Forfeiture of Shares Part 1

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Shareholders subscribe to the shares of a particular company and they pay the amount for the allotted shares when the company demanded for the called up capital, in either one or more installments. But, sometimes shareholders do not pay the due as per installments and they become defaulters. In this case company may file a suit against defaulters. Because this they will get either due amount or cancel the membership. Due to the cancellation of membership amount paid by the shareholders stands forfeited and called ‘Forfeited of Shares’. It results reduction in issued share capital of the company.

Procedure of Forfeiture of Shares:

As per Articles of Association of the company Board of Directors have the authority to forfeit the shares in defaulting case. In order to forfeit the shares Board of directors should

Image of Procedure of forfeiture of Shares

Image of Procedure of Forfeiture of Shares

Image of Procedure of forfeiture of Shares

Accounting Treatment of Forfeited Shares:

Shares of a company are issued at par value, at discount value and at premium value. Accounting treatment will be different in different cases when forfeiting of shares takes place.

Accounting Treatment when Forfeiture of Shares Issued at Par:

  • Debit Share Capital A/c with amount called up (whether received or not) per share up to the time of forfeiture.

    Amount called up = No. of shares × called up per share

  • Credit Share Forfeited A/c. with the amount received up to the time of forfeiture.

    Amount paid = No. of shares × Amount paid per share

  • Credit ‘Unpaid Calls A/c’ with the amount due on forfeited shares

    Amount called but not paid = No. of shares × Amount called but not paid per share

Journal Entry:

When Forfeiture of Shares Issued At Par

When Forfeiture of Shares Issued at Par

When Forfeiture of Shares Issued At Par

Forfeiture of Shares Allotted on Pro-Rata Basis:

Sometimes subscription to the shares will be more than the number of shares offered for allotment. In this case company allots 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 on pro-rata basis. The excess money received, in this case, will be transferred to Shares Allotment A/c from Share Application A/c. If shareholder fails to make payment of allotted and call money then the unpaid amount will be calculated as

Number of Shares applied for allotment =

Excess applications received = Number of shares applied for – number of shares allotted

Excess application money received = Excess no. of applied shares× money called per share on application

Amount unpaid on allotment = Amount due on allotment – excess application money adjusted towards allotment

Example:

A company has offered for subscription to the public 10000 shares of Rs 10 each. It has received applications for 15000 shares. Company has decided to allot shares on prorata basis. Gunakshi holding 200 shares failed to pay allotment money and first call money. Her shares were forfeited

Amount payable was as under :

Rs 2 per share on application.

Rs 3 per share on allotment.

Rs 5 per share on call.

Make journal entries in the books of the company

Working Notes:

Number of Shares applied for allotment =

= = 300

Excess applications received = 300 – 200 = 100

Excess applications amount received = 100 × 2 = Rs 200

Amount Due on allotment = 200 × 3 = Rs 600

Excess application money adjusted = Rs 200

Net unpaid amount on allotment = Rs 600 – Rs 200 = Rs 400

Journal Entries

Table of Journal Entries
Title: Table of Journal Entries

S.No

Particulars

L.F

Amount (Rs.)

Dr.

Cr.

1.

Bank A/c Dr.

To Share Application A/c

(Application money received for 15000 shares @ Rs.2 per share )

30000

30000

2.

Share Application A/c Dr.

To Share Capital A/c

To Share Allotment A/c

(Share application money for 10000 shares and share allotment for 5000 shares transferred)

30000

20000

10000

3.

Share Allotment A/c Dr.

To Share Capital A/c

(Allotment money due on 10000 shares @ Rs.3)

30000

30000

4.

Bank A/c Dr.

To Share Allotment A/c.

(Allotment money received on 9800 shares)

19600

19600

5.

Share First and Final Call A/c Dr.

To Share Capital A/c.

(Call money due on 10000 shares @Rs.5)

50000

50000

6.

Bank A/c Dr.

To Share First & Final call A/c

(Call money received on 9800 shares @Rs.5 per share)

49000

49000

7.

Share capital A/c Dr.

To Share Forfeited A/c

To Share Allotment A/c

To Share First & Final Call A/c

(200 shares forfeited for non-payment of allotment & call money)

2000

600

400

1000