COMPANY ACCOUNTS _

UNIT - 2 ISSUE, FORFEITURE AND RE-ISSUE

OF SHARES

( LEARNING OUTCOMES

After studying this unit, you would be able to:

. Appreciate various types of shares and share capital.
. Learn the accounting treatment if shares issued under different
circumstances.
Differentiate the accounting treatment for under-subscription and
over-subscription of shares.
Understand the concept and accounting treatment of call-in-arrears
and call-in-advance.
Deal with the forfeiture of shares issued with different conditions.
Journalize the entry for re-issue of shares.
Know the treatment of shares issued for consideration other than
cash.
luNIT ovERVIEW [
Procedure for raising funds through equity
|
Issue of prospectus inviting applications for share from the public

. Over subscription i.e.

Full subscription i.e. Under subscription i.e. applications received are
application received for all application received are less than e Se e
issued shares share issued

Pro-rata allotment made by

Minimum subscription Directors
Minimum not received
subs: ion
received

All application
money returned
Allotment money received
Ll Directors make
allotment for shares
applied

Further calls made and call

money received

Share issued for cash

Shares issued at Face Value Shares issued at Premium

“Securities Premium Account”

is credited with the entry for
“Share Capital Account”

Note: As per Section 53 of Companies Act, 2013 a company cannot issue shares at discount
except for in case of sweat equity shares and therefore any issue on discount by the company
will be void with company being punishable with fine. Sweat equity shares means such equity
shares as are issued by a company to its directors or employees at a discount or for
consideration, other than cash, for providing their know-how or making available rights in the
nature of intellectual property rights or value additions, by whatever name called.

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 2.1 INTRODUCTION
Funds provided by the owner(s) into a business are recorded as capital. Capital of the business
depends upon the form of business organisation. Proprietor provides capital in a sole-
proprietorship business. In case of a partnership, there is more than one proprietor, called
partners. Partners introduce capital in a partnership firm. As the maximum number of
members in a partnership firm is restricted, therefore only limited capital can be provided in
such form of businesses. Moreover, the liability of the proprietor(s) is unlimited in case of non-
corporate business, namely, sole-proprietorship and partnership.

Capital funding process for different types of business forms can be summarised as follows:

Business Ownership Type of Capital | Liability of Owners

Organisation
Sole - Proprietorship | Proprietor - He alone | Capital Unlimited
is the owner of
business
Partnership Partners Partners' Capital | Unlimited
Company Shareholders Share Capital Limited to issue price of
shares held

With the onset of industrial revolution, requirement of capital investment soared to a new
height and the attached risk of failure increased due to pace of technological developments.
Non-corporate entities could not cope with the pressure of increased capital and degree of
risk involved. This led to the emergence of corporate form of organisation.

O 2.2 SHARE CAPITAL

Total capital of the company is divided into a number of small indivisible units of a fixed
amount and each such unit is called a share. The fixed value of a share, printed on the share
certificate, is called nominal/par/face value of a share. However, a company can issue shares
at a price different from the face value of a share. The liability of holder of shares (called
shareholders) is limited to the issue price of shares acquired by them.

Note: The issue price need not be equal to market price of the share. These days the shares
are generally priced on the basis of book building process. (Book building is a process through
which company determines it's share prices. Under this method company determines a price
band of its shares and on the basis of bids received from potential investors at various prices
within the price band finally fixes its issue price.)

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The total capital of the company is divided into shares, the capital of the company is called
‘Share Capital’. At the time of issue of shares, every Company is required to follow SEBI
Regulations.

Share capital of a company is divided into following categories:

0} Authorised Share Capital or Nominal Capital: A company estimates its maximum capital
requirements. This amount of capital is mentioned in ‘Capital Clause’ of the
‘Memorandum of Association’ registered with the Registrar of Companies. It puts a
limit on the amount of capital, which a company is authorised to raise during its
lifetime and is called ‘Authorised Capital'. It is shown in the Share Capital schedule in
the financial statements as per the prescribed format at face value.

(i) Issued Share Capital: A company need not issue total authorised capital. Whatever
portion of the share capital is issued by the company, it is called ‘Issued Capital’. Issued
capital means and includes the nominal value of shares issued by the company for:

1. Cash, and

2. Consideration other than cash to:

(i) Promoters of a company; and

(i) Others.

It is also presented in the balance sheet at nominal value.

