Q.(a) Merak Ltd. forfeited 6,000 equity shares of ₹ 10 each for non-payment of final call of ₹ 3 per share. The minimum amount per share at which these shares can be reissued will be : (A) ₹ 3 (B) ₹ 7 (C) ₹ 10 (D) ₹ 6
Concept understanding — Forfeiture Conditions
Forfeiture of Shares – The First Meeting
Think of a situation where you book a seat for a concert, pay a deposit, but then don't show up on the day. The organiser keeps your deposit because you broke the promise. That's the everyday intuition behind forfeiture of shares.
A company invites people to buy its shares. You agree to buy, say, 100 shares at ₹10 each. You pay the application money (₹2) and allotment money (₹3). But when the company later asks for the final call (₹5), you don't pay. The company has already spent money on your behalf — printing share certificates, maintaining records, planning for your capital. You've broken your promise. So the company forfeits (cancels) your shares and keeps the money you've already paid.
What Exactly Is Forfeiture?
Forfeiture is the cancellation of partly-paid shares by a company because the shareholder failed to pay the call money due. The company keeps the amount already received and the shareholder loses all rights in those shares.
The NCERT Class 12 Accountancy textbook (Part II, Chapter 1) defines forfeiture as: "Forfeiture of shares refers to the cancellation of the shares of a shareholder who fails to pay the amount due on allotment or on any of the calls."
The key point: forfeiture happens only when shares are partly paid. If a shareholder has paid the full amount, the company cannot forfeit — it can only sell the shares in the market to recover any dues.
Why Does Forfeiture Matter?
For the company, forfeiture serves two purposes:
- Discipline – It forces shareholders to honour their payment commitments.
- Recovery – The company can later reissue the forfeited shares to someone else, often at a discount, and recover the unpaid amount.
For the shareholder, forfeiture means losing the money already paid. That's why companies follow a strict legal procedure — a board resolution, a notice to the defaulter, and a 14-day grace period — before forfeiting.
Accounting Treatment – The Core Logic
When shares are forfeited, the company has received some money but the shares are no longer with the original holder. The accounting question is: What do we do with the money already received?
The answer: The money received (application, allotment, and any calls paid) becomes the company's gain — but it's not profit yet. It's kept in a special account called Share Forfeiture Account.
Here's the journal entry:
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| Share Capital A/c (called-up amount per share × number of shares forfeited) | Dr | ||
| To Share Forfeiture A/c (amount already received per share × number of shares) | |||
| To Calls-in-Arrears A/c (amount not received per share × number of shares) | |||
| (Being forfeiture of X shares for non-payment of call money) |
Let's break this down with a concrete example from NCERT.
Example (NCERT-style)
A company issued 1,000 shares of ₹10 each, payable as:
- Application: ₹2
- Allotment: ₹3
- First Call: ₹3
- Final Call: ₹2
Mr. X, who held 100 shares, paid application and allotment but failed to pay the first call and final call. The company forfeited his shares.
Step 1: Calculate the amounts
- Called-up amount per share = ₹10 (all calls made)
- Amount received per share = ₹2 (application) + ₹3 (allotment) = ₹5
- Amount not received per share = ₹3 (first call) + ₹2 (final call) = ₹5
Step 2: Journal entry
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Share Capital A/c (100 shares × ₹10) | 1,000 | |
| To Share Forfeiture A/c (100 shares × ₹5) | 500 | |
| To Calls-in-Arrears A/c (100 shares × ₹5) | 500 | |
| (Being forfeiture of 100 shares of Mr. X) |
What does this entry do?
- Share Capital A/c is debited – because the shares are cancelled, the company's share capital reduces by the called-up amount.
- Share Forfeiture A/c is credited – with the amount already received. This is a liability (or a reserve) because the company may later reissue these shares.
- Calls-in-Arrears A/c is credited – because the unpaid amount is no longer due from Mr. X. The Calls-in-Arrears account is cleared.
The Share Forfeiture Account – A Temporary Home
The Share Forfeiture Account is not a profit account. It's a temporary account that holds the money received from the defaulting shareholder. This money will be used later when the forfeited shares are reissued.
The amount in Share Forfeiture Account is not distributed as dividend until the shares are reissued. It remains a reserve until then.
Reissue of Forfeited Shares
When the company reissues forfeited shares, the accounting changes. The company can reissue them at par, at a premium, or even at a discount (but the discount cannot exceed the amount already received from the original shareholder).
Journal entry for reissue:
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c (amount received on reissue) | Dr | |
| Share Forfeiture A/c (discount allowed, if any) | Dr | |
| To Share Capital A/c (called-up amount) |
After reissue, the balance in Share Forfeiture Account (if any) is transferred to Capital Reserve — which is a free reserve available for distribution as dividend.
Format of Share Forfeiture Account
Here's how the Share Forfeiture Account looks in the ledger:
Share Forfeiture Account
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
|---|---|---|---|---|---|---|---|
| To Capital Reserve A/c (balance transferred after reissue) | xxx | By Share Capital A/c (amount received on forfeiture) | xxx | ||||
| To Balance c/d (if shares not yet reissued) | xxx | ||||||
| xxx | xxx |
Common Mistake to Avoid
Do not debit Share Forfeiture Account when forfeiting shares. The Share Forfeiture Account is credited with the amount received. Many students mistakenly debit it because they think "forfeiture means loss." No — the company keeps the money, so it's a gain (temporarily).
