Share Forfeiture Accounting: Identifying the Incorrect Statement
This solution analyzes the accounting treatment of forfeited shares to identify the statement that is not true.
Statement Analysis:
- Option 1: True. When not all forfeited shares are reissued, the remaining balance in the Forfeited Shares Account represents the realized gain on those shares that have not yet been reissued. This balance reflects the portion of the original paid-up amount related to the un-reissued shares.
- Option 2: True. The gain on forfeiture represents the maximum amount that can be recovered from the payments made by the shareholder. Any loss incurred upon the reissue of these shares reduces this gain. Therefore, the loss on reissue cannot exceed the total gain recognized from the forfeiture of those specific shares.
- Option 3: True. According to accounting principles, if shares were originally issued at a premium but this premium amount was not received from the shareholder, the Securities Premium account must be debited (and thus reversed) at the time of share forfeiture. This corrects the accounting entry since the premium was never actually received.
- Option 4: False. When forfeited shares are reissued at a price exceeding their face value (i.e., at a premium), this premium amount received on reissue is typically credited to the Securities Premium on Reissue account, not directly to the Capital Reserve Account. The net profit resulting from the forfeiture and subsequent reissue (i.e., the final balance in the Forfeited Shares Account after all adjustments) is the amount that gets transferred to the Capital Reserve Account.
Conclusion:
Option 4 describes an incorrect accounting treatment. The premium received upon reissue of forfeited shares is accounted for separately and does not bypass the Securities Premium on Reissue account to be directly credited to Capital Reserve.
Important Questions from Shares
Which of the following distinction(s) is/are not correct between public issue and rights issue?
(A) In public issue, applications for shares are invited from the general public and in rights issue, the shares are offered to existing shareholders.
(B) In public issue there is no question of any over-subscription and in rights issue the shares may be under subscribed or over subscribed leading to prorata allotment.
(C) The price of public issue is generally less than the market price and in rights issue, the price is deliberately made less than the market price.
(D) In a public issue, the communication of the issue is through prospectus or advertisements and in a rights issue the communication is between the company and the existing members of the company.
Choose the most appropriate answer from the options given below:
Match List I with List II:
List I List II (A) Bonus shares (I) Invitation to existing shareholders to purchase additional new shares (B) Demat shares (II) Issue is made to existing members free of charge (C) Right issue (III) Share issues by a company to its employees/directors at a discount for providing know-how (D) Sweat equity share (IV) Shares in electronic form Choose the correct answer from the options given below:
Identify the correct sequence of activities involved in the process of buy back of shares.
A. Letter of offer to the shareholders.
B. Opening of bank account.
C. Approval for Extra-ordinary General Meeting.
D. Convening board meeting.
E. Declaration of Solvency.
Choose the correct answer from the options given below:
Identify the correct statements in context of equity financing.
A. Borrowing limit increases as a consequence of increase in number of shares.
B. Ordinary shares are generally not redeemable.
C. Issue of new shares dilutes the EPS if the profits do not increase immediately in proportion to increase in number of shares.
D. A company is not legally oblidged to pay dividend.
E. Ordinary shares are less riskier from investor's perspective.
Choose the correct answer from the options given below:
Which of the following order is followed in the issue of shares under the "Fixed Price Offer Method"?
A. Issue of a prospectus
B. Receipt by the company of application for share
C. Selection of merchant banker
D. Issue of share certificates
E. Allotment of shares to the applicant
Choose the correct answer from the options given below
