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Q.JK Ltd. forfeited 6,000 equity shares of ₹ 10 each issued at a premium of ₹ 2 per share for the non-payment of first call of ₹ 2 per share. The second and final call of ₹ 2 per share had not yet been made. The forfeited shares were reissued at a discount of ₹ 3 per share fully paid up. Pass necessary journal entries for the above transactions in the books of the company. Also prepare 'Share Forfeiture Account'.

CBSECBSE Class XII Board 2025Subjective· 4mImportance★★★★★
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JK Ltd. forfeited 6,000 shares for non-payment of the first call, then reissued them at a discount. The journal entries record the forfeiture, reissue, and transfer of the profit on reissue to Capital Reserve, resulting in a ₹18,000 balance in the Capital Reserve Account.

When a company issues shares, shareholders are required to pay the share value in installments (application, allotment, and various calls). If a shareholder fails to pay any of these installments, the company, after following due process (like sending reminders and final notices), has the right to forfeit those shares. Forfeiture means cancelling the shares and taking back the amount already paid by the defaulting shareholder. The amount already paid by the shareholder is then credited to a 'Share Forfeiture Account'.

The accounting treatment for forfeiture involves reversing the entries related to the shares to the extent of the called-up capital and accounting for the unpaid amounts and the amounts already received.

  1. Share Capital Account (Debit): The Share Capital Account represents the company's ownership capital. When shares are forfeited, the capital associated with those shares is cancelled. Therefore, the Share Capital Account is debited with the called-up amount per share (excluding any premium, unless the premium itself was unpaid and due on the forfeited call) multiplied by the number of forfeited shares. This reduces the company's share capital liability.
  2. Securities Premium Account (Debit): This account is debited only if the premium amount related to the forfeited shares was due but not received. If the premium was already received, it remains in the Securities Premium Account and is not affected by forfeiture, as per Section 52 of the Companies Act, 2013. In this question, the premium is assumed to have been received as only the first call is mentioned as unpaid.
  3. Calls-in-Arrears Account (Credit): This account represents the unpaid amount on calls. When shares are forfeited, these unpaid amounts are no longer recoverable from the defaulting shareholder. Therefore, the Calls-in-Arrears Account is credited to eliminate this receivable.
  4. Share Forfeiture Account (Credit): This account is credited with the total amount already received from the defaulting shareholder on the forfeited shares (excluding any premium received, as explained above). This amount is a capital gain for the company, which can be used to offset any loss on the subsequent reissue of these shares.

After forfeiture, the company can reissue these forfeited shares. Reissue is essentially a fresh issue of shares.

  1. Bank Account (Debit): The company receives cash for the reissued shares, so the Bank Account is debited with the actual amount received on reissue.
  2. Share Forfeiture Account (Debit): If the reissued shares are issued at a discount, this discount cannot exceed the amount originally forfeited on those shares. The discount allowed on reissue is debited to the Share Forfeiture Account. This reduces the balance in the Share Forfeiture Account.
  3. Share Capital Account (Credit): The Share Capital Account is credited with the fully paid-up value of the reissued shares, as these shares are now considered fully paid.

Finally, any balance remaining in the Share Forfeiture Account after adjusting for the discount on reissue (if any) represents a capital profit. This profit must be transferred to the Capital Reserve Account, as it is not a revenue profit.

  1. Share Forfeiture Account (Debit): The remaining balance in the Share Forfeiture Account is debited to close it.
  2. Capital Reserve Account (Credit): This account is credited with the capital profit, which is a non-distributable reserve.
Watch out

A common mistake is to debit the Securities Premium Account even if the premium was already received. Remember, Securities Premium Account is debited only if the premium was due on the forfeited shares and was not paid. If it was paid, it remains untouched.

Working Notes

  1. Called-up amount per share:

    Face Value = ₹10

    Second and Final Call not yet made = ₹2

    Called-up amount = Face Value - Uncalled amount = ₹10 - ₹2 = ₹8 per share.

  2. Amount unpaid per share:

    First Call unpaid = ₹2 per share.

  3. Amount received per share (to be credited to Share Forfeiture A/c): …

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