Understanding Share Forfeiture and Minimum Reissue Price

This question deals with the accounting treatment of shares that have been forfeited and subsequently reissued. Share forfeiture occurs when a shareholder fails to pay the calls made by the company on the shares held by them. The shares are then cancelled by the company. The amount already paid by the shareholder on these shares is usually retained by the company.

Key Concept: Reissue of Forfeited Shares

Forfeited shares can be reissued by the company. When reissued, these shares can be issued at par, at a premium, or even at a discount. However, there is a specific rule regarding the maximum discount allowed on the reissue of forfeited shares:

• The total discount allowed on the reissue of forfeited shares cannot exceed the amount that was originally received (and forfeited) on those specific shares.
• In other words, the sum of the amount received on reissue and the amount forfeited on those shares must be at least equal to the paid-up value of the shares upon reissue.

Calculating the Minimum Reissue Price

To find the minimum price at which the forfeited shares can be reissued, we need to consider the amount already received on these shares (which is forfeited) and the paid-up value requirement upon reissue.

From the question, we have the following information for X Ltd.:

• Number of shares forfeited: 40
• Face value per share: $\text{Rs. } 10$
• Amount paid per share before forfeiture: $\text{Rs. } 4$
• Amount forfeited per share: $\text{Rs. } 4$
• The forfeited shares are reissued as $\text{Rs. } 8$ per share paid up. This means the new shareholder will be considered as having paid $\text{Rs. } 8$ towards the share's face value after the reissue.

The minimum reissue price is calculated using the formula:

Minimum Reissue Price per Share = Paid-up value on Reissue per Share - Amount Forfeited per Share

Let's substitute the values:

Minimum Reissue Price per Share = $\text{Rs. } 8$ (Paid-up value) - $\text{Rs. } 4$ (Amount forfeited)

Minimum Reissue Price per Share = $\text{Rs. } 4$

This means the company must charge at least $\text{Rs. } 4$ per share when reissuing these forfeited shares. The discount on reissue would be $\text{Rs. } 8$ (Paid-up value) - $\text{Rs. } 4$ (Reissue price) = $\text{Rs. } 4$ per share. This discount of $\text{Rs. } 4$ per share is exactly equal to the amount forfeited per share ($\text{Rs. } 4$), which is the maximum permissible discount.

Therefore, the minimum price the company must charge for the reissue of these forfeited shares is $\text{Rs. } 4$ per share.

Revision Table: Key Concepts of Share Forfeiture and Reissue

Additional Information on Forfeited Shares Accounting

When shares are forfeited, the Share Capital account is debited with the called-up amount per share. The Calls-in-Arrears account is credited with the unpaid amount. The amount paid by the shareholder is credited to the Share Forfeited Account (or Forfeited Shares Account).

When forfeited shares are reissued, the Bank account is debited with the reissue price received. If there is a discount on reissue, the Share Forfeited Account is debited with the amount of discount. The Share Capital account is credited with the amount called up/paid up on reissue.

Any balance remaining in the Share Forfeited Account relating to the reissued shares (i.e., total forfeited amount minus the discount on reissue) is transferred to the Capital Reserve account. This represents a capital gain for the company.

In this specific case, if the shares are reissued at the minimum price of $\text{Rs. } 4$ per share, the discount on reissue is $\text{Rs. } 4$ per share. Since the amount forfeited per share was $\text{Rs. } 4$, the entire amount forfeited is used up to cover the discount. Therefore, no amount will be transferred to Capital Reserve for these 40 shares.