400 shares of ₹ 50 each issued at par were forfeited for non-payment of final call of ₹ 10 per share. These shares were reissued at ₹ 45 per share as fully paid-up. The amount transferred to capital reserve is:
₹ 14,000
Understanding Share Forfeiture and Reissue
When a shareholder fails to pay the amount due on allotment or any calls, the directors of the company have the power to forfeit their shares. Forfeiture means cancelling the shares and taking away the amount already paid by the shareholder. These forfeited shares can then be reissued by the company.
The amount received from the reissue of forfeited shares, over and above the discount allowed on reissue (if any), is transferred to the Capital Reserve account. This represents a capital profit for the company.
Step-by-Step Calculation
Step 1: Determine the Amount Paid on Forfeited Shares
The shares were issued at par, meaning the face value was ₹ 50 and the issue price was also ₹ 50. The shareholder failed to pay the final call of ₹ 10 per share. This implies that the shareholder had paid all amounts except the final call.
Amount paid per share = Face Value per share - Amount unpaid on Final Call
Amount paid per share = \(₹ 50 - ₹ 10 = ₹ 40\)
Step 2: Calculate the Total Amount Forfeited
The total amount forfeited by the company is the total amount paid by the shareholder on the forfeited shares.
Number of shares forfeited = 400 shares
Total amount forfeited = Number of shares forfeited \(\times\) Amount paid per share
Total amount forfeited = \(400 \text{ shares} \times ₹ 40/\text{share} = ₹ 16,000\)
Step 3: Calculate the Discount Allowed on Reissue
All 400 forfeited shares were reissued at ₹ 45 per share as fully paid-up. Fully paid-up means the shares are treated as if the full face value of ₹ 50 has been paid. The difference between the fully paid-up value and the reissue price is the discount allowed on reissue.
Fully paid-up value per share = ₹ 50
Reissue price per share = ₹ 45
Discount per share on reissue = Fully paid-up value per share - Reissue price per share
Discount per share on reissue = \(₹ 50 - ₹ 45 = ₹ 5\)
Total discount on reissue = Number of shares reissued \(\times\) Discount per share
Total discount on reissue = \(400 \text{ shares} \times ₹ 5/\text{share} = ₹ 2,000\)
Note: The maximum discount allowed on reissue cannot exceed the amount forfeited on those specific shares being reissued. In this case, the amount forfeited per share is ₹ 40, and the discount allowed is only ₹ 5 per share, which is well within the limit.
Step 4: Calculate the Amount Transferred to Capital Reserve
The amount transferred to Capital Reserve is the surplus of the forfeited amount on the reissued shares over the discount allowed on their reissue. Since all 400 forfeited shares were reissued, the entire forfeited amount of ₹ 16,000 is considered here.
Amount transferred to Capital Reserve = Total amount forfeited on reissued shares - Total discount allowed on reissue
Amount transferred to Capital Reserve = \(₹ 16,000 - ₹ 2,000 = ₹ 14,000\)
Summary of Calculations
| Description | Amount (₹) |
|---|---|
| Amount paid per share by defaulting shareholder | 40 |
| Total amount forfeited (400 shares @ ₹40) | 16,000 |
| Fully paid-up value per share on reissue | 50 |
| Reissue price per share | 45 |
| Discount per share on reissue | 5 |
| Total discount on reissue (400 shares @ ₹5) | 2,000 |
| Amount transferred to Capital Reserve | 14,000 |
Revision Table: Key Concepts
| Term | Explanation | Relevance to Problem |
|---|---|---|
| Share Forfeiture | Cancellation of shares due to non-payment of calls. Amount already paid is forfeited. | 400 shares forfeited for non-payment of final call. |
| Amount Forfeited | The amount previously paid by the defaulting shareholder that the company keeps upon forfeiture. | ₹40 per share, totalling ₹16,000 for 400 shares. |
| Share Reissue | Selling the forfeited shares again to new or existing shareholders. | 400 forfeited shares were reissued. |
| Fully Paid-up | Shares are treated as if the full face value has been paid, irrespective of the reissue price. | Shares reissued as fully paid-up (₹50). |
| Discount on Reissue | The difference between the fully paid-up value and the reissue price, if the reissue price is lower. Cannot exceed the amount forfeited on those shares. | ₹5 per share (₹50 - ₹45), totalling ₹2,000. |
| Capital Reserve | A reserve created out of capital profits. The surplus from reissue of forfeited shares is transferred here. | Calculation of the amount to be transferred is the main objective. |
Additional Information: Accounting Treatment
Understanding the journal entries helps clarify the process:
- Journal Entry for Forfeiture: Debit Share Capital Account (with the amount called up per share) Credit Share Forfeiture Account (with the amount paid per share) Credit Share Allotment Account (if any unpaid) Credit Share Calls Account (with the amount unpaid on calls)
- Journal Entry for Reissue: Debit Bank Account (with the reissue price per share) Debit Share Forfeiture Account (with the discount allowed per share, if any) Credit Share Capital Account (with the fully paid-up value per share)
- Journal Entry for Transfer to Capital Reserve: Debit Share Forfeiture Account (with the surplus) Credit Capital Reserve Account (with the surplus) The surplus is the credit balance in the Share Forfeiture Account relating to the reissued shares, after being debited for any discount on reissue.
In this specific case, the credit balance in the Share Forfeiture account related to the 400 reissued shares was ₹ 16,000. A discount of ₹ 2,000 was debited from this account upon reissue. The remaining balance, ₹ 14,000, is transferred to Capital Reserve.
Important Questions from Accounting for Share Capital
Arrange the following in the correct order:
(A) Subscribed Capital
(B) Issued Capital
(C) Authorised Capital
(D) Paid-up Capital
(E) Called-up Capital
Choose the correct answer from the options given below:
Libraries run by charitable trusts are an example of:
Oversubscription is a situation where the:
Match List-I with List-II and choose the correct answer from the options given below:
List-I
(Name of account to be debited or credited, when shares are forfeited)List-II
(Amount to be debited or credited)(A) Share Capital Account (I) Debited with amount not received (B) Share Forfeited Account (II) Credited with amount not received (C) Calls-in-arrears Account (III) Credited with amount received towards share capital (D) Securities Premium Account (IV) Debited with amount called up If a delay occurs beyond 8 days in refunding the subscription amount, failing to gather the minimum subscription, from the date of closure of the subscription list, the company shall be liable for interest at the rate of:
