MCom I Semester Corporate Accounting Issue Forfeiture Reissue Shares Study Material Notes 

MCom I Semester Corporate Accounting Issue Forfeiture Reissue Shares Study Material Notes: Meaning and Definition fo Company Share Capital of Company Issue of Shares Classes of Shares journal Entries Calls in Arrear Burdwan Steels LTD Under Subscription of Shares Over Subscription of Shares Calculation  Table Journal Entries Forfeiture of Shares Balance Sheet Reissue of Forfeited Shares Journal Entries

BCom 3rd Year Definition Functions Financial Money Study Material Notes in Hindi

Issue, Forfeiture, and Reissue of Shares

Meaning and Definition of Company

Company is a voluntary association of persons created by law usually for the purpose or carrying on some business for profit. with perpetual succession and common seal.

In the words of Haney. “A company is an artificial person, created by law, having a separate entity with a perpetual succession and a common seal.”

Section 3 (1) () of the Indian Companies Act, 1956 defined a company as “a company formed and registered under this Act, or an existing company.” An existing company means a company formed and registered under any of the former Companies Act. Thus, a company is an artificial person, invisible and existing only in contemplation of the law. Its main features are as follows:

(1) Voluntary Association – It is a voluntary association of persons usually for profit.

(2) Created by Law – A company gets its existence according to some law.

(3)  Artificial Person – It is an artificial person and acts through human beings who are called directors.

(4) Separate Entity – A company is a separate legal entity, it is independent of its members and its existence is not affected by the change of its members. It can claim and be sued on its own name.

(5) Perpetual Succession – Its life is not affected by the life of its members.

(6) Common Seal – The company has its common seal. Only those documents can be said to belong to the company which contain its common seal.

(7)  Limited Liability – Most of the companies are limited companies. The liability of the members of such companies is limited by the unpaid amount on their shareholdings.

Share Capital of a Company

The capital of a company is divided into units of small denomination. Each unit is called a share. A company collects capital by selling its shares in the public. The person who takes share/shares of the company is called the member or shareholder of the company. Shareholders are the real owners of the company. The Institute of Chartered Accountants of India defines the term share capital as “the aggregate amount of money paid or credited as paid on the shares and/or stocks of a corporate enterprise”. For accounting purposes, the share capital of a company can be divided into the following categories:

1 Authorised Capital – It is the maximum amount of the share capital, set out in the memorandum of association of the company, which the company is entitled to issue. It is that amount by which the company is registered and on the basis of which its registered fees is paid. This sets out a limit beyond which a company can not issue its shares to the public. Authorised capital is also termed as ‘registered capital’ or ‘nominal capital’. The amount of authorised capital is not included in the sum of balance sheet and hence a line is sketched below its amount

2. Issued Capital-It refers to the nominal value of that part of the authorised capital which has actually been offered for subscription. It also includes-bonus-shares and shares issued for consideration other than cash. It sets out the limit or the amount receivable from share issue. Like authorised capital this capital is also demarcated from other amounts of balance sheet by sketching a line below its amount.

3. Subseribed Capital – It refers to the nominal value of that part of issued capital which has actually been subscribed and allotted. If the public has fully subscribed the offer of the company, then issued and subscribed capitals can be shown in the balance sheet under one head as ” Issued and Subscribed Capital”.

Note : (i) Shares issued as bonus shares and shares issued for consideration other than cash should be separately stated under this heading.

(ii) Where the public has fully subscribed the offer of the company, the amounts of issued and subscribed capitals will be the same and so they can be shown in the balance sheet under one head as “Issued and Subscribed Capital”.

(iii) Where shares have been forfeited for non-payment of calls then the issued and subscribed pals will differ. In such a case, the subscribed capital shall be reduced by the number and the value of shares forfeited

4. Called-up Capital – (It is that portion of subscribed capital which the shareholders are called upon to pay on the shares allotted to them

Note: The amount of the share premiun is not a part of the called up share capital but discount on shares is a part of called up capital.

5. Paid-up Capital – It refers to that part of the called up capital which has actually been paid by the shareholders. In case of calls – in – arrear the amount of calls – in – arrear is deducted from the called up capital to arrive at the figure of paid up capital. This is the actual capital of the company and is included in the total of balance sheet.

It is important to note that Part I of Schedule VI of Companies Act, 1956 requires to classify the share capital of a company into three categories only: Authorised, Issued and Subscribed

Reserve Capital – It is that part of the uncalled share capital which a limited liability company has resolved by special resolution, not to call up in its life span. This capital can be called up only in the event of winding up of the company. Thus, it is in the nature of guarantee fund for the creditors on the winding up of the company. Under Section 99 of the Companies Act the word ‘reserve capital has been substituted by the more accurate expression: “reserve liability of limited company”.

Illustration 1. A company was registered with a capital of Rs. 20,00,000, divided into shares of Rs. 100 each. The company issued 12,000 shares, on which Rs. 80 per share had been called up. All shareholders paid the amount with the exception of a call of Rs. 20 on 1,000 shares. Besides, the company issued 3,000 shares as fully paid to the vendor in exchange of machineries. How will you show this information in the Balance Sheet of the company

Classes of Shares

Section 2(46) of the Companies Act, 1956 defines a share as “a share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied”. The Companies Act provides for three classes of shares viz., preference shares, equity shares and deferred shares. However. the companies formed after the commencement of this Act are allowed to issue only preference and equity shares.

(1) Preference Shares – The Act defines preference share capital as that part of the share capital which carries preferential rights as to-i) the payment of dividend at a fixed rate, and (ii) the return of capital on winding up of the company. It may be remembered that the preference shareholders can enforce their right of getting dividend prior to equity shareholders only when the directors declare the dividend.

Classes of Preference Shares – The preference shares are sub-divided as follows:

Cumulative and Non-Cumulative Preference Shares – The term ‘cumulative’ implies that the amount Fixed dividend which the preference shares carry, accumulates if it is not paid in any year or years and such dividend must be paid out of the profits of the subsequent years before dividend is paid to the equity shareholders. Such arrears of preference dividend are shown in the Balance Sheet by way of note under the heading ‘Contingent Liabilities’. Unless Articles provide otherwise, a preference share is deemed to be cumulative.

A non-cumulative preference share is that share on which arrears of dividend do not accumulate. If dividend is not paid for any year, the right to receive dividend for that year lapses.

(ii) Redeemable and Irredeemable Preference Shares – Redeemable preference shares are those the amount of which will be repaid on or after a certain date as per the terms of their issue. On the other hand, irredeemable preference shares are those which can not be redeemed except in the case of winding of the company. After commencement of the Companies (Amendment) Act, 1988 no company limited by shares can issue irredeemable preference shares. Companies (Amendment) Act, 1996 which is effective since 1-3-1997 provides that no company can issue redeemable preference shares which are redeemable after 20 years of their issue.

(iii) Convertible and Non-Convertible Preference Shares – A convertible preference share is that which can be converted into equity shares while a non-convertible preference share is that which does not possess such right. Unless stated otherwise, a preference share is deemed to be non-convertible.

(iv) Participating and Non-Participating Preference Shares – Participating preference shares are those which in addition to receiving dividend at a fixed rate, also carry a right of sharing with equity shares in any (1) surplus profits left after paying a specified equity dividend and/or (ii) surplus assets remained after the entire capital has been repaid on winding up of the company. Non-participating preference shares on the other hand, are those which do not carry such right. Unless stated otherwise, a preference share is deemed to be non -participating

(2) Equity or Ordinary Shares – According to Section 85 of Companies Act, an equtiy share is a share. which is not a preference share. That is to say, if a share does not possess the preferential right as to payment of dividend or repayment of capital, such share is called an equity share. Thus, equity shareholders get dividend and repayment of capital after meeting the claims of preferential shareholders. An equity share carries voting right.

(3) Deferred Shares – A deferred share is that which ranks for dividend only after the equity shares have received dividend at some specified maximum rate. These shares are generally of small nominal value but carry the right to receive a considerable proportion of the surplus profits and also extensive voting powers. Seldom created now-a-days, these shares were often issued to promoters of the company and sometimes to the vendors. After the commencement of Companies Act, 1956, these shares now can be issued by independent private companies only.

Issue of Shares

A company can issue its shares (i) for cash and (ii) for consideration other than cash.

Shares Issued For Cash

Shares can be issued for cash to friends, relatives, important financial organizations and to public. A private company usually issues shares informally, by personal contact between the directors and the prospective -often existing-shareholders. No notice or circular etc. is issued by such companies. A contract is executed, consideration passes, share certificates are made out and records made in the company’s books. The Registrar of Companies is informed by filing him the return of allotment within 30 days after allotment.

In the case of a public company, a large amount of capital is required. It is therefore, necessary for such companies to make public issue of their share capital. The following procedure is followed by these companies :

(1) Issue of Prospectus – First of all, the company issues a prospectus which is an invitation to the general public to apply for its shares. The main contents of prospectus are usually advertised in leading newspapers , radio and T.V. for the information of general public. The prospectus gives information about the company and the terms of issue. The Companies Act has laid down the details of contents which must be included in the prospectus. Besides other information, it states the number and types of shares offered for issue, the minimum subscription, the date of opening and closure of the lists and the mode of payment

(2) Receipt of Applications – After the issue of prospectus the intending shareholder is required to deposit his application form duly filled alongwith the application money with the prescribed scheduled bank.

(3) of the Companies Act, application money can not be less than 5% of the face value of the share. However, according to SEBI guidelines dated 6-3-1995 the minimum application money to be paid shall not be less than 25% of the issue price. These guidelines also provide that where on application and on allotment an amount exceeding Rs. 250 crores is raised the amount to be called up on application allotment and on various calls shall not exceed 25% of the total quantam of issue. It, therefore, follows that for issues on less than Rs. 250 crores, the issuer company is permitted to call up entire issue price on application set. For the issues of less than Rs. 500 crores the issue amount should be fully called up within a period of 12 months from the date of allotment. For the issues of Rs. 500 crores and above the issue price can be fully called up within the said period only after the financial institutions are satisfied about the utilisation of the issue proceeds.

After the close of subscription list, (which can not be less than 3 days after the opening of subscription list and the subscription list can not be considered open prior to the beginning of the fifth day after the date of first publication of prospectus), the bankers forward all the applications alongwith the application money to the company. The company ultimately records these in the “Application and Allotment Book.”

Section 69 (5) of the Companies Act requires that the amount received on applications for shares has to be kept in a Scheduled Bank till the minimum subscription as laid down in the prospectus is raised and till cerificate of commencement of business obtained, in case of a new company. If the company fails to raise the minimum subscription within 120 days of issue of prospectus, the whole of the application money received has to be refunded to the applicants within the next ten days. Failing this, the directors of the company shall be jointly and severally liable to repay the money with interest at the rate of 6 percent per annum from the expiry of 130th day. As per SEBI guidelines, if the company does not receive 90% of the issued amount from public subscription including accepted devolvement from underwriters, if any, within 60 days from the date of closure of the issue, the amount of subscription received is required to be refunded.

In terms of Section 73(2) and (2A), the company should refund the excess application money after adjusting the allotment call within 10 weeks of closing of the subscription list and pay interest @ 15% p.a. if refunds are delayed by more than 8 days after this period.

(3) Allotment of Shares – After satisfying the conditions laid down in Section 69 and 70 of the Companies Act, the Board of Directors meets and allots the shares. If the number of shares applied for falls short of the number of shares offered, the allotment can be made only for the shares applied for , provided minimum subscription has been received. But if the number of shares applied for exceeds the number of shares offered, the Board of Directors must set a criterion for allotment. Directors have discretionary power either to reject or to accept partially the applications.

On the shares being allotted, a letter known as “the letter of allotment” is sent by the company to each allottee informing him of the number of shares allotted and asking him to pay the allotment money due from him, by a specified date. The allotment money becomes due immediately after allotment is made. On dispatch of the letter of allotment, an applicant becomes the bonafide shareholder of the company. On receipt of this letter, the allottees will forward to the company the amount due on allotment which will be recorded in the Application and Allotment Book. Where no allotment is made to an applicant, a letter of regret” is sent to him alongwith refund of his application money.

(4) Calls on Shares – The entire share money may be payable either in a lump sum alongwith the application money or in instalments. If the amount is payable in instalments, the amount payable alongwith application is known as application money, the amount payable on allotment as allotment money and the remainder is known as call money. If the balance due is collected in more than one instalment, the instalments are known as the first call, the second call and so on, the last call being termed as the final call. Calls are made by the directors on specified dates fixed by its Articles. If the Articles are silent in this respect, the provisions laid down in Table A shall apply. Table A imposes the following restrictions:

(i) a period of one month must elapse before another call is made;

(ii) The amount of the call should not exceed 25% of the face value of the share: and

(iii) fourteen days notice is given to the shareholders to pay the amount.

According to Section 91 of Comapnies Act, calls must be made on a uniform basis on all shares within the same class. Particulars of each call are entered in “Share Call Book”

Note: Where both the equity and the preference shares are issued, separate application and allotment. call and capital accounts are maintained in respect of the two classes of shares.

Application and Allotment Account-As application and allotment both calls are due on the date of allotment of shares, some accountants do not open separate application and allotment accounts, but make entries regarding both in one account called ” Application and Allotment Account”. If this procedure is adopted, journal entries regarding application and allotment moneys in illustration 2 will be as follows:

Preparation of Cash Book – When shares (or debentures) are issued, it would be proper to prepare the Cash Book and enter the cash transactions in this book. If Cash Book is prepared, it would not be necessary record entries for cash transactions in the Journal. In that case only non-cash transactions will be journalized If Cash Book is prepared, the solution to illustration 2 will be as follows:

Two classes of shares – Where both preference and equity shares are issued, there will be separate preference and equity shares accounts to record applications, allotments and calls. Similarly, ‘share capital account will be separated into “Preference share capital account and Equity share capital account

Illustration 3. Calcutta Textiles Ltd. was incorporated on January 1, 1998. The authorised capital of the company was Rs. 5,00,00,000 divided into 30,00,000 equity shares of Rs. 10 each and 2,00.000 12% preference shares of Rs. 100 each. The company issued 12,00,000 equity shares and half of the preference shares payable as follows Equity Shares – Rs. 3 on application, Rs. 3 on allotment, Rs. 2 on first call and Rs. 2 on final call Preference Shares – Rs. 30 on application, Rs. 30 on allotment, Rs. 20 on first call and Rs. 20 on final call All these shares were subscribed. Prepare Cash Book and Journal assuming that all money was duly received Solution:

Terms of Issue of Shares : Shares of a company may be issued in any of the following three ways: (1) At par, (2) At premium or (3) At discount.

(1) Issue of Shares at Par : Shares are said to have been issued at par where an applicant has to pay a total sum equal to the face value of the share. This has already been discussed earlier.

(2) Issue of Shares at Premium : Shares are said to have been issued at premium where an applicant has to pay a total sum in excess of the face value of the shares, the premium being the difference of issue price and face value of the share. For example, if a share of Rs. 10 is issued at Rs. 15, then Rs. 15 – Rs. 10 = Rs. 5 is premium. The word ‘share’ used in Section 78 has been substituted by ‘Securities’ by Companies (Amendment) Act, 1999. Section 2 (45 AA) inserted by the Companies (Amendment) Act, 2000, defines the expression securities to include shares, scrip, stock, bonds, debentures, debenture stock etc. Hence, now the amount of share premium will be credited to Securities Premium Account which will be shown on the liabilities side of Balance Sheet under the head “Reserves and Surplus”.

There are no restrictions in the Companies Act on the issue of shares at premium but there are restrictions on its disposal. Section 78 provides that a company may apply Securities Premium Account wholly or in part only for :

(i) issuing fully paid bonus shares to the members:

(ii) writing off preliminary expenses of the company;

(iii) writing off the expenses of, or the commission paid or discount allowed on any issue of shares or debentures of the company; or

(iv) providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.

In addition, according to Section 77A, a company may purchase its own shares or other specified securities out of the Securities Premium Account.

Accounting Entries : A company can realize premium with any installment but in the absence of any information to the contrary, it is presumed to be payable on allotment. Therefore, the amount of premium be debited (along with the amount due in respect of share capital) to share allotment account and Securities Premium Account. For example, if a share of Rs. 100 is issued at a premium of Rs. 20 and Rs 45 including premium is due on allotment, the journal entry will be as follows:

Shares Share Allotment Account                                                Dr. 45

To Share Capital Account                                                                                    25

To Securities Premium Account

When the amount is received, following entry will be made :

Bank Account                                                                             Dr. 45

To Share Allotment Account                                                                                45

Securities Premium Account is shown on the liabilities side of a company’s balance sheet under the head “Reserves and Surplus”.

Illustration 4. Dinarpur Paper Mills Ltd. issued 25.000 Equity shares of Rs. 100 each, payable as to S. 20 on application, Rs. 30 on allotment (including Rs. 10 premium) and Rs. 60 on call. All shares were applied for and allotted. All money was received. Make journal entries in the books of the company.

(3) Issue of Shares at Discount : Shares are said to have been issued at discount where an applicant has to pay a total sum less than the face value of the share, the discount being the difference of face value and issue price of the share. For example, if a share of Rs. 10 is issued at Rs. 9 then Rs. 10 – Rs. 9 – Re. I is the discount. It must be remembered that according to Section 79 of Companies Act, a company can issue shares at a discount only when the following conditions are fulfilled :

(i) The shares must belong to a class already issued.

(ii) The issue is authorised by a resolution passed by the general meeting and sanctioned by Company Law Board;

(iii) The issue is made at a discount specified in the above resolution but in no case the rate of discount should exceed 10 percent or such higher rate as permitted by the Company Law Board.

(iv) At least one year has elapsed since the date on which the company was entitled to commence business.

(v) The issue is made within two months from the date of receiving the sanction of the Company Law Board or within such extended time as the Board may allow.

Discount on issue of shares is a loss of capital nature and as such debited to a separate account called Discount on Issue of Shares Account”. Until it is written off, it must be distinctly shown on the assets side of the company’s Balance Sheet under the head “Miscellaneous Expenditure”.

Accounting Entries : The journal entry for discount on shares is generally made at the time of allotment of shares. Share

Allotment Account is debited only with the net amount due and the discount allowed is count due and the discount allowed is debited to Discount on mares Account, the total amount is credited to Share Capital Account For example, if a share on 100 is issued at Rs. 90, of which Rs. 25 is payable on allotment, the journal entry at the day as follows:

Calls-In-Arrear

If a shareholder makes a default in sending the call money within the specified period, the money not so sent is called calls-in-arrear. There are two alternative methods of dealing with this problem:

(A) Opening a Separate Account – If some shareholders fail to pay the amount of a call, Calls-inArrear Account is debited and the relevant call account is credited. In this method, allotment and other call accounts will not show any balance but the Calls-in-Arrear Account will show a debit balance equal to the total unpaid amount on various instalments. The balance of calls-in-arrear account is shown as a deduction from the called up capital on the liabilities side of the company’s Balance Sheet. On receipt of amount of calls-in-arrear on a subsequent date, Bank Account will be debited and Calls-in-Arrear Account credited.

(b) Not Opening a Separate Account – It is not necessary to open a separate account for calls-inarrear. In that case, amount actually received is credited to the call account and hence the various call accounts will show debit balance equal to the total unpaid amount of each call. On receipt of amount of calls-in-arrear on a subsequent date, Bank Account will be debited and the relevant Call Account will be credited. At the year end, the balance of various call accounts may be transferred either to Calls-in-Arrear Account or to the Balance Sheet. In both circumstances, total amount of unpaid calls will be shown as a deduction from the called up capital.

It must be remembered that if there are more than one class of shares, Calls-in-Arrear in respect of each class of shares should be shown separately.

Interest on Calls-in-Arrear – Directors are actually authorised by the Articles to charge interest at a rate on calls-in-arrear from the due date to the date of payment. However, if the Articles are silent,

Calls-in-Advance

The money received by a company from its shareholders in excess of what has been called upon the shares is called Calls-in-Advance. Section 92 of Companies Act states that calls-in-advance can be accepted only when company is so authorised by its Articles. On receipt of such sums by a company, the amount should be credited to a separate account, called Calls-in-Advance Account by passing the following entry :

Bank Account                                          Dr

To Calls-in-Advance Account

The amount received as calls-in-advance is a debt of the company until the calls are made and the amount is actually payable by the shareholders. As and when calls are made, the appropriate amount is transferred from the Calls-in-Advance Account to the relevant Call Account by passing the following entry :

Calls-in-Advance Account                   Dr

To Relevant Call Account

It is to be noted that the money so received does not form part of the company’s share capital. So, the shareholders making advance are not entitled to any voting rights in respect of such amount. They are also not entitled to receive dividend on such advance amount. The balance of Calls-in-Advance Account is shown as a separate item on the Balance Sheet after paid up capital. Some companies show this balance as a current liability

Interest on Calls-in-Advance – Generally, Articles of the company specify the rate at which interest is payable on calls-in-advance. If the company has adopted Table A, the Board of Directors can pay interest on such advances subject to the maximum of 6% per annum from the date of receipt to the date when the call is due for payment. It is to be noted that this interest is a charge on profits of the company. As such, this interest will be paid even if no profit is earned by the company.

Issue Forfeiture Reissue Shares

Accounting Entries :

1 If interest is paid in cash –

Interest on Calls-in-Advance Account                                         Dr.

To Bank Account

Issue, Forfeiture and Reissue of Shares

2. If interest is not paid in cash

Interest on Calls-in-Advance Account                                        Dr.

To Sundry Shareholders Account

3. For writing off the amount of interest –

Profit & Loss Account

To Interest on Calls-in-Advance Account

Illustration 7 On 1st January, 1998, X Ltd. makes an issue of 10.000 equity shares of Rs. 10 each payable as below:

On application             Rs. 2

On allotment                Rs. 3

On first and final call   Rs. 6

(Three month after allotment) The issue was subscribed for in full and the shares were allotted. A shareholder holding 20 shares paid first and final call with allotment money and another shareholder did not pay allotment money on his 30 shares but which he paid with first and final calls Directors have decided to charge and allow interest, as the case may be, on calls-in-arrears and calls-in-advance respectively according to the provisions of Table A. Journalise the transactions including cash transactions.

Under-Subscription of Shares

The shares are said to be under-subscribed if the number of shares applied for is less than the number of shares offered for issue. A company may go ahead with its allotment plan provided the subscription is more than the minimum amount of subscription. In such a case entries are made on the basis of the number of shares applied for.

Illustration 8. On 1st January, 1998, Indian Explosives Ltd. issued a prospectus offering 2,00,000 shares of Rs. 10 each to the public. The shares were payable as follows:

On application Rs. 3, allotment Rs. 2, first call Rs. 3 (June 1, 1998) and second call Rs. 2 (Oct. 1, 1998).

Applications for 1.80,000 shares were received upto Feb. 20 and these shares were allotted on March 1, 1998. All allotment money and first call money were received on April 15 and June 20 respectively. At the close of accounting year on Dec. 31, it was known that second call on 1,000 shares was in arrear.

Journalise these transactions.


Over-Subscription of Shares

Share issues of good companies often get over-subscribed. Shares are said to be over-subscribed when the number of shares applied for is more than the number of shares offered for issue. As the company can not allot shares more than that offered for subscription, the Board of Directors must set a criterion for allotment of shares. Following courses are available to the directors in this situation :

(i) Rejecting the excess applications – The directors can reject the excess applications. If this course is followed, application money received from such applicants is returned in full and the following entry is made:

Share Application Account                               Dr.

To Bank Account

(i) Accepting applications partially – The directors can accept applications partially. For example, if aplicant has applied for 500 shares, he may be allotted 200 shares. The surplus application money may be returned to the concerned applicant or be retained by the company for its utilisation towards the due on allotment and future calls . If the surplus application money is returned, following entry is made :

Share Application Account                   Dr.

To Bank Account

For adjusting the surplus application money towards allotment, the following entry is made

Share Application Account                      Dr.

To Share Allotment Account

Note : If Instead of opening separate applications and allotment accounts, one account called Applications and Allotment Account” is opened, then the above entry will not be required.

Surplus money exceeding that due on allotment has to be returned. However, it can be retained by me company for its utilisation for future calls if the Articles so authorise. Usually the prospectus on clause to this effect. If it is retained, it should be transferred to Calls-in-Advance Account by pasm following entry :

Share Application Account                           Dr.

To Calls-in-Advance Account

In future, whenever this calls-in advance money is adjusted towards some call due, then the following entry is made :

7000 Calls-in – Advance Account

15000 To Share Call Account (put the name of call) 11 surplus on application of any applicant exceeds the amount of total calls on shares allotted to him then the excess is returned to him at the time of allotment.

(iii) Full allotment to some applicants, a partial allotment to others and no allotment to the rest : This course is usually followed by the companies in case of over-subscription. If this course is followed, application money is returned to the unsuccessful applicants, surplus money on partially allotted shares is retained for utilizing it towards the amount due on allotment and future calls.

Illustration 9. Bhatia Ltd, issued a prospectus inviting applications from the public for 10,000 shares of Rs. 10 each, payable as to Rs. 5 on application, Rs. 4 on allotment and Rs. 3 on final call. Applications were received for 20,000 shares. Applications for 2,000 shares were totally rejected, applications for 3,000 shares were accepted in fult and the remaining applicants were allotted pro-rata.

Journalise the above transactions assuming that an applicant who was allotted 70 shares on pro rata basis did not pay the final call.

Issue Forfeiture Reissue Shares

Illustration 10. Rahul Constructions Ltd. made an issue of 30,000 shares of Rs. 10 each payable Rs. 3 on application, Rs. 5 on allotment and Rs. 2 on call. 93,200 shares were applied for and owing to this heavy oversubscription, allotments were made as follows:

(I) applicants for 21,500 shares (in respect applications for 2.000 or more) received 10,200 shares.

(11) Applicants for 50,600 shares (in respect of applications for 1,000 or more but less than 2,000 shares) received 12,600 shares.

(iii) Applicants for 21,100 shares in respect of applications for less than 1,000 shares) received 7,200 shares.

Cash then received after satisfying amount due on applications was applied towards allotment and call money and any balance then was returned. All moneys due on allotment and call were realized.

Give journal entries relating to the issue of shares in the books of the company. Solution : Working Notes :

 

Illustration 11. Pioneer Ltd, whose authorized capital is divided into 70.000 shares of Rs.100 each out of which 50,000 shares are issued and fully paid, invited applications for the remaining 20,000 shares at a discount of 10 per cent, payable as follows.com

On application Rs. 12.50; on allotment Rs. 12.50; on first call Rs. 25 and remaining on second and final callus

Applications were received in excess and the applicants to whom no share was allotted were returned 40.000.Allallotment money was received but shareholders of 240 shares failed to pay first call and of 400 shares failed to pay the second call.

Expenses of issue were Rs. 40,000. This was debited to share issue expenses account. The old balance this account was Rs. 76,000. Out of the money received from the issue, Rs. 8,00,000 were invested m e purchase of 40,000 shares of another company to have a controlling hand in that company.

From the above transactions, prepare necessary ledger accounts, Cash Book and Balance Sheet in the books of the Company

Issue Forfeiture Reissue Shares

Illustration 12. Neelam Co. Ltd. issued 50,000 shares of Rs. 10 each payable as under:

Rs. 2 on application, Rs.2.50 on allotment, Rs. 3 on first call and Rs.2.50 on final call. The subscriptions were received from the public for 90,000 shares. The allotment was made as follows on 1st Aug. 1997:

To applicants of 45,000 shares              Full

” ” 20,000                                             25% + ” ”

remaining”                                              Nill

The first call was made on 1st November, 1997 and the second call on 1st Feb., 1998. According to the terms of issue, the surplus application money could be kept by directors against money due on allotment and against subsequent calls. One shareholder to whom 5,000 shares were allotted paid on allotment the full amount due on shares. On 1st Feb., 1998, interest on calls-in-advance was paid @ 5% per annum.

Give entries in the Journal and Cash Book, assuming that all moneys were duly received by the company. Prepare Calls-in-Advance account also.

Illustration13. Zed Co. Ltd. offered to the public for subscription 20.000 equity shares of Rs 25 each able as to Rs. Son application, Rs. 5 on allotment and the balance in two equal calls of Rs. 7.50 each, payable allotment at intervals of three months each. One of the terms of issue was that in case of partially accepted applications, the surplus application money would be treated as Calls-in-Advance. The Articles of Association of the company provided for payment of interest on calls-in-advance @ 12% per annum. Also, it contained a provision for charging of interest on calls-in-arrear @ 10% per annum.

Applications totalled 53.000 shares. The Board of Directors rejected applications for 3,000 shares and made pro rata allotment on the remaining applications. One month after the date of allotment, one shareholder holding 200 shares remitted Rs. 2,500 on calls-in-advance. Another shareholder paid second and final call on 800 shares held by him three months late along with interest for late payment. All other moneys were received in time

Forfeiture of Shares

If a shareholder fails to pay on his shares any call made on him within the specified period, the Directors, if empowered by the Articles of the company, may forfeit his shares. Forfeiture of shares means compulsory termination of the membership as a penalty for non-payment of any call money. In order to make this forfeiture valid, it is essential to follow the procedure laid down in the Articles and Table A. The usual procedure is that Board of Directors serve a notice to the defaulting shareholder requiring him to pay the unpaid amount on his shares together with the accrued interest thereon. This notice must specify a future date (not being earlier than the expiry of 14 days from the date the notice is served ) and must also state that in the event of non-payment within such specified period, his shares will be liable to be forfeited. If the defaulting shareholder does not comply with the requirements of this notice, the Board of Directors at their duly constituted meeting pass a resolution forfeiting his shares. The defaulting shareholder should be informed by the company about the resolution of the Board. The company makes a public declaration also wherein full details are given of forfeited shares.

Effect of Forfeiture – Forfeiture deprives the shareholder of all his rights and interests in the forfeited shares. His name is removed from the Register of Members and the amount paid by him on these shares is forfeited. Although the forfeiture deprives the shareholder of his right of membership but he continues to be liable for the unpaid calls u/s 426 until these shares are fully paid up. The Directors have the right to cancel such forfeiture before these shares are reissued. This is made on the defaulting shareholder’s paying all sums due to the company alongwith a remission fee. When this takes place, suitable entries are passed to restore status quo of the shareholder.

Accounting Entries — Accounting treatment on forfeiture differs according to the terms of issue. As such accounting entries are shown below separately under each such cases:

(a) Forfeiture of shares issued at par – On forfeiture, Share Capital Account is debited with total amount called up on these shares as it reduces the share capital and various unpaid calls accounts (or Calls in-Arrear Account) are credited with amounts in arrear on forfeited shares in order to cancel their debit balance standing in the books. The amount already paid by the defaulting shareholders on the shares forfeited being a capital gain to the company is credited to Forfeited Shares Account (or Share Forfeiture Account or Shares Forfeited Account). The journal entry is :

Share Capital Account                   Dr. (No. of Forfeited Shares x Called up value per share)

To Respective Unpaid Calls Account    Amount unpaid on forfeited shares)

(or Calls-in-Arrear Account)

To Forfeited Shares Account                            (Amount paid on forfeited shares)

The Forfeited Shares Account balance will be shown as a separate item under the sub-head Subscribed Capital” on the liabilities side of the balance sheet till such time that shares are reissued. The subscribed capital and called up capitals are reduced by the number of shares forfeited.

Illustration 16. A limited company has an authorised capital of Rs. 2,50,000 in Rs. 10 shares of these, 4,000 shares were issued as fully paid in payment of purchasing the building. 8,000 shares were subscribed for by the public and during the first year Rs. 5 per share was called up, payable on application Rs. 2, on allotment Re. 1, on first call Re. 1 and on second call Re. 1. The amount received in respect of these shares were as follows:

(b) Forfeiture of shares issued at premium – The use of share premium money is guided by the provisions of Sections 78 of Companies Act. As such, premium once collected can not be cancelled later on. In this situation, there are two possibilities :

(1) Premium on forfeited shares has been received – If the shares to be forfeited were issued at a premium and the premium money was duly collected on these shares, Share Premium Account will not be cancelled (by debiting it) at the time of forfeiture. In such a case, the accounting entry on forfeiture will be the same as the one passed in case of shares issued at par. (See point (a) on page 24 ) 000 8

(II) Premium on forfeited shares has not been received in this case, Share Premium Account will be cancelled by the debiting Share Premium Account with the unrecovered amount of premium on forfeited shares and the following entry is passed

Share Capital Account                     Dr. (With the called up value of forfeited shares)

Share Premium Account                  Dr. (With the amount of premium not received

on forfeited shares)

To Respective Unpaid Calls Accounts  (With the respecting unpaid amount of call (or Calls-in-Arrear Account) on forfeited shares)

To Forfeited Shares Accounts                (With total amount received on forfeited shares)

Here it is to be noted that if the shares have been forfeited prior to the call with which premium amount is payable then Share Premium Account will not be debited on forfeiture of shares. It is further to be noted that in such a case, the balance standing credited in Share Premium Account may not be proportionate to the shares issued.

Illustration 17. Sapan Ltd, issued 5,000 shares of Rs. 100 each at premium of 20%, payable 30% on application, 40% on allotment and 30% (including 20% share premium) on first call and the balance on final call. All the shares were applied for and allotment was made. Mr. Ramesh who holds 100 shares failed to pay the allotment money and his shares were forfeited. After forfeiture, the first call was made and Mr. A. Banerji who holds 200 shares failed to pay first call and his shares were forfeited. After this forfeiture, the final call was made which was received on all shares except 500 shares of Mr. J. Basu and his shares were also forfeited by the company.

Pass necessary journal entries and show the Balance Sheet of the company after forfeiture.

