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Notes
Company Accounts
Accountancy
FORFEITURE OF SHARES
In the previous lesson you have learnt about the shares and their issue by a Joint Stock Company. You have also learnt that generally the issue price of shares is payable in instalments i.e. on application, on allotment and on calls made from time to time by the Board of Directors of the Company. Sometimes some shareholders fail to pay the called up amount in full i.e., they do not pay on one or more instalments after the allotment of the shares to them. In such a case either the company can go to the court and file a suit against the defaulting shareholders for recovery of the due amount or can cancel the membership of the defaulting shareholders. In case the membership is cancelled, the amount paid by the defaulting members towards share capital stands forfeited. It is called ‘Forfeiture of Shares.’
In this lesson you will learn about different situations in which shares can be forfeited and accounting treatment thereof.
After studying this lesson you will be able to:
z explain the meaning of forfeiture of Shares:
z explain the situations in which shares can be forfeited;
z explain accounting treatment for forfeiture of shares issued at par, at discount and at premium and
z prepare relevant accounts.
OBJECTIVES
Notes
Company Accounts
Accountancy
28.1 MEANING AND PROCEDURE
If a shareholder fails to pay the due amount of allotment or any call on shares issued by the company, the Board of directors may decide to cancel his/her membership of the company. With the cancellation, the defaulting shareholder also loses the amount paid by him/her on such shares. Thus, when a shareholder is deprived of his/her membership due to non payment of calls, it is known as forfeiture of shares. The result of forfeiture of shares is : Cancellation of membership of the shareholder. Reduction of issued share Capital of the company. Let us take an example to make it more clear. S.K. Ltd. issued 100000 shares of 10 each payable as 2 on application, 2 on allotment, 3 on first call and 3 on second and final call. Mr. Harish, the allottee of 100 shares, fails to pay the second and final call money made by the company. In this case if the Board of Directors decide to forfeit his shares, his membership will be cancelled and the amount of 700 paid by him (on 100 shares 2 on application, 2 on allotment and 3 on first call per share) will be forfeited. Now Mr. Harish will no longer be the member of the company and the issued capital of the company will be reduced by 1000. Procedure of forfeiture of shares The authority to forfeit shares is given to the Board of Directors in Articles of Association of the company. The Board of Directors has to give at least fourteen days notice to the defaulting members calling upon them to pay outstanding amount with or without interest as the case may be before the specified date. The notice must also state that if the shareholders fail to remit the amount mentioned therein within the stipulated period, their shares will be forfeited. If they still fail to pay the amount within the specified period of time, the Board of Directors of the company may decide to forfeit such shares by passing a resolution. The decision regarding the forfeiture of shares should be communicated to the concerned allottees and should be asked to return the allotment letters and share certificates of the forfeited shares to the company.
Forfeiture of Shares
Notes
Company Accounts
Accountancy
Note : (i) Amount called up = No. of shares × called up per share (ii) Amount paid = No. of shares × Amount paid per share (iii) Amount called but not paid = No. of shares × Amount called but not paid per share Illustration 1 X, a shareholder, holding 100 shares of 10 each has paid application money of 2 per share and allotment money of 3 per share, but has failed to pay the first call of 2 per share and second call of 3 per share. His shares were forfeited. Make the journal entry to record the forfeiture of shares. **Solution : Journal Entry** **_Date Particulars L.F. Dr. Cr._** ``` `` ````` Share Capital A/c (100 × 10) Dr. 1, To Share forfeited A/c (100 × 5) 500 To Share First Call A/c (100 × 2) 200 To Share Second and Final Call A/c (100 × 3) 300 (forfeiture of 100 shares) **Illustration 2** Alpha Ltd. issued 10000 shares of 100 each payable as : 25 on application. 25 on allotment 20 on First call and 30 on second and final call. 9000 shares were applied for and allotted. All the payments were received with the exception of allotment money, first call and second and final call money on 300 shares allotted to Ganesh. The Board of Directors decided to forfeit these shares. Make journal entry to record transaction relating to forfeiture of shares.
