Life Machine Tools Limited issued 50,000 equity shares of Rs. 10 each at Rs. 12 per share, payable as follows:

Numerical Questions · Q17

Particulars	Amount (₹)
On Application (including premium)	5
On Allotment	4
On First and Final Call	the balance

Applications for 70,000 shares had been received. Of the cash received, Rs. 40,000 was returned and Rs. 60,000 was applied to the amount due on allotment. All shareholders paid the call due, with the exception of one shareholder of 500 shares. These shares were forfeited and reissued as fully paid at Rs. 8 per share. Journalise the transactions.

Uttarakhand UbseTextbookSubjective· 5mImportance★★★★★

91% · 67/74 Questions

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

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

Start your 14-day free trial to unlock the full solution →

A company issued 50,000 shares of ₹10 each at ₹12 (₹2 premium). Payment: Application ₹5 (₹3 capital + ₹2 premium), Allotment ₹4, First & Final Call ₹3. Applications for 70,000 shares were received; ₹40,000 was refunded and ₹60,000 of excess application money was adjusted to allotment. A shareholder holding 500 shares did not pay the final call; the shares were forfeited and reissued at ₹8 fully paid.

Forfeiture treatment: The defaulter had paid Application ₹5 (₹3 capital + ₹2 premium) and Allotment ₹4. The ₹2 premium is already in Securities Premium and is not written back. Share Forfeiture is credited with capital received only = Application-capital ₹3 + Allotment ₹4 = ₹7 per share.

Share Forfeiture on 500 shares = 500 × ₹7 = ₹3,500
Reissue at ₹8 (face ₹10): discount = ₹2 × 500 = ₹1,000
Capital Reserve = ₹3,500 − ₹1,000 = ₹2,500

Journal Entries

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr. (70,000 × ₹5)	3,50,000
To Share Application A/c		3,50,000
Share Application A/c Dr.	3,50,000
To Share Capital A/c (50,000 × ₹3)		1,50,000
To Securities Premium A/c (50,000 × ₹2)		1,00,000
To Bank A/c (refund)		40,000
To Share Allotment A/c (excess adjusted)		60,000
Share Allotment A/c Dr. (50,000 × ₹4)	2,00,000
To Share Capital A/c		2,00,000
Bank A/c Dr. (2,00,000 − 60,000 adjusted)	1,40,000
To Share Allotment A/c		1,40,000
Share First & Final Call A/c Dr. (50,000 × ₹3)	1,50,000
To Share Capital A/c		1,50,000

Start your 14-day free trial to unlock the full solution →

500 shares are forfeited for non-payment of the first and final call and reissued as fully paid at ₹8 per share. Of the ₹5 application money, ₹2 is premium, so only the face-value amount of ₹7 per share is credited to the Share Forfeiture Account. After the reissue discount, Capital Reserve = ₹2,500.

Amounts received on the forfeited shares

Each share carried application ₹5 (₹3 face + ₹2 premium), allotment ₹4 (face) and the call ₹3 (face). The defaulting holder paid application and allotment and failed only the call, so the amount received towards face value = ₹3 + ₹4 = ₹7 per share; the ₹2 premium was already received and stays in Securities Premium Reserve.

Journal Entries in the Books of Life Machine Tools Ltd.

Particulars	Debit (₹)	Credit (₹)
Bank A/c (70,000 x ₹5) Dr.	3,50,000
To Share Application A/c		3,50,000
Share Application A/c Dr.	3,50,000
To Share Capital A/c (50,000 x ₹3)		1,50,000
To Securities Premium Reserve A/c (50,000 x ₹2)		1,00,000
To Bank A/c (refund)		40,000
To Share Allotment A/c (adjustment)		60,000
Share Allotment A/c (50,000 x ₹4) Dr.	2,00,000
To Share Capital A/c		2,00,000
Bank A/c (2,00,000 - 60,000) Dr.	1,40,000
To Share Allotment A/c		1,40,000
Share First and Final Call A/c (50,000 x ₹3) Dr.	1,50,000
To Share Capital A/c		1,50,000
Bank A/c (49,500 x ₹3) Dr.	1,48,500
To Share First and Final Call A/c		1,48,500
Forfeiture of 500 shares
Share Capital A/c (500 x ₹10) Dr.	5,000
To Share Forfeiture A/c (500 x ₹7)		3,500
To Share First and Final Call A/c (500 x ₹3)		1,500
Reissue of 500 shares at ₹8, fully paid
Bank A/c (500 x ₹8) Dr.	4,000

Start your 14-day free trial to unlock the full solution →

←Previous question · questions-for-practiceQ16 — Prince Limited issued a prospectus inviting applications for 20,000 eq…→Next question · questions-for-practiceQ18 — The Orient Company Limited offered for public subscription 20,000 equi…

Amounts received on the forfeited shares

Journal Entries in the Books of Life Machine Tools Ltd.

🎓Unlock everything free for 14 days

Unlock everything free for 14 days