Q.When forfeited shares are re-issued at a price lower than their paid-up value, the balance left over in the Share Forfeiture Account (after adjusting the discount allowed on re-issue) is transferred to:
Option (b) is correct. The balance remaining in the Share Forfeiture Account, after adjusting the discount allowed on re-issue, for the specific shares that have been re-issued, is a genuine capital profit to the company — money retained from a defaulting shareholder over and above what was needed to cover the discount given to the new shareholder — and capital profits of this kind are transferred to Capital Reserve, a non-distributable reserve. Option (a) is wrong: Securities Premium arises only when shares are issued at a price above face value; it has no role when forfeited shares are re-issued at a discount. Option (c) is wrong: General Reserve is built up out of revenue (trading) profits, not out of a capital-nature gain like this. Option (d) is wrong: crediting this capital profit to Profit and Loss Account would wrongly treat it as ordinary trading income of the year.
(b) Capital Reserve Account — the leftover Share Forfeiture Account balance on the re-issued shares is a capital profit, never a revenue item.
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