Accountancy · Ch 2 — Accounting for Share Capital
Reissue of Forfeited Shares
Reissue of Forfeited Shares
Reissue of Forfeited Shares
When a company forfeits shares, the directors have two options: they can either cancel those shares or reissue them. In practice, companies almost always choose to reissue forfeited shares rather than cancel them, because reissue brings in fresh capital.
Key Rules for Reissue
The reissue of forfeited shares can be done at par, at a premium, or at a discount. However, there is a critical restriction on the discount that can be offered:
The maximum discount allowed on reissue cannot exceed the amount that was originally received on those shares at the time of their initial issue. This amount is the credit balance in the Share Forfeiture Account relating to those specific shares.
For example, if a company forfeited 200 shares of ₹10 each on which ₹600 had been received, the maximum discount that can be given on reissue is ₹600. The company could reissue these shares at ₹9 per share (a discount of ₹1 per share, totalling ₹200), or even at ₹7 per share (a discount of ₹3 per share, totalling ₹600), but never at a price lower than ₹4 per share (which would mean a discount exceeding ₹600).
Accounting Treatment of Reissue
The journal entry for reissuing forfeited shares depends on whether they are reissued at par, at a premium, or at a discount.
1. Reissue at Par (no discount, no premium)
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | [Amount received] | |||
| To Share Capital A/c | [Nominal value of shares reissued] | |||
| (Being reissue of forfeited shares at par) |
2. Reissue at a Premium
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | [Amount received including premium] | |||
| To Share Capital A/c | [Nominal value] | |||
| To Securities Premium Reserve A/c | [Premium amount] | |||
| (Being reissue of forfeited shares at a premium) |
3. Reissue at a Discount (most common scenario)
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | [Amount actually received] | |||
| Share Forfeiture A/c Dr. | [Discount allowed on reissue] | |||
| To Share Capital A/c | [Nominal value of shares reissued] | |||
| (Being reissue of forfeited shares at a discount) |
The discount allowed is debited to the Share Forfeiture Account because this account represents the amount already received from the original shareholder. By debiting it, we are using that past receipt to cover the discount given to the new shareholder.
Transfer of Profit to Capital Reserve
After the reissue, the Share Forfeiture Account may still have a credit balance. This balance represents the profit made on the reissue — the difference between what was originally received on the forfeited shares and the discount allowed on reissue.
This profit is a capital profit and must be transferred to the Capital Reserve Account.
The journal entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Share Forfeiture A/c Dr. | [Balance in Share Forfeiture A/c relating to reissued shares] | |||
| To Capital Reserve A/c | [Same amount] | |||
| (Being profit on reissue of forfeited shares transferred to capital reserve) |
Partial Reissue of Forfeited Shares
A very important point: capital profit arises only on the shares that are actually reissued, not on all forfeited shares. If only a portion of the forfeited shares are reissued, you cannot transfer the entire balance of the Share Forfeiture Account to Capital Reserve.
Instead, you must calculate the proportionate amount that relates to the reissued shares. The remaining balance in the Share Forfeiture Account should be equal to the amount forfeited on the shares that have not yet been reissued.