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Re-Issue of Forfeited Shares – Premium & Discount

Introduction

Forfeited shares become the property of the company. The company can sell (re-issue) them to a new shareholder. This is different from a fresh issue because these shares are already "partly paid" by the original defaulter.

1. Terms of Re-Issue

The company can re-issue shares at:

  1. Par (₹10 as fully paid for ₹10).
  2. Premium (₹10 as fully paid for ₹12).
  3. Discount (₹10 as fully paid for ₹8).

Maximum Permissible Discount

Generally, distinct shares cannot be issued at a discount. BUT, forfeited shares CAN be re-issued at a discount.

  • Limit: The discount on re-issue CANNOT exceed the amount previously forfeited (received) on those specific shares.
  • Logic: The company should not make an overall loss on the share.
  • Example: A paid ₹3 on a ₹10 share. It was forfeited.
    • Max Discount on re-issue = ₹3.
    • Min Re-issue Price = ₹7.

2. Journal Entry for Re-Issue

1. Re-issue at Discount Loss is debited to Share Forfeiture A/c.

Bank A/c ...Dr                         (Amount Recd)
Share Forfeiture A/c ...Dr             (Discount Given)
    To Share Capital A/c                   (Paid Up Value)

2. Re-issue at Premium

Bank A/c ...Dr                         (Total Recd)
    To Share Capital A/c                   (Paid Up Value)
    To Securities Premium A/c              (Premium)

3. Transfer to Capital Reserve (FINAL STEP) The profit made on re-issue (Gain on Forfeiture - Loss on Re-issue) is a Capital Profit. It must be transferred to Capital Reserve.

Share Forfeiture A/c ...Dr             (Net Gain)
    To Capital Reserve A/c                 (Net Gain)

Formula for Net Gain:

(Amount Forfeited on Re-issued Shares) - (Discount allowed on Re-issue) = Capital Reserve

Illustration

Scenario:

  • A's 100 shares (₹10 each) forfeited for non-payment of Final Call ₹4.

  • He had paid ₹6 (Forfeited Amount = 100 x 6 = ₹600).

  • Case 1: All 100 shares re-issued at ₹8 fully paid.

    • Discount = ₹2 per share.
    • Total Discount = ₹200.
    • Capital Reserve = 600 (Pocketed) - 200 (Loss) = ₹400.
    • Entry: Share Forfeiture Dr 400 To Capital Reserve 400.

  • Case 2: Only 50 shares re-issued at ₹8.

    • Proportionate Amount Forfeited = 50 shares x ₹6 = ₹300.
    • Discount Given = 50 shares x ₹2 = ₹100.
    • Capital Reserve = 300 - 100 = ₹200.
    • Balance in Share Forfeiture: ₹300 (belongs to remaining 50 shares).

Exam Notes: Writing the Answer

Question: "Journal Entry for Liability of Transfer to Capital Reserve." (2 Marks)

Trick: Always check how many shares were re-issued. If only 60% shares are re-issued, you can only use 60% of the Forfeited Amount to calculate profit. The remaining 40% stays in the Share Forfeiture Account until those remaining shares are sold.

Calculations:

  1. Find Profit/Share = (Amount Recd From Defaulter) - (Discount given to New Guy).
  2. Multiply by No. of Shares Re-issued.

Summary

  • Bank Dr: Money comes in.
  • Forfeiture Dr: Discount is treated as loss here.
  • Capital Reserve: Final profit goes here.
  • Max Discount: Cannot exceed amount already collected.

Quiz Time! 🎯

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