Prince Limited issued a prospectus inviting applications for 20,000 equity shares of Rs. 10 each at a premium

Numerical Questions · Q16

Prince Limited issued a prospectus inviting applications for 20,000 equity shares of Rs. 10 each at a premium of Rs. 3 per share payable as follows:

Particulars	Amount (₹)
With Application	2
On Allotment (including premium)	5
On First Call	3
On Second Call	3

Applications were received for 30,000 shares and allotment was made on pro-rata basis. Money overpaid on applications was adjusted to the amount due on allotment. Mr. Mohit, to whom 400 shares were allotted, failed to pay the allotment money and the first call, and his shares were forfeited after the first call. Mr. Joly, to whom 600 shares were allotted, failed to pay for the two calls and hence his shares were forfeited. Of the shares forfeited, 800 shares were reissued to Supriya as fully paid for Rs. 9 per share, the whole of Mr. Mohit's shares being included. Record journal entries in the books of the Company and prepare the Balance Sheet.

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Concept understanding — Share Capital Accounting

Let’s begin with something you already know from everyday life.

Imagine you and two friends decide to start a small business — say, a tiffin service. You each put in some money to buy utensils, a stove, and ingredients. That money you all contributed is the capital of the business. The business doesn’t own that money; it owes it back to you, the owners. In accounting, we call you the shareholders, and the money you put in is share capital.

Now scale that up to a company. A company needs huge amounts of money to build factories, buy machinery, or develop software. It raises this money by selling shares — small units of ownership. When you buy a share, you become a part-owner of that company. The total money collected from all shareholders is the company’s share capital.

Why does share capital matter in accounting?

Because the company is a separate legal person. It does not own the money — the shareholders do. So the company must record exactly how much it has collected from whom, and in what form. This affects the balance sheet (where share capital appears under Equity and Liabilities) and the cash flow (money coming in from shareholders is a financing activity).

The precise meaning (NCERT Class 12)

Share Capital is the money raised by a company by issuing shares to the public or to promoters. It is shown under the head Shareholders’ Funds in the Balance Sheet.

There are two main types of shares:

Equity shares – ordinary shares; owners get dividends only if the company makes profit.
Preference shares – owners get a fixed dividend before equity shareholders, but usually have no voting rights.

Accounting treatment — the journal entries

When a company issues shares, it follows a standard sequence. Let’s say a company issues 10,000 equity shares of ₹10 each at par (i.e., at face value). The money is received in two instalments: ₹4 on application, ₹6 on allotment.

Step 1: Application money received

Date	Particulars	Debit (₹)	Credit (₹)
	Bank A/c Dr.	40,000
	To Share Application A/c		40,000
(Being application money received on 10,000 shares @ ₹4 each)

Step 2: Transfer application money to Share Capital

Date	Particulars	Debit (₹)	Credit (₹)
	Share Application A/c Dr.	40,000
	To Share Capital A/c		40,000
(Being application money transferred to Share Capital)

Step 3: Allotment money due

Date	Particulars	Debit (₹)	Credit (₹)
	Share Allotment A/c Dr.	60,000
	To Share Capital A/c		60,000
(Being allotment money due on 10,000 shares @ ₹6 each)

Step 4: Allotment money received

Date	Particulars	Debit (₹)	Credit (₹)
	Bank A/c Dr.	60,000
	To Share Allotment A/c		60,000
(Being allotment money received)

Note

If shares are issued at a premium (e.g., ₹10 face value, issued at ₹12), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c. It is not part of share capital.

The Balance Sheet format (as per NCERT)

Under Equity and Liabilities, share capital appears like this:

Particulars	Note No.	Amount (₹)
1. Shareholders’ Funds
(a) Share Capital	1	1,00,000
(b) Reserves and Surplus	2	20,000
2. Non-Current Liabilities	...	...
3. Current Liabilities	...	...

And Note 1 (Share Capital) is typically shown as:

Particulars	Amount (₹)
Authorised Capital
1,00,000 Equity Shares of ₹10 each	10,00,000
Issued Capital
80,000 Equity Shares of ₹10 each	8,00,000
Subscribed and Paid-up Capital
80,000 Equity Shares of ₹10 each fully paid	8,00,000

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Prince Limited issued 20,000 shares of ₹10 each at a premium of ₹3, payable: Application ₹2, Allotment ₹5 (including ₹3 premium), First Call ₹3, Second Call ₹3. Applications for 30,000 shares were received and allotted pro-rata (3:2). Mr. Mohit (400 shares) failed to pay allotment and first call; Mr. Joly (600 shares) failed to pay the two calls. 1,000 shares were forfeited and 800 reissued to Supriya at ₹9 fully paid (including all of Mohit's shares).

Amounts received (towards capital) before forfeiture:

Mohit paid only application on 600 applied shares (600 × ₹2 = ₹1,200); all of it is share-capital money → ₹1,200. He paid no premium.
Joly paid application (900 × ₹2 = ₹1,800) and allotment. Of his allotment, ₹3/share is premium and ₹2/share is capital. Capital received from Joly = application ₹1,200 (on 600) + excess ₹600 (adjusted to allotment, capital) + allotment-capital ₹600 = ₹2,400; premium received = ₹1,800 (stays in Securities Premium, not reversed).

Forfeiture (premium already received is not written back):

Share Forfeiture before reissue = Mohit ₹1,200 + Joly ₹2,400 = ₹3,600
Mohit's premium of ₹1,200 was not received (he did not pay allotment), so the ₹1,200 credited to Securities Premium at allotment is reversed. Securities Premium = 20,000 × ₹3 − ₹1,200 = ₹58,800.

Reissue of 800 shares at ₹9 (discount ₹1/share = ₹800):

Capital forfeited on the 800 reissued shares = Mohit 400 × ₹3 + Joly 400 × ₹4 = ₹1,200 + ₹1,600 = ₹2,800
Capital Reserve = ₹2,800 − ₹800 (discount) = ₹2,000
Balance in Share Forfeiture (Joly's 200 shares) = 200 × ₹4 = ₹800

Journal Entries (forfeiture and reissue)

Particulars	Debit (₹)	Credit (₹)
Share Capital A/c Dr. (400 × ₹6 called)	2,400
Securities Premium A/c Dr. (400 × ₹3, not received)	1,200
To Share Forfeiture A/c		1,200
To Share Allotment / Calls in Arrears A/c		2,400
(Forfeiture of Mohit's 400 shares)

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Mohit's 400 shares (forfeited after the first call) and Joly's 600 shares (forfeited after the second call) are dealt with, and 800 shares -- all 400 of Mohit's plus 400 of Joly's -- are reissued to Supriya at ₹9, fully paid. Capital Reserve = ₹2,000; the Balance Sheet totals ₹2,59,600.

Key figures (pro-rata 30,000 : 20,000 = 3 : 2)

Mohit -- allotted 400, applied 400 × 3/2 = 600; paid only application. Excess application adjusted to allotment = (600-400)×₹2 = ₹400, so his allotment arrears = 400×₹5 - ₹400 = ₹1,600. Forfeited after the first call, so only application + allotment were called and his shares carry a called-up value of ₹7 (second call not yet made). Premium of ₹3 was called on allotment but not received, so it is reversed.
Joly -- allotted 600, applied 900; paid application and allotment (including premium), defaulted on both calls. Forfeited after the second call, so fully called (₹10). Amount received towards face value = application 2 + allotment 2 = ₹4 per share; premium was received and is not disturbed.

Journal Entries in the Books of Prince Ltd.

Particulars	Debit (₹)	Credit (₹)
Bank A/c (30,000 x ₹2) Dr.	60,000
To Equity Share Application A/c		60,000
Equity Share Application A/c Dr.	60,000
To Equity Share Capital A/c (20,000 x ₹2)		40,000
To Equity Share Allotment A/c (excess on 10,000 shares)		20,000
Equity Share Allotment A/c (20,000 x ₹5) Dr.	1,00,000
To Equity Share Capital A/c (20,000 x ₹2)		40,000
To Securities Premium Reserve A/c (20,000 x ₹3)		60,000
Bank A/c (80,000 - 1,600) Dr.	78,400
Calls-in-Arrears A/c (Mohit, allotment) Dr.	1,600
To Equity Share Allotment A/c		80,000
Equity Share First Call A/c (20,000 x ₹3) Dr.	60,000
To Equity Share Capital A/c		60,000
Bank A/c (19,000 x ₹3) Dr.	57,000
Calls-in-Arrears A/c (1,000 x ₹3) Dr.	3,000
To Equity Share First Call A/c		60,000
Forfeiture of Mohit's 400 shares (after first call)
Equity Share Capital A/c (400 x ₹7) Dr.	2,800
Securities Premium Reserve A/c (400 x ₹3) Dr.	1,200
To Share Forfeiture A/c (400 x ₹3)		1,200
To Calls-in-Arrears A/c (allotment 1,600 + first call 1,200)		2,800
Equity Share Second Call A/c (19,600 x ₹3) Dr.	58,800
To Equity Share Capital A/c		58,800
Bank A/c (19,000 x ₹3) Dr.	57,000
Calls-in-Arrears A/c (600 x ₹3) Dr.	1,800
To Equity Share Second Call A/c		58,800
Forfeiture of Joly's 600 shares (after second call)
Equity Share Capital A/c (600 x ₹10) Dr.	6,000
To Share Forfeiture A/c (600 x ₹4)		2,400
To Calls-in-Arrears A/c (first call 1,800 + second call 1,800)		3,600
Reissue of 800 shares to Supriya at ₹9, fully paid
Bank A/c (800 x ₹9) Dr.	7,200
Share Forfeiture A/c (800 x ₹1) Dr.	800
To Equity Share Capital A/c (800 x ₹10)		8,000
Transfer to Capital Reserve

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Key figures (pro-rata 30,000 : 20,000 = 3 : 2)

Journal Entries in the Books of Prince Ltd.

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