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Q.The directors of Axim Ltd. forfeited 20,000 equity shares of ₹ 10 each, ₹ 8 per share called up for non-payment of first call of ₹ 2 per share. Final call of ₹ 2 per share has not been yet called. Half of the forfeited shares were reissued as fully paid up for ₹ 15 per share. The amount transferred to Capital Reserve will be : (A) ₹ 2,00,000 (B) ₹ 1,20,000 (C) ₹ 60,000 (D) ₹ 40,000

CBSECBSE Class XII Board 2020MCQ· 1mImportance★★★★★
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The amount transferred to Capital Reserve is ₹60,000, representing the capital profit from the reissue of forfeited shares.

When a company forfeits shares, it cancels the shares of a shareholder who has failed to pay call money. This action results in the company retaining the amount already paid by that shareholder on those shares. Subsequently, these forfeited shares can be reissued by the company. The accounting treatment for these events follows specific principles to correctly reflect the changes in share capital and the resulting capital profit or loss.

Concept and Accounting Treatment

  1. Share Forfeiture:

    • Why: Shares are forfeited when a shareholder fails to pay the call money due on their shares. The company, as per its Articles of Association, can cancel these shares.
    • Treatment:
      • Debit Share Capital Account: The Share Capital account is debited with the called-up amount per share on the forfeited shares. This reduces the company's issued share capital to reflect the cancellation of these shares. Share Capital is a liability account, and a reduction in liability is a debit.
      • Credit Unpaid Calls Account(s): The respective Share Call accounts (e.g., Share First Call, Share Second Call) are credited with the amount that was due but not received on the forfeited shares. This eliminates the outstanding balance in these call accounts for the defaulting shareholder.
      • Credit Share Forfeiture Account: The amount already received from the defaulting shareholder on the forfeited shares is credited to a 'Share Forfeiture Account'. This account temporarily holds the capital gain arising from the forfeiture. It's a capital receipt for the company.

  2. Reissue of Forfeited Shares:

    • Why: Forfeited shares can be reissued to new shareholders. The company can reissue them at par, at a premium, or at a discount. However, the discount allowed on reissue cannot exceed the amount originally forfeited on those specific shares.
    • Treatment:
      • Debit Bank Account: The amount received from the new shareholder upon reissue is debited to the Bank account.
      • Credit Share Capital Account: The Share Capital account is credited with the paid-up value of the reissued shares. This increases the company's issued share capital again.
      • Debit Share Forfeiture Account (if discount): If the shares are reissued at a discount (i.e., reissue price is less than the paid-up value), the amount of discount is debited to the Share Forfeiture Account. This reduces the balance in the Share Forfeiture Account, as the forfeited amount is used to cover the discount.
      • Credit Securities Premium Reserve Account (if premium): If the shares are reissued at a premium (i.e., reissue price is more than the paid-up value), the premium amount is credited to the Securities Premium Reserve account.

  3. Transfer to Capital Reserve:

    • Why: Any balance remaining in the Share Forfeiture Account after the reissue of shares (and after adjusting for any discount on reissue) represents a capital profit for the company. This capital profit cannot be distributed as dividends and must be transferred to the Capital Reserve account.
    • Treatment:
      • Debit Share Forfeiture Account: The remaining balance (pertaining to the reissued shares) in the Share Forfeiture Account is debited.
      • Credit Capital Reserve Account: This amount is credited to the Capital Reserve account, which is a part of the company's reserves and surplus.

Solution: Journal Entries

Let's record the necessary journal entries for the forfeiture, reissue, and transfer to Capital Reserve.

Journal of Axim Ltd.

DateParticularsL.F.Debit (₹)Credit (₹)
Equity Share Capital A/c (20,000 shares @ ₹8 called up)1,60,000
To Equity Share First Call A/c (20,000 shares @ ₹2 unpaid)40,000
To Share Forfeiture A/c (20,000 shares @ ₹6 received)1,20,000
(Being 20,000 equity shares forfeited for non-payment of first call)
Bank A/c (10,000 shares @ ₹15)1,50,000
To Equity Share Capital A/c (10,000 shares @ ₹10 fully paid up)1,00,000
To Securities Premium Reserve A/c (10,000 shares @ ₹5 premium)50,000
(Being 10,000 forfeited shares reissued as fully paid up at ₹15 per share)
Share Forfeiture A/c60,000
To Capital Reserve A/c60,000
(Being capital profit on reissue of 10,000 forfeited shares transferred to Capital Reserve)

Working Notes

  1. Amount called up per share: ₹8
  2. Amount unpaid on first call per share: ₹2
  3. Amount received (forfeited) per share: Called up amount - Unpaid amount = ₹8 - ₹2 = ₹6 …
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