Share Forfeiture and Re-issue of Forfeited Shares

Share Forfeiture

A joint stock company allots shares to the applicants applied for the shares. Upon allotment, the applicants are liable to pay the allotment money and call money within the time specified. If applicants fail to pay the allotment amount and the shareholders fail to pay the call money, then the company can forfeit such shares. Forfeiture of shares is a process of withdrawing the shares allotted and seizing the amount already paid by the defaulters.

If an applicant fails to pay allotment and the shareholder fails to pay call money, then the company should send a three months’ notice to the defaulters requesting to pay the due amount of shares. According to section 38 of the Companies Act, 2053, a three months’ notice shall be served to the defaulters for payment with interest after the expiry of the initial deadline of 30 days.

Even after the notice, if no payment is made, another notice should be served to the defaulters informing that his shares will be forfeited. If the payment is not made yet, the board of directors passes a resolution to forfeit the shares held by the defaulting shareholders.

The conditions of forfeiture of shares are as follows:

• Forfeiture of shares issued at par
• Forfeiture of shares issued at discount
• Forfeiture of shares issued at premium

Forfeiture of shares issued at par

The following journal entry is passed for the forfeiture of shares initially issued at par:

The following alternative entry can be passed for forfeiture of shares initially issued at par if calls in arrears a/c is debited, while preparing journal entries for the share amount received with exception of calls in arrears.

Share capital a/c….Dr. xxx

To share forfeiture a/c xxx

To calls-in-arrears a/c xxx

(Being forfeiture of…shares of Rs…..each due to non-payment of allotment money of Rs….and first and final call money of Rs….each)

Illustration 1:

Citizens Co. Ltd. forfeited 1500 shares of Rs.10 each due to non-payment of first call of @ Rs.2 per share and second and final call of Rs.3 per share.

Required: Journal entry for the forfeiture of share.

Forfeiture of share issued at discount

The discount on issue of shares initially provided is required to be withdrawn from the shareholder who has made default of share installment amount. Discount is offered with presumption that the entire share amount will be received in the specified time, but if the shareholders fails to meet the commitment then they has got no right to receive discount facility. Therefore, the discount on such shares should be withdrawn.

Illustration 2:

Xerox Co. Ltd. forfeited 500 shares of Rs.100 each issued at 10% discount on which a shareholder failed to pay first and final call of Rs.40 per share.

Required: Journal entry.

Forfeiture of share issued at premium

When a shareholder fails to pay the amount of premium: The share premium amount is normally collected along with share allotment. The revoke of share premium is essential on non-payment of share premium.

Illustration 3:

Iceland Co. Ltd. forfeited 1000 equity shares of Rs.100 each, which were issued at a premium of Rs.10 per share due to non-payment of allotment money of Rs.50 and first and final call money of Rs.30 per share.

Required: Journal entry

When a shareholder pays the amount of premium: The share premium amount already collected is not needed to be adjusted upon non-payment of subsequent share call amount.

Illustration 4:

Zonal Company Ltd. forfeited 300 shares of Rs.10 each issued at a premium of Rs.2 due to non-payment of first call of Rs.2 and second and final call of Rs.3 per share.

Required:Journal entry

The unpaid share premium amount should be revoked (adjusted) upon default of share allotment amount. But, share premium amount received is not needed to be revoked.

Re-issue of forfeited shares

The Board of Directors of the company is empowered to reissue the forfeited shares if authorized by its articles. Such shares may be issued either at par or at premium or at discount. When the forfeited shares are re-issued either at par or at premium, the similar entries prepared for the issue of shares at either par or at premium is prepared at the time of reissue. The forfeited shares can also be re-issued at discount. In such a case, a sum equal to the discount allowed is withdrawn from the share forfeited account to compensate such discount. This needs giving debit to share forfeiture account. The following journal entry is passed for re-issue of shares at discount:

Bank a/c… Dr. (with amount received on reissue) xxx

Share forfeiture a/c…. Dr. (with amount of discount allowed) xxx

To share capital a/c (with total amount) xxx

(Being ……shares reissue at Rs….. each)

The balance remaining in shares forfeited account in the nature of capital gain and would be closed by transferring to the capital reserve account. The following journal entry is passed for transferring the amount of net gain on capital reserve amount:

Share forfeiture a/c… Dr. (with total credit balance in share forfeiture account, after re-issue) xxx

To capital reserve a/c xxx

(Being net gain on re-issue of shares transferred into capital reserve account)

Re-issue of forfeited shares at par initially issued at par

Illustration 5:

Aggressive Co. Ltd. forfeited 100 shares of Rs.10 each due to non-payment of first and final call money of Rs.5 each. These shares were reissued at Rs.10 per share fully paid.

Required: Journal entry

Re-issue of forfeited shares at discount initially issued at par

Illustration 6:

Progressive Co. Ltd. forfeited 300 shares of Rs.100 each fully called up on which Rs.60 per share was received. These shares were re-issued to Mr. A at Rs.70 per share as fully paid.

Required: Journal entry

Working note:

Gain= (Amount of forfeiture/no. of forfeited shares) * No. of shares re-issued-share forfeiture (dis. amt.)

= (18000/300)*300-9000= Rs.9000

Re-issue of forfeited shares at premium initially issued at par

Illustration 7:

United Co. Ltd. forfeited 500 shares of Rs.100 each fully called up on which Rs.70 per share was received. These shares were reissued to Mr. Gurung at Rs.110 per share as fully paid.

Required:Journal entry

Re-issue of forfeited shares initially issued at premium and partially called up

Illustration 8:

Super Co. Ltd. forfeited 500 shares of Rs.100 each issued at a premium of Rs.20 on which the company did not receive first call of Rs.30. The second and final call money of Rs.20 was not called up. Out of these forfeited shares, 300 shares were reissued at Rs.60 per share as Rs.80 paid up.

Required: Journal entries

The balance of share forfeiture account of 200 forfeited shares not yet issued is Rs.10, 000. The balance of the forfeited account is required to be adjusted at the time of re-issue of 200 forfeited shared. The balance of share forfeiture account is derived by adjusting in the following way: Rs.25000-Rs.6000-Rs.9000= Rs.10,000 means forfeiture amountwas transferred to capital reserve= Remaining balance of forfeiture account. This amount is shown on the liability side of the balance sheet and adjusted at the time of re-issue of the remaining forfeited shares.

Reissue of forfeited shares at Discount Initially Issued at Discount

Illustration 9:

Trishakti Co. Ltd. forfeited 300 shares of Rs.10 each, which were issued at a discount of Rs.2 due to non-payment of first call of Rs.3 and second and final call of Rs.2 per share. Subsequently, these shares were reissued at Rs.7 per share as fully paid.

Required: Journal entries for forfeiture and reissue

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu