MCom I Semester Corporate Accounting Issue Forfeiture Reissue Shares Study Material Notes ( Part 2 )

MCom I Semester Corporate Accounting Issue Forfeiture Reissue Shares Study Material Notes ( Part 2 ) : Journal Entries  Reissue of Forfeited Shares Which were Originally Issued at Discount When all the Forfeited Shares are Not Reissued Journal Entries Balance Sheet Right Issue of Shares Discussion Questions Long Answer Questions Short Answer Questions Objectives Questions ( This Post Is Most Important For MCom Examination )

CTET Paper Level 2 Previous Year Science Model paper II in Hindi

Illustration 21. Neelam Co. Ltd. issued 80,000 equity shares of Rs. 10 each at a premium of 25% payable Rs. 4 per share on application, Rs. 6.50 per share on the allotment and the balance on first and final call. Applications total 91,000 shares out of which applications for 11,000 shares were rejected while all other applications are fully accepted. Mr. Ashok, the holder of 200 shares failed to pay allotment money and his shares were forfeited by the company and these shares were reissued to Vimal, as Rs. 8 paid up at Rs. 9 per share. After this, the Company made the first and final call which was duly received except on 500 shares of Ramesh. The Company after serving due notice forfeited his shares. Later, these were reissued to Dinesh as fully paid at Rs. 9 per share.

Make necessary entries of the above transactions in the Company’s Journal.

Illustration 22. A limited company issued a prospectus inviting applications for 40,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as under:

On application              Rs. 2 per share

On allotment                 Rs. 5 per share (including premium)

On first call                   Rs. 3 per share

On first call                   Rs. 2 per share

Issue Forfeiture Reissue Shares

Applications were received for 60,000 shares including one from Nitin who applied for 1,400 shares. Shares were allotted to the applicants including Nitin to whom only 1,000 shares were allotted, the remaining applications were refused and amount refunded. Money overpaid by Nitin on application was employed on count of sums due on allotment. Nitin failed to pay the allotment money due and on his subsequent failure to he first call his shares were forfeited. These shares were sold as fully paid to Rajiv at Rs. 10 each including Amount due on the second call was received in full from all the shareholders. Show the journal entries in the books of the company.

(3) Reissue of forfeited shares which were originally issued at discount : If such shares are reissued at par or at premium the accounting entries will be passed as explained in 1A and 1B on pages 27 & 28. But if such shares are reissued at discount (or loss) the Discount on Shares Account should be debited to the extent of proportionate amount of original discount on shares reissued and Forfeited Shares Account will be debited with the amount at deficiency, if any.

For example, if in illustration 18 the company reissued the forfeited shares to Mr. Anshu at Rs. 7 each, then the following entries will be passed on reissue of these shares :

When all the forfeited shares are not reissued

When only a part of the forfeited shares are reissued, only proportionate amount of gross gain of Forfeitted Shares Account relating to that part of forfeited shares which has been re-issued can be utilised towards discount to be given to the new allottee and any balance left from this proportionate amount will be treated as net gain on re-issue and this amount must be transferred to Capital Reserve Account. The amount relating to that part of forfeited shares which have not yet been re-issued will be left in the Forfeited Shares Account and this amount will be shown on the liabilities side of Balance Sheet.

Illustration 24. Give journal entries for the forfeiture and re-issue of shares in the following cases:

(1) Bharat Company forfeited 300 shares of Rs. 10 each, Rs. 7 called up of Kamal who could not pay the first call of Rs. 3 per share on these shares. Out of these, 200 shares were re-issued to Vimal as fully paid-up for Rs. 7 per share.

(ii) Bharat Company forfeited 200 shares of Rs. 10 each of Neeta on which Rs. 6 were called; these shares were issued at a discount of 10% and Neeta paid only Rs. 2 per share. Out of these 160 shares were re-issued to Geeta for Rs. 6 per share as Rs. 8 paid-up.

(iii)  Bharat Company forfeited 150 shares of Rs. 10 each, issued to Avinash at Rs. 11 per share. On these shares he paid only application money of Rs. 2 per share but could not pay the allotment money of Rs. 6 per share (including premium) and the first call money of Rs. 2 per share. Out of these, 60 shares were re-issued to Ajit as fully paid-up for Rs. 12 per share, 40 shares to Anup as fully paid-up at a discount of 10% and the remaining shares to Rakesh at a discount of 20%. Re-issue was made on different dates.

Forfeiture and Reissue of Shares Allotted on Pro-rata Basis in case of Over-subscription

In case of over-subscription, usually shares are allotted pro rata and the excess application money is retained by the company and adjusted subsequently against allotment money and/or call money. If some of the shares belonging to such pro rata category are forfeited, it may involve some difficulty in calculation of the amount of arrear on allotment on these shares. In such a case, excess amount received alongwith the application is adjusted against amount due on allotment and/or call but care should be taken to see that share of the defaulting shareholder in this excess is deducted from the amount due on the particular call from this shareholder to arrive at the net amount failed by the shareholder. To reach correct solution, following procedure is recommended :

(1) Calculate amount due from all shareholders on allotment (or on any other call on which application excess is adjusted and which is failed by the shareholder). Deduct from this the amount sent in advance with application.

Issue Forfeiture Reissue Shares

(2) To arrive at the amount received on allotment, deduct from (1) the net amount failed (i.e., the amount of calls-in-arrear) by the shareholder whose shares are being forfeited. This is found by deducting excess amount received on application from such shareholder from the amount due on allotment from him and this excess is calculated by deducting application money due on shares allotted to the defaulting shareholder from the application money received from such shareholder. This excess may, alternatively, be calculated by multiplying the total excess received on application by the ratio of shares allotted to this shareholder with total shares allotted to all shareholders.

IIlustration 25. The Madhu Co. Ltd. invited applications for 10,000 equity shares of Rs. 100 each at a premium of Rs. 10 each payable as below:

Rs. 50 on application,

Rs. 35 on allotment (including premium) and

Rs. 25 on call.

Applications for 15,000 shares were received. The applicants for 2,500 shares did not get any allotment and their money was returned on 31st May, 1997. Allotment was made pro rata to the remaining applicants on the same date.

Mr. Atulya was allotted 20 shares. He failed to pay the amount due on allotment (31st May, 1997) and the call (31st July, 1997). The company forfeited his shares on 31st October, 1997 and subsequently re-issued to Mr. Ellias on 31st December, in the same year at Rs. 105 per share.

Show the journal and cash book entries in the books of the above company, and also prepare balance sheet.

Note : As the amount of surplus on application from Atulya is more than the amount of securities premium due on his shares, it will be presumed that premium money has been received on his shares and so Securities Premium A/c will not be debited on forfeiture of his shares.

Illustration 26. Dum Dum (India) Ltd. issued a prospectus inviting applications for 12,000 shares of Rs. 10 each at a premium of Rs. 2 per share payable as follows:

On application     Rs. 2

On allotment       Rs. 5

On first call          Rs. 3

On  second call    Rs. 2

Applications were received for 18,000 shares and allotment made pro rata to the applicants of 14,400 shares. Money over-paid on applications was employed on account of sums due on allotment.

Kismatlal, to whom 240 shares were allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited. Chikkuram, who was allotted 360 shares, failed to pay the two calls and his shares were forfeited after the second call.

Of the shares forfeited 480 shares were sold to Hiralal credited as fully paid for Rs. 9 per share, the whole of Kismatlal’s shares being included. Show Journal and Cash Book entries and the Balance Sheet.

Illustration 28. Robbins Ltd. issued 10,000 equity shares of Rs. 10 each at a premium of Rs. 2 per share, payable Rs. 2 on application, Rs. 4 on allotment (including the premium) and Rs. 3 on first call. Subscriptions were received for 11,000 shares and the directors, while making allotment, adjusted the excess money received on application to the allotment money due in respect of 500 shares. Three months after the date of allotment, the first call was made.

The company received all money due except in the case of a holder of 200 shares from whom nothing other than application money was received and in respect of another holder of 100 shares in whose case the call money became overdue. The directors, after giving proper notice forfeited the defaulting shares and re-issued them to a shareholder for a consideration of Rs. 2,000 which was duly received. ”

From the above, show the journal entries in respect of forfeiture and re-issue of shares and the relevant ledger accounts in the books of the company

Right Issue of Shares

Section 81 of Companies Act, 1956 provides that whenever a public company proposes to increase its subscribed capital after the expiry of two years from the date of its incorporation or after the expiry of one year from the date of the first allotment of shares in that company, whichever is earlier, then such further shares must be offered to the existing holders of shares in proportion to capital paid up on those shares as nearly as possible. Such right of shareholders is known as ‘right of pre-emption’ and this type of share issue is known as ‘right issue of shares’. Section 81(IA) provides that the new shares may be offered to outsiders if(i) a special resolution is passed to that effect or (ii) an ordinary resolution is passed to that effect and approval of the Central Government is obtained on the ground that such an offer to the outsiders is most beneficial to the company.

The aforesaid right to shareholders is made by notice specifying the number of shares offered and limiting a time not being less than 15 days from the date of the offer with in which the offer can be availed. The shareholder may, within the prescribed time accept, reject or renounce the offer. If a shareholder has neither accepted the offer nor renounced in favour of another person, the Board of Directors may dispose of the shares so declined in such manner as it thinks would be most beneficial to the company.

The payment of right shares may be required in one lump sum or in instalments. Such an offer may be at par, at premium or at discount.

Illustration 29. A limited company issued 20,000 equity shares of Rs. 10 each. All these shares are fully paid up on 31st December, 1997. On 1st February, 1998, directors of the company decided to give one right share in exchange of two old equity shares to its existing equity shareholders. This right share was issued at the rate of Rs. 4 per share payable as Rs. 4 on application and Rs. 10 on allotment including premium. Equity shareholders took up 8,000 right shares. Remaining right shares, which were not taken over by equity shareholders, were sold by the directors for Rs. 29,000 in the open market. Expenses of this issue amounted to Rs. 500. Pass the necessary journal entries in the books of company. All payments have been received in time.

Discussion Questions

Long Answer Questions

1 What is meant by a ‘Share’? Discuss clearly the various kinds of shares.

2 What do you understand by preference shares ? What are their kinds ? How are preference shares redeemed?

3. Explain the procedure for the issue and allotment of shares. Can shares be issued at a premium and at a discount?

4. What do you understand by subscription of shares ? Differentiate between ‘over-subscription and “under-subscription.’ How would you treat the excess application money in the books of accounts ?

5. What is over-subscription ? Discuss the various methods of disposal of over-subscribed amount.

6. What is meant by forfeiture of shares ? Describe the procedure for the forfeiture of shares. Can forfeited shares be issued at a discount ? If so, to what extent ?

7. What is meant by forfeiture of shares ? Describe the procedure of forfeiture. Can the forfeited shares be re-issued ? If so, under what terms? Give journal entries regarding the forfeiture and reissue of shares.

8. Under what circumstances can a company forfeit its shares ? Can forfeited shares be reissued at a discount ? If so, to what extent? What entries are passed before and after the reissue of forfeited shares?

Issue Forfeiture Reissue Shares

9. Answer the following:

(a) A company issues 10,000 shares at Rs. 100 each. It receives applications for 15,000 shares. It wants to allot all the 15,000 shares, advise the company.

(b) The company wants to take Rs. 2 per share on application in respect of the above shares, will it be correct?

(c) A company issues 10,000 shares, minimum subscription is 9,000 shares, applications from public are for 6,000 shares, the company wants to allot 6,000 shares. Criticise.

(d) A company wants to issue shares and debentures at 15% discount. Advise.

(e) A company forfeited Rs. 10 shares on which Rs. 4 per share is received. Now the company has decided to reissue these shares at Rs. 5 per share. Advise.

Short Answer Questions

(i) Explain the main categories in which the share capital of a company is divided.

(ii) Define Minimum Subscription.

(iii) What is meant by a pro rata allotment ?

(iv) How can the amount of securities premium be utilised ?

(v) Explain the provisions of Companies Act regarding issue of shares at a discount.

(vi) When can the shares be forfeited ? Can the forfeited shares be reissued at discount? If so, to what extent

(vii) What is the effect of forfeiture of shar

(viii) How should the balance, if any, on for should the balance, I any, on forfeited shares account after reissue be dealt with ?

(ix) Name the purpose of utilising the security me securities premium that would maximise the return to shareholders. of interest wmien van be allowed on calls-in-advance and charged on calls-in-artear

(x) What is the rate of interest which can be per Table A ? Issue, Forfeiture and Reissue of Shares

 (xi) How is the value of right computed ?

(xii) Distinguish between forfeiture of shares and surrender of shares.

(xiii) Distinguish between capital reserve and reserve capital.

(xiv) What do you understand by preference shares ? What are their kinds?

(xv) Distinguish between Preference Shares and Equity Shares.

(xvi) Explain the reissue of forfeited shares.

Numericals

(i) If shares are issued by a company to its promoters in exchange of their services, what entry shall be passed in the company’s journal ?

(Answer: Debit goodwill account and credit Bank account)

(ii) A company issued 1.000 equity shares of Rs. 100 each fully paid up in consideration of the purchase of Plant and Machinery worth Rs. 99,000. Make entries in the company’s journal.

(Answer : Discount on issue Rs. 1,000)

(iii) A Ltd, purchased assets worth Rs. 4,18,000 from Bihar Industrial Corporation and issued equity shares of Rs. 100 each, fully paid, in satisfaction of the purchase consideration. Show journal entries in the books of A Ltd, assuming that the shares were issued : (i) at par, (ii) at discount of 5%, (iii) at a premium of 10%.

(Answer: Number of shares issued : (i) 4.180, (ii) 4,400, (iii) 3,800)

(iv) X Ltd. invited application for 5,000 shares of Rs. 10 each payable as follows: Rs. 2 on application, Rs. 3 on allotment, Rs. 2 on first call and the balance on final call. All the shares applied were subscribed and allotted, all the money duly received. You are required to Journalise these transactions. (Agra 2006) The directors of a company forfeited 100 equity shares of Rs. 10 each on which Rs. 500 had been paid. The shares were re-issued to one of the directors upon payment of Rs. 7.50 per share. Give necessary journal entries.

(Answer: Capital Reserve 250)

Issue Forfeiture Reissue Shares

(vi) A company forfeited 1,000 equity shares of Rs. 100 each issued at par for non payment of final call of Rs. 30 per share. These shares are subsequently reissued at a premium of 10 per share. Journalise the transactions.

(Answer: Transfer to Capital Reserve 70,000)

(vii) On 500 shares of Rs. 10 each fully called up, the company received only Rs. 8 per share. Consequently the shares were forfeited. Give journal entries for the forfeiture and recommend the minimum price at which these shares can be reissued.

(Answer: Forfeited shares account Rs. 4,000, minimum price Rs. 1,000)

(viii) Alok Ltd. forfeited 300 shares of Rs. 10 each fully called up held by Ram for non-payment of allotment money of Rs. 3 per share and final call money of Rs. 4 per share. Out of these shares 250 shares were reissued to Shyam for a total payment of Rs. 2,000. Give necessary entries in the company’s journal.

(Answer: Capital Reserve Rs. 250)

(ix) Y Ltd. forfeited 100 equity shares of Rs. 10 each, issued at a discount of 10% for non-payment of first call of Rs. 2 per share and final call of Rs. 3 per share. Out of these 50 equity shares were reissued at Rs. 7 per share. Give necessary journal entries in the company’s journal. (Answer : Capital Reserve Rs. 100) X Ltd. forfeited 150 equity shares of Rs. 10 each issued at a premium of Rs. 5 per share for non-payment of allotment money of Rs. 8 per share (including securities premium of Rs. 5 per share), the first call of Rs. 2 per share and the final call of Rs. 3 per share. Out of these 100 equity shares were reissued at Rs. 9 per share. Make necessary journal entries in the company’s journal. (Answer: Capital Reserve Rs. 100) The directors of a company forfeited 1,000 equity shares of Rs. 10 each for non-payment of the first call of Rs. 2 and the final call of Rs. 2. The shares were reissued to one of the directors upon payment of Rs. 8 per share. No entries were made on forfeiture but when the shares were reissued, the cash received was credited to the Share Capital Account. Give the necessary rectifying journal entry. (Answer: Dr. Equity Share Capital a/c by Rs. 8,000 and credit First Call a/c by Rs. 2.000. Final Call alc by Rs. 2,000 and Capital Reserve a/c by Rs. 4,000)

Issue Forfeiture Reissue Shares