The remaining portion of the authorised capital which is not issued either in cash or
consideration may be termed as ‘Un-issued Capital’. It is not shown in the balance sheet.

(i) Subscribed Share Capital: It is that part of the issued share capital, which is subscribed
by the public i.e., applied by the public and allotted by the company. It also includes
the face value of shares issued by the company for consideration other than cash.

(iv) Called-up Share Capital: Companies generally receive the issue price of shares in
instalments. The portion of the issue price of shares which a company has demanded
or called from shareholders is known as ‘Called-up Capital’ and the balance, which the
company has decided to demand in future may be referred to as Uncalled Capital.

v Paid-up Share Capital: It is the portion of called up capital which is paid by the
shareholders. Whenever a particular amount is called by the company and the
shareholder(s) fails to pay the amount fully or partially, it is known as ‘unpaid calls’
or ‘instalments (or Calls) in Arrears’. Thus, instalments in arrears mean the amount
not paid although it has been demanded by the company as payment towards the
issue price of shares. To calculate paid-up capital, the amount of instalments in arrears
is deducted from called up capital.

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 Call-in-advance is that portion of capital which is yet to be called by the company but
has already been paid by shareholder.

In the financial statements, called-up and paid-up capital are shown together.

(vi) Reserve Share Capital: As per Section 65 of the Companies Act, 2013, a Company may
decide by passing a resolution that a certain portion of its subscribed uncalled capital
shall not be called up except in the event of winding up of the company. Portion of
the uncalled capital which a company has decided to call only in case of liquidation of
the company is called Reserve Capital.

Reserve Capital is different from Capital reserve, Capital reserves are part of ‘Reserves
and Surplus’ and refer to those reserves which are not available for declaration of
dividend. Thus, reserve capital which is portion of the uncalled capital to be called up
in the event of winding up of the company is entirely different in nature from capital
reserve which is created out of capital profits only.

1. Authorised Capital = Issued Capital + Unissued Capital.

2. Subscribed Capital can be equal to or grater than or less than Issued Capital
resulting in 3 situations respectively: Fully Subscribed; Over Subscribed and
Under Subscribed.
3. Called up Capital = Paid up Capital + Calls in arrears if any — Calls in advance
if any.

ILLUSTRATION 1

A company had an authorised capital of < 10,00,000 divided into 1,00,000 equity shares of 10
each. It decided to issue 60,000 shares for subscription and received applications for 70,000
shares. It allotted 60,000 shares and rejected remaining applications. Upto 31-3 -2022, it has
demanded or called T 9 per share. All shareholders have duly paid the amount called, except
one shareholder, holding 5,000 shares who has paid only ¥ 7 per share.

Prepare a balance sheet assuming there are no other details.

SOLUTION

Balance Sheet as at 31st March, 2022

Particulars Notes No. k¢

EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1 5,30,000

Total 5,30,000

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 ASSETS

Current assets

Cash and cash equivalents 2 5,30,000

Total 5,30,000
Notes to accounts

k¢ k¢
1. | Share Capital
Equity share capital
Authorised share capital
1,00,000 Equity shares of ¥ 10 each 10,00,000

Issued share capital

60,000 Equity shares of ¥ 10 each 6,00,000

Subscribed share capital

60,000 Equity shares of ¥ 10 each 6,00,000

Called up and Paid up share capital

60,000 Equity shares of ¥ 10 each ¥ 9 called up 5,40,000

Less: Calls unpaid on 5,000 shares @ X 2 per share (10,000) 5,30,000

2. | Cash and cash equivalents

Balances with banks 5,30,000

It is clear from above, that details of authorised, issued and subscribed capital are given in the
Notes to Accounts but are not counted. It is only the paid-up capital i.e., the portion of the
issued capital subscribed by shareholders which is taken into account while totalling the
liabilities side of the balance sheet.

G 2.3 TYPES OF SHARES

Share issued by a company can be divided into following categories :

(i) Preference Shares: According to Section 43 of the Companies Act, 2013 persons
holding preference shares, called preference shareholders, are assured of a preferential
dividend at a fixed rate during the life of the company. They also carry a preferential
right over other shareholders to be paid first in case of winding up of the company.
Thus, they enjoy preferential rights in the matter of:

(a) Payment of dividend, and

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 (b) Repayment of capital

Generally, holders of these shares do not get voting rights. Companies use this mode
of financing as it is cheaper than raising debt. Dividend is generally cumulative in
nature and need not be paid every year in case of deficiency of profits. The Companies
Act, 2013 prohibits the issue of any preference share which is irredeemable. Preference
shares are cumulative and non-participating unless expressly stated otherwise.

