In this article we will discuss about the accounting treatment for reissue of forfeited shares, explained with the help of suitable illustrations.
Forfeited shares may either be cancelled or reissued. Such shares once forfeited can be reissued to any person within reasonable time and at reasonable price. They can be reissued at par, at premium or at discount. However, the reissue price together with the amount already received on such shares should not be less than the called up amount on each share.
In other words, if the forfeited shares are reissued at a discount, the amount of discount should not exceed the amount already paid by the defaulter. Thus, the maximum amount of discount on reissue should not be more than the original discount (if so) plus the amount paid by the defaulter.
If a Company makes any loss on reissue of shares, such loss is made good by making adjustments by debiting the Forfeited Shares Account. The balance remaining the forfeited Share Account is a capital profit and it must be transferred to Capital Reserve Account. However, it is to be noted that the amount forfeited in respect of shares, not yet reissued, must be kept intact in the Forfeited Shares Account.
Entries in Connection with Reissue of Forfeited Shares:
Illustration 1 (Reissue of all forfeited shares):
Mr Gopal is the holder of 200 shares of Rs. 10 each. He had paid on these shares application money of Rs. 2 each, allotment money of Rs. 2 each and first call money of Rs. 3 each. He failed to pay the final call amount of Rs. 3 per share. His shares were forfeited and re-issued at Rs. 8 per share as fully paid up.
Give necessary entries to record the forfeiture and re-issue.
Illustration 2 (Reissue of a part of forfeited shares):
A holds 10 shares of Rs. 10 each on which he has paid Re. 1 per share as application money. B holds 20 shares of Rs. 10 each on which he has paid Re. 1 on application and Rs. 2 on allotment.
C holds 30 shares of Rs. 10 each and has paid Re. 1 on application, Rs. 2 on allotment and Rs. 3 on first call.
They all fail to pay their arrears and the second call of Rs. 2 per share. Therefore, the Directors forfeited their shares. The shares of C were then reissued at Rs. 7 per share as fully paid up. Pass necessary journal entries of forfeiture and reissue of shares.
Show the forfeiture and re-issue entries for the following:
(a) Y Ltd. forfeited 400 shares of Rs. 10 each, fully called up, held by a share-holder for non-payment of final call money of Rs. 4 per shares. These shares were re-issued to Mr. Thomas at Rs. 12 per share as fully paid up.
(b) Z Ltd. forfeited 250 shares of Rs. 10 each, fully called up, held by a share-holder for non-payment of allotment money of Rs, 3 per share and first and final call money of Rs. 4 per share. These shares were reissued at Rs. 8 per share to Ramlal.
X Co. Ltd. forfeited 100 equity shares of Rs. 10 each issued at a discount of 10% held by Nikhil on 15th Jan., for non-payment of first call of Rs. 2 per share and the final call of Rs. 3 per share. Of these, 50 equity shares were reissued to Mr. Udith Kumar at Rs. 8 per share on 20th Jan. and the rest reissued on 25th Jan. to Uma Vinayagam at Rs. 7 per share.
Solution: Journal Entries
The Fancy Ltd. issued 4,000 Equity Shares of Rs. 10 each at a premium of Rs. 2 per share payable as follows:
On application – Rs. 2
On allotment – Rs. 6 (including premium);
On First call – Rs. 2;
On Final call – Rs. 2.
6,000 shares were applied for and allotment was made pro-rata. Excess application moneys were utilised towards sum due on allotment. Mr. Bobby who held 120 shares failed to pay first call and second call and these shares were forfeited. Out of these forfeited shares, 100 forfeited shares were reissued to a Director as fully paid up for Rs. 9 per share.
Show Journal entries, Cash Book and Balance Sheet.
X Co. Ltd. forfeited 150 Equity share of Rs. 10 each, issued at a premium of Rs. 5 per share, held by Motilal on 15th December, for non-payment allotment money of Rs. 8 per share, including premium of Rs. 5 per share, the first call of Rs. 2 per share and the final call of Rs. 3 per share. Out of these, 100 Equity shares were reissued to Nikhil at Rs. 14 per share on 25th December.
Show the forfeiture and re-issue journal entries.