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Issue, Forfeiture, Reissue of Shares

Forfeiture of Shares

Forfeiture of share means the cancellation of the shares for non-payment of calls due. But, the company can forfeit shares only if the Article of Association of the company allow forfeiture. If any shareholder is not able to pay the amount of call, the company may exercise the power to forfeit his shares on which he is unable to pay the amount of call.

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Forfeiture of Share

As we know, a company can forfeit shares on non-payment of the number of calls. The company before forfeiture must first give clear 14 days’ notice to the defaulting shareholder that he shall pay the due amount along with the interest.

If not paid by the specified date, the shares shall be forfeited. If the shareholder still does not pay, the company may forfeit the shares by passing an appropriate resolution.

On forfeiture, we need to cancel the shares and to that extent, reduce the Share Capital. The amount received by the company is not refunded.

Till the time the company re-issues the forfeited shares, it adds the balance of the Forfeited Shares Account to paid-up capital under Subscribed Capital in the Notes to Accounts on ‘Share Capital’.

Being part of shareholders’ Funds we show it under Equity and Liabilities part of the Balance Sheet.

Forfeiture of Share

Accounting Entries on Forfeiture of Share

The company may issue the forfeited shares at par or at a premium. Accounting entry for forfeiture will vary according to the situation.

1. When Forfeiture of shares Issued at Par

In this case,

  1. The company debits the Share Capital Account with the amount called-up up to the date of forfeiture on shares.
  2. It credits the Shares Allotment Amount or Shares Call Account with amount called-up on forfeited shares but due from the shareholders. If we are maintaining Calls-in-Arrears Account then we credit Calls-in-Arrears Account.

The company credits the Forfeited Shares Account by the receipt of the amount on the shares forfeited.

Learn more about Shares Issued at Par here in detail.

Journal entry for forfeiture of shares is:

Date Particulars   Amount (Dr.) Amount (Cr.)
Share Capital A/c Dr.  XXX
   To  Forfeited Shares Account A/c Cr.  XXX
   To Shares Allotment A/c Cr.  XXX
   To Shares Call A/c Cr.  XXX

If, we maintain Calls-in-Arrears Account we will credit Calls-in-Arrears Account instead of “Shares Allotment Amount” and “Shares Call Account”.

Journal entry for this will be:

Date Particulars   Amount (Dr.) Amount (Cr.)
Equity Share Capital A/c Dr.  XXX
   To Forfeited Shares Account A/c Cr.  XXX
   To Calls-in-Arrears A/c Cr.  XXX


2. Forfeiture of Shares which were originally issued at Premium

When shares issued at a premium are forfeited, two following possibilities exist:

a. Securities Premium amount has been received:

In this case, we will debit the Share Capital Account with the amount called up and will credit Forfeited Shares (amount received less premium), Shares Allotment (amount not received on allotment), First Call (amount not received on calls); Final Call Account in the same manner.

Journal entry will be:

Date Particulars   Amount (Dr.) Amount (Cr.)
Share Capital A/c Dr.  XXX
   To Shares Allotment A/c Cr.  XXX
   To Forfeited Shares A/c Cr.  XXX
   To First Call A/c Cr.  XXX

b. Securities Premium amount has not been received:

In this case, we will debit the Share Capital Account with the amount called-up. If Securities Premium has not been received, we will debit Securities Premium in order to cancel it.

Learn more about Shares Issued at Premium here in detail.

And we will credit Forfeited Shares (amount received less premium), Shares Allotment (amount not received on allotment), First Call (amount not received on calls); Final Call Account in the same manner.

Date Particulars Amount (Dr.) Amount (Cr.)
Share Capital A/c Dr.  XXX
Securities Premium A/c Dr.  XXX
   To Shares Allotment A/c Cr.  XXX
   To Forfeited Shares A/c Cr.  XXX
   To First Call A/c Cr.  XXX

Solved Example on Forfeiture of Share

Give Journal entry relating to ‘Forfeiture of Shares’ for the following:

1.ABC Ltd. Issued 10,000 equity shares of ₹ 10 each at a premium of ₹ 2 per share. The amount is payable as ₹ 4 per share on the application, ₹ 5 per share (including premium) on the allotment, ₹ 3 per share on first and final call.

The company allows 200 shares to Mr. Gaurav.

Case 1: If Gaurav fails to pay allotment money and on his subsequent failure to pay the first and final call, the company forfeits his shares.

Case 2: If Gaurav fails to pay the first and final call and company forfeits his shares.

2. XYZ Ltd. Issued 5,000 equity shares of ₹ 10 each at par payable as ₹ 2 per share on the application, ₹ 3 per share on the allotment, ₹ 3 on first and final call and ₹ 2 per share on second and final call. The company allots 40 shares to Mr. Ashish.

Case 1: If Mr. Ashish fails to pay allotment money and company forfeits his shares.

Case 2: If Mr. Ashish fails to pay the first call and on his subsequent failure to pay the final call, the company forfeits his shares.

Ans:

1. Journal Entries

IN THE BOOKS OF ABC LTD.

Date Particulars   Amount (Dr.) Amount (Cr.)
Case 1 Equity Share Capital A/c (200 x ₹ 10) Dr. 2,000
Securities Premium A/c  (200 x ₹ 2) Dr. 400
   To Shares Allotment A/c (200 x ₹ 5) Cr. 1,000
   To Forfeited Shares A/c (200 x ₹ 4) Cr. 800
   To First and final Call A/c (200 x ₹ 3) Cr. 600
(Being 200 shares forfeited for non-payment of allotment and first and final call money)
Case 2 Equity Share Capital A/c (200 x ₹ 10) Dr. 2,000
   To Forfeited Shares A/c (200 x ₹ 7) Cr. 1,400
   To First and final Call A/c (200 x ₹ 3) Cr. 600
(Being 200 shares forfeited for non-payment of first and final call money)

2. Journal Entries

IN THE BOOKS OF XYZ LTD.

Date Particulars   Amount (Dr.) Amount (Cr.)
Case 1 Equity Share Capital A/c ( 40 x ₹ 5) Dr. 200
   To Shares Allotment A/c ( 40 x ₹ 3) Cr. 120
   To Forfeited Shares A/c (40 x ₹ 2) Cr. 80
(Being 40 shares forfeited for non-payment of allotment money )
Case 2 Equity Share Capital A/c (40 x ₹ 10) Dr. 400
   To Forfeited Shares A/c (40 x ₹ 5) Cr. 200
   To Shares First Call A/c (40 x ₹ 3) Cr. 120
   To Shares Second and Final Call A/c (40 x ₹ 2) Cr. 80
(Being 40 shares forfeited for non-payment of first and second and final call)

 

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