Forfeiture of Shares
Notes
Company Accounts
Accountancy
Solution : Journal Entry Date Particulars L.F. Dr. Cr. 100) Dr. 30, To Share forfeited A/c (300 × 25) 7, To Share allotment A/c (300 × 25) 7, To Share first call A/c (300 × 20) 6, To Share second call A/c (300 × 30) 9, (300 shares of 100 each forfeited due to non payment of allotment money and calls money)
Forfeiture of Shares Allotted on Pro-rata Basis
In case the shares being over subscribed one of the scheme of allotment of shares to applicants is to allot in the ratio of shares for which applications are entertained by the company for allotment and the number of shares company has offered for subscription. This is called allotment of shares on pro-rata basis. In case of pro-rata allotment the excess money received on applications is transferred to Share Allotment A/c from Share Application A/c. In case a shareholder fails to make payment on allotment and call money of shares held by him/her, the unpaid amount will be calculated as under:
(i) Number of shares applied for allotment
= (^) TotalShareAllotted Total No.ofSharesApplied×SharesAllotedtoDefaulter
(ii) Excess Applications Received = Number of shares applied for (as per step) – number of shares allotted
(iii) Excess application money received = Excess number of applied shares × money called per share on application.
(iv) Amount unpaid on allotment = Amount due on allotment – Excess application money adjusted towards allotment
Illustration 3
A company has offered for subscription to the public 10000 shares of ` 10 each. It has received applications for 15000 shares. Company has decided to allot shares
Forfeiture of Shares
Notes
Company Accounts
Accountancy
- Share Allotment A/c Dr 30, To Share Capital A/c 30, (Allotment money due on 10000 Shares @ ` 3 per share)
- Bank A/c Dr 19, To Share Allotment A/c 19, (Allotment money received on 9800 shares)
- Share First & Final call A/c Dr 50, To Share Capital A/c. 50, (Call money made due on 10000 Shares @
5 per share) 6 Bank A/c Dr 49, To Share First & Final Call A/c 49, (Call Money received on 9800 shares @ 5 per share) - Share capital A/c Dr 2, To Share forfeited A/c 600 To Share Allotment A/c 400 To Share First & Final call A/c 1, (200 shares forfeited for non payment of allotment & call money)
Working Note
200 10 , 000
15 , 000 ×
= 300 Shares were applied. 300 x 2 = 600 200 x 2 = - 400 Advance = ` 200
Adjusted on Allotment Total Requirement 30, (-) Advance 10, 20, (-) Arrear 400
` 19,
(200 x 3 = 600 - 200 adv) = ` 400
Forfeiture of Shares
Notes
Company Accounts
Accountancy
Ledger Bank A/c Dr. Cr. Date Particulars J.F. Amount Date Particulars J.F. Amount `` ````` Share Application A/c 30,000 Balance c/d 98, Share Allotment A/c 19, Share First and Final call A/c 49, 98,600 98, Balance b/d 98, **Share Applicaiton A/c** Dr. Cr. **_Date Particulars J.F. Amount Date Particulars J.F. Amount_** ````` Share Capital A/c 20,000 Bank A/c 30, Share Allotment A/c 10, 30,000 30, **Share Capital A/c** Dr. Cr. **_Date Particulars J.F. Amount Date Particulars J.F. Amount_** ``` Share Forfeited A/c 600 Share Application A/c 20, Share Allotment A/c 400 Share Allotment A/c 30, Share First and Final Share First and call A/c 1,000 Final call A/c 50, Balance cld 98, 1,00,000 1,00, Balance b/d 98, **Share Allotment A/c** Dr. Cr. **_Date Particulars J.F. Amount Date Particulars J.F. Amount_** ``` `` Share Capital A/c 30,000 Bank A/c 19, Share Application Ac 10, Share Capital A/c 400 30,000 30,
Forfeiture of Shares
Notes
Company Accounts
Accountancy
i. 200 shares of 100 each were forfeited for non payment of first call of 20 per share and find call of 30 per share. Write the amount against each account in the journal entry for forfeiture of shares : `````^ ````` Share Capital A/c Dr. (a) .............. To Share Forfeited A/c (b) .............. To Share First Call A/c (b) .............. To Share Final Call A/c (d) .............. (Forfeitures of 200 shares of 100 each for non payment of first call and final call) ii. A Joint Stock Company has offered for subscription 50000 shares of 100 each on which it has demanded 30 on application, 40 on allotment and balance as and when required. Applications were received for 60000 shares. Allotment to the applicants was made on prorata basis. Rakesh who was allotted 200 shares did not pay the allotment money. Ascertain the following amounts of Rakesh’s shares. (a) Excess application amount received ............... (b) Amount due on allotment ............... (c) Net unpaid amount on allotment ...............
28.3 FORFEITURE OF SHARES ISSUED AT PREMIUM
AND AT DISCOUNT
Forfeiture of Shares Issued at Premium In case shares are issued at premium and thereafter forfeited there can be two situations : z Premium on shares has been received prior to the forfeiture. z Amount of premium on shares has not been received and it still stands credited to the Securities Premium A/c.
1. Premium Money has been Received Prior to the Forfeiture : If the amount
INTEXT QUESTIONS 28.
Forfeiture of Shares
Notes
Company Accounts
Accountancy
of premium on shares forfeited has been received by the company prior to the forfeiture, securities Premium A/c will not get affected. In this case the journal entry of forfeiture of shares will be similar to the entry made as if the shares had been issued at par. The journal entry will be : Share Capital A/c Dr. To Share forfeited A/c To Unpaid Calls A/c./Calls in arrears A/c (forfeiture of share issued at premium)
Illustration 4
M.B. Software Ltd. issued 500000 capital divided into equity shares of 10 each. The shares were issued at a premium of 4 per share and were payable as : 3 per share on application, ` 7 (including premium) per share on allotment and the balance on call.
All the shares applied for and were duly allotted. All the money was duly received except on 500 shares on which the call money was not received. Company decided to forfeit these shares. Make journal entry to record the forfeiture of 500 shares.
Solution : Journal Entry Date Particulars L.F. Dr. Cr. 10 each due to on non payment of call money of 4 per share)
2. Premium on shares has not been received and stands credited to Securities Premium A/c as due but not paid : When a share is forfeited on which the amount of premium has been made due but has not been received, either wholly or partially, the Securities Premium A/c will be cancelled. At the time of making due, Securities Premium A/c will be credited. The journal entry will be as follows:
Forfeiture of Shares
Notes
Company Accounts
Accountancy
(ii) Share Capital A/c (300 × 20) Dr. 6, To Shares forfeited A/c(300 × 12) 3, To Share First Call A/c (300 × 4) 1, To Share Second Call A/c (300 × 4) 1, (Forfeiture of 300 shares held by Reshma)
Combined entry of the above will be as :
Date Particulars L.F. Dr. Cr.
Forfeiture of Shares Issued at Discount
Discount on issue of shares is a loss to the company. When shares issued at a discount are forfeited for non payment of dues, the discount allowed on such shares is written back. At the time of issue of shares, Discount on issue of Shares A/c is debited and when forfeited, this account is credited to cancel the discount allowed on such shares. In this case the following journal entry is made : Share Capital A/c Dr. To Share Forfeited A/c To Discount on Issue of Shares A/c To Unpaid call A/c (Forfeiture of shares originally issued at discount for non payment of dues).
Illustration 6
The Evergrowing Ltd. invited applications for 20000 shares of 50 each at a discount of 10% payable as follows: On application 10 per share On allotment 20 per share On call 15 per share
Forfeiture of Shares
Notes
Company Accounts
Accountancy
Whole of the issue was subscribed and paid for except the calls money on 200 shares which were forfeited by the company. Make journal entry for forfeiture of shares. Solution : Date Particulars L.F. Dr. Cr. ``` ``^ Share Capital A/c (`200 × 50) Dr. 10, To Share forfeited A/c (`200 × 30) 6, To Discount on Issue of Shares A/c (`200 × 5) 1, To Share First and Final call A/c (`200 × 15) 3, (Forfeiture of 200 shares of ` 50 each issued at discount of 10% on non payment of call money) **Illustration 7** M/s Herbal Tea Plantations Ltd. was registered with a capital of ` 1 crore divided into equity shares of ` 100 each. The company offered to public 50000 shares at a premium of ` 20 per share. The amount on shares was payable as : ` 25 on application ` 50 (including ` 20 premium) on allotment ` 20 on first call and ` 25 on final call. Applications were received for 75000 shares. Shares were alloted to the applicants on prorata basis. Kanti Bhai who was allotted 500 shares did not pay the allotment money. He also failed to pay the first call. His shares were forfeited. Sheetal was holding 200 shares did not pay the first call. Final call was not made. Make journal entries in the books of the company. **Solution : M/s Herbal Tea Plantations Ltd Journal Entries** **_Date Particulars L.F. Dr. Cr._** `````
- Bank A/c Dr. 18,75, To Share Application A/c 18,75, (Application money received)
Forfeiture of Shares
Notes
Company Accounts
Accountancy
Share Allotted 50000 Ratio = 3 : 2 Number of shares holded by Kanti Bhai = 500 Number of shares applied 500 ×^23 = 750 Excess application money received = 250 × 25 = 6250 Share allotment money due = 500 ×s 50 = 25000 Net Amount due after adjustment of excess applicaiton money = 25000 – 6250 = 18750 Total allotment money due = 2500000 Less excess application money adjusted 625000 Less Kanti Bhai’s amount due on allotment 18750 Net Amount Received 1856250
In the following cases write whether the account given is to be debited or credited and the amount by which it is debited or credited. (i) Forfeiture of 100 shares of 10 each fully paid issued at par on which final call of 3 per share is not received. Shares forfeited A/c. (ii) 250 shares of 10 each issued at a premium of 4 per share forfeited for non payment of call money, of 2 per share premium as called with allotment is paid. Shares forfeited A/c (iii) 100 shares of 10 each issued as fully paid at a premium of 2 per share forfeited on which only application money @ 2 per share is received. Securities Premium A/c (iv) 200 shares of 20 each issued at a discount of 2, 15 called are forfeited for non payment of final call of 5 per share. Discount on issue of shares A/c
INTEXT QUESTIONS 28.
Forfeiture of Shares
Notes
Company Accounts
Accountancy
z Forfeiture of shares means cancellation of membership of a shareholder due to non payment of calls made by the company. Forfeiture of shares amount to Cancellation of the membership of the defaulting shareholder and Reduction of share capital of the company.
z Power to forfeit shares is given in the Articles of Association of the company. The Board of Directors have to give a fourteen days notice to the defaulting shareholder
z There are three situations when shares can be forfeited:
(i) Shares issued at par (ii) Shares issued at premium (a) Premium received in full (b) Premium due but not yet received (iii) Shares issued at discount
z In all cases share capital is debited by the called up amount on forfeited shares
z Shares forfeited A/c is credited by the amount received (excluding the amount of premium) on forfeited shares.
z Securities premium A/c will not get affected if premium on forfeited shares has been received but it will be debited if it is due but not received.
z Shares issued at a discount when forfeited discount on issue of shares will always be credited by the amount of discount allowed on forfeited shares:
- State the meaning of forfeiture of shares. When can shares be forfeited?
- What accounting treatment is given to Securities Premium A/c on forfeiture of shares when: (i) Amount of premium has been received (ii) Amount of premium has not been received on such forfeited shares.
WHAT YOU HAVE LEARNT
TERMINAL EXERCISE
Forfeiture of Shares
Notes
Company Accounts
Accountancy
Applications were received for 75000 shares. Applicants of 15000 were sent letters of regret and their application money was returned. Remaining applicants were allotted shares on prorata basis. Sudhir holding 400 shares did not pay the allotment money. His shares were forfeited and call was made. Make journal entries.
28.1 (i) forfeit (ii) (a) cancellation of membership of the company (b) reduction of issued capital (iii) Articles of Association (iv) Fourteen
28.2 i. (a) 20000 (b) 10000 (c) 4000 (d) 6000
ii. (a) 40 × 30 = 120 (b) 200 × 40 = 800 (c) 800 – 120 = ` 680
28.3 (i) Credited by 700 (ii) Credited by 2000 (iii) Debited by 200 (iv) Credited by 400
ANSWERS TO INTEXT QUESTIONS
Forfeiture of Shares
