company’s equity records accurately represent the effective capital raised.