Summary – The Big Picture
| Concept | What It Means |
|---|---|
| Forfeiture | Cancellation of partly-paid shares for non-payment |
| Share Capital A/c | Debited with called-up amount |
| Share Forfeiture A/c | Credited with amount received |
| Calls-in-Arrears A/c | Credited with amount not received |
| After reissue | Balance in Share Forfeiture A/c → Capital Reserve |
The logic is simple: the company gave you shares, you paid part of the price, then broke your promise. The company takes back the shares and keeps your money — but that money isn't profit until the shares are sold to someone else. That's forfeiture.
Part (a): Minimum reissue price = ₹3 — option (A).
Part (b): Loss on Issue of Debentures = ₹1,00,000 — option (B).
On forfeiture, the amount already received is credited to the Share Forfeiture Account, and on reissue the discount allowed cannot exceed this balance.
- Face value = ₹10; final call unpaid = ₹3
- Amount forfeited per share = ₹10 − ₹3 = ₹7 (maximum permissible discount)
- Minimum reissue price = ₹10 − ₹7 = ₹3
The minimum amount per share at which these shares can be reissued is ₹3 — option (A).
Concept understanding — Premium on Redemption
Let’s start with something you already know from everyday life. Suppose you borrow ₹1,000 from a friend and promise to pay it back after one year. But when the year ends, you don’t just return ₹1,000 — you also pay an extra ₹50 as a “thank you” for the favour. That extra ₹50 is like a premium — an amount above the face value.
Now replace your friend with a company, and the loan with a redeemable preference share or a debenture. When a company issues these, it promises to repay the holder at a future date. Sometimes, the company agrees to repay more than the face value — say, a ₹100 share is repaid at ₹110. That extra ₹10 is the premium on redemption.
Why does a company offer a premium on redemption?
It’s not generosity. A company offers a premium to make its shares or debentures more attractive to investors. If the market interest rate is high, investors won’t buy a low-coupon debenture unless they know they’ll get a bonus at redemption. The premium is the sweetener.
From the company’s side, this premium is a cost — an extra outflow of cash when the instrument is redeemed. And like any cost, it must be accounted for properly.
The accounting treatment — the core rule
The premium on redemption is not a loss that hits the Profit & Loss account directly. Instead, it is adjusted against the company’s reserves and surplus — specifically, the Securities Premium Reserve (if available) or the General Reserve / Retained Earnings.
Here’s the precise journal entry when the premium is paid at the time of redemption:
Journal Entry for Premium on Redemption Payable
| Date | Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Securities Premium Reserve A/c … Dr. | xxx | ||
| General Reserve A/c … Dr. (if needed) | xxx | ||
| To Premium on Redemption of Debentures/Preference Shares A/c | xxx | ||
| (Being the premium payable on redemption provided for) |
Then, when the actual payment is made:
| | Premium on Redemption of Debentures/Preference Shares A/c … Dr. | xxx | |
| | To Bank A/c | | xxx |
| | (Being the premium paid to debenture/shareholders) | | |
Which account is debited and which is credited — the logic
- Debit the reserve account (Securities Premium Reserve first, then General Reserve, then any other free reserve). Why? Because the company is using its accumulated profits (reserves) to meet this extra cost — it’s not a business expense like salary or rent.
- Credit a temporary liability account called “Premium on Redemption of … A/c”. This shows that the company owes this premium to the holders. Later, when paid, that liability is cleared by crediting Bank.
Never debit the Profit & Loss Account for premium on redemption. The NCERT textbook is clear: premium on redemption is a capital loss (or a distribution of accumulated profits), not a revenue expense. Doing otherwise would understate the year’s profit.
Where does this appear in the financial statements?
In the Balance Sheet, before redemption, the “Premium on Redemption of … A/c” appears under Current Liabilities (or as a separate item under Non-Current Liabilities if the redemption is due after one year). After payment, it disappears.
In the Notes to Accounts, the movement in reserves (like Securities Premium Reserve) will show the amount used for premium on redemption as a deduction.
A small format — as per NCERT style
The NCERT textbook (Class 12, Part 2, Chapter on Redemption of Debentures) shows a statement of premium on redemption when debentures are redeemed at a premium. Here’s a simplified version:
Statement showing Premium on Redemption of Debentures
| Particulars | Amount (₹) |
|---|---|
| Face value of debentures to be redeemed | 1,00,000 |
| Premium payable (say 10%) | 10,000 |
| Total amount payable to debentureholders | 1,10,000 |
This statement is used to compute the total cash needed. The premium amount (₹10,000) is then provided for by debiting Securities Premium Reserve or General Reserve.
The key takeaway for your exam
- Premium on redemption = extra amount paid above face value when redeeming shares/debentures.
- It is not a revenue expense — it is adjusted against reserves (Securities Premium Reserve first, then General Reserve).
- Journal entry: Debit Reserve, Credit Premium on Redemption A/c (liability). Then debit that liability, credit Bank when paid.
- In the Balance Sheet, the unpaid premium appears as a liability.
Remember: the premium is a cost of raising finance, but it’s settled from past profits (reserves), not from current year’s profit. That’s the conceptual heart.
Part (a): Minimum reissue price = ₹3 — option (A).
Part (b): Loss on Issue of Debentures = ₹1,00,000 — option (B).
When debentures are issued at a premium but redeemable at a premium, prudence requires recognising the future redemption premium as a loss at issue.
- Number of debentures = 20,000; face value = ₹100
- Premium on redemption = 5% × ₹100 = ₹5 per debenture
- Loss on Issue = 20,000 × ₹5 = ₹1,00,000 (credited to Premium on Redemption of Debentures A/c)
The 10% issue premium is a gain (Securities Premium), not part of the loss. Only the redemption premium is debited to Loss on Issue of Debentures.
The Loss on Issue of Debentures account is debited by ₹1,00,000 — option (B).
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