(c) Forfeiture of Shares Issued at Discount – If shares to be forfeited were issued at a discount, a proportionate amount of discount allowed on such shares should be cancelled. Since discount account is debited at the time of issue of shares , at the time of its cancellation, it is credited. The entry is –

Share Capital Account                                Dr. (With called up value of forfeited shares)

To Respective Unpaid Calls Account         (With the respective unpaid amount of call on forfeited shares)

To Share Discount Account                       (With proportionate amount of discount allowed on forfeited shares)

To Forfeited Shares Account                       (With amount received on forfeited shares)

Illustration 18). Bengal Potteries Ltd. issued 30,000 shares of Rs. 10 each at a discount of 10%. On these shares payments are to be made as follows: Rs. 2 on application, Rs. 3 on allotment and Rs. 4 on first and final call. Mr. A. Basu, the holder of 8,000 shares did not pay the call money, hence his shares have been forfeited by the Company. Journalize the transactions in the books of the Company and prepare Balance Sheet.

Surrender of Shares

Surrender of shares means voluntary return of shares by a shareholder to the company for their cancellation in case he finds that he is unable to pay the calls made on him. The shares thus surrendered are cancelled by the company. In such a case the shareholder becomes estopped from questioning the validity. The effect of surrender of shares is the same as that of forfeiture of shares. The accounting entries required for recording the surrender of shares are very much similar to those required for recording the forfeiture of shares. Surrendered shares can be reissued in the same way as forfeited shares.

Reissue of Forfeited Shares

Table A empowers the Board of Directors to reissue forfeited shares on such terms, as it thinks fit. That is to say that forfeited shares may be reissued by the Board at par, at premium or at discount as per the then prevailing market conditions. However, if the shares are reissued at a discount, the amount of discount (or loss) can in no case exceed the amount of gross gain on forfeiture credited to Forfeited Shares Account at the time of their forfeiture. If the amount of discount exceeds the gross gain on forfeiture then the excess will be recovered from the Directors responsible. After reissue, the balance in Forfeited Shares Account, being net gain on forfeiture, will be transferred to Capital Reserve Account which will appear on the liabilities side of the Balance Sheat under the head “Reserves and Surplus”. This amount is available for writing off preliminary expenses, goodwill, discount on issue of shares or debentures or any other loss of capital nature.

Issue Forfeiture Reissue Shares

Accounting Entries :

(1) Reissue of forfeited shares which were originally issued at par:

(A) If the forfeited shares are reissued at par:

(i) On reissue of shares :

Bank Account                                 Dr  (With the amount received)

To Share Capital Account           (With the paid-up value of shares reissued

(ii)  On transfer of Forfeited Shares Account to Capital Reserve Account

Forfeited Shares Account              Dr. With the entire amount standing to the credit

To Capital Reserve Account               of Forfeited Shares Account

(B) If the forfeited shares are reissued at premium

(i) On reissue of shares Bank Account    Dr. (With the total amount received)

To Share Capital Account                        (With the paid-up value of shares reissued)

To Securities Premium Account              (With the amount of premium)

(ii) On transfer of Foreited Shares Account to Capital Reserve Account on Forfeited Shares Account

Dr. With the entire amount standing to the credit

To Capital Reserve Account of Forfeited Shares Account

(C) If the forfeited shares are reissued at discount:

(i) On reissue of shares –  Domonitoring 000,85 Bank Account

1 (With the amount received) Forfeited Shares Account D (With the discount allowed (or loss) on reissue)

To Share Capital Account (With the paid-up value of shares reissued)

(ii)  On transfer of Forfeited Shares Account to Capital Reserve Account

Forfeited Shares Account Dr. With the net gain, if any, on reissue

To Capital Reserve Account

Note: If all the forfeited shares are not reissued then the amount of net gain on reissue is found out by deducting the loss on reissue from proportionate gross gain on forfeiture of reissued shares.

Illustration 19.(A) Give journal entries for the forfeiture and reissue of shares in the following cases:

(i) Premier Company Ltd. forfeited 3,000 shares of Rs. 10 each, Rs. 8 called up held by Mr. Tapan for nonpayment of second call money of Rs. 3 per share. These shares were subsequently reissued by the Company to Bimal Kant for Rs. 10 per share as fully paid-up.

(ii) Karim Ltd. forfeited 500 shares of Rs. 10 each, fully called up held by Mr. Akbar for non-payment of final call money of Rs. 4 per share. These shares were subsequently reissued by the Company to Mr. Salim for Rs. 12 per share as fully paid-up.

(111) Tata Ltd. forfeited 300 shares of Rs. 10 each fully called up, held by Mr. A. Ray for non-payment of allotment money of Rs. 3 per share and final call of Rs. 4 per share. These shares were reissued to Mr. P. Sethi for Rs. 8 per share. Of

 (B) Bharat Company forfeited 200 equity shares of Rs. 10 each issued at par for non-payment of the first call @ Rs. 2 per share and the second and final call @ Rs. 3 per share. These shares are reissued as fully paidup to one of the directors @ Rs. 9 per share. No entries are made on forfeiture but when the shares are reissued, the cash received is credited to Equity Share Capital Account. Give the rectifying entry

 

Issue Forfeiture Reissue Shares