Types of Preference Shares

Preference shares can be of various types, which are as follows :

(a) Cumulative Preference Shares: A cumulative preference share is one that

carries the right to a fixed amount of dividend or dividend at a fixed rate. Such
a dividend is payable even out of future profit if current year's profits are
insufficient for the purpose. This means that dividend on these shares
accumulates unless it is paid in full and, therefore, the shares are called
Cumulative Preference Shares. The companies are required to disclose the
arrears of fixed cumulative dividends on preference shares separately in the
financial statement. In case, the dividend remains in arrears for a period of not
less than two years, holders of such shares will be entitled to take part and vote
on every resolution on every matter in the general body meeting of the
shareholders.
(b) Non-cumulative Preference Shares: A non-cumulative preference share
carries with it the right to a fixed amount of dividend. In case no dividend is
declared in a year due to any reason, the right to receive such dividend for that
year expires. It implies that holder of such a share is not entitled to arrears of
dividend in future.
(o) Participating Preference Shares: Notwithstanding the right to a fixed
dividend, this category of preference share confers on the holder the right to
participate in the surplus profits, if any, after the equity shareholders have been
paid dividend at a stipulated rate. Similarly, in the event of winding up of the
company, this type of share carries the right to receive a pre-determined
proportion of surplus as well once the equity shareholders have been paid off.

(d) Non-participating Preference Shares: A share on which only a fixed rate of

dividend is paid every year, without any accompanying additional rights in
profits and in the surplus on winding-up, is called ‘Non-participating Preference
Shares.’ Unless otherwise specified, the preference shares are generally non-
participating.

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 (e) Redeemable Preference Shares: These are shares that a company may issue
on the condition that the company will repay after the fixed period or even
earlier at company’s discretion. The repayment on these shares is called
redemption and is governed by Section 55 of the Companies Act, 2013.

) Non-redeemable Preference Shares: The preference shares, which do not

carry with them the arrangement regarding redemption, are called Non-
redeemable Preference Shares. According to Section 55, no company limited by
shares shall issue irredeemable preference shares or preference shares
redeemable after the expiry of 20 years from the date of issue. However, a
Company may issue preference shares redeemable after 20 years for such
infrastructure projects as may be specified, under the Companies Act, 2013.

(9) Convertible Preference Shares: These shares give the right to the holder to
get them converted into equity shares at their option according to the terms
and conditions of their issue.

(h) Non-convertible Preference Shares: When the holder of a preference share

has not been conferred the right to get his holding converted into equity share,
it is called Non-convertible Preference Shares. Preference shares are non-
convertible unless otherwise stated.

(ii) Equity Shares: Equity shares are those shares, which are not preference shares. It
means that they do not enjoy any preferential rights in the matter of payment of
dividend or repayment of capital. The rate of dividend on equity shares is
recommended by the Board of Directors and may vary from year to year. Rate of
dividend depends upon the dividend policy and the availability of profits after
satisfying the rights of preference shareholders. These shares carry voting rights.
Companies Act, 2013 permits issue of equity share capital with differential rights as to
dividend, voting or otherwise in accordance with prescribed rules.

The shares can be issued by a company either

M for cash or

@ for consideration other than cash.

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 2.4 ISSUE OF SHARES FOR CASH
To issue shares, private companies depend upon ‘Private Placement’ of shares. Public
companies issue a ‘Prospectus’ and invite general public to subscribe for shares. To discuss
accounting treatment, we shall concentrate on public companies who invite general public to
subscribe for equity shares. Similar accounting treatment is applicable in other cases.
However, for journal entries in case of issue of preference shares, the word ‘Equity’ is replaced
with the word 'Preference’.
A public company issues a prospectus inviting general public to subscribe for its shares. On
the basis of prospectus, applications are deposited in a scheduled bank by the interested
parties along with the amount payable at the time of application, in cash. First instalment paid
along with application is called ‘Application Money'. As per Section 39 of the Companies
Act, 2013. Application money must be at least 5% of the nominal value of shares. After
the closing date of the issue (the last date for filing applications), company decides about
allotment of shares in consultation with the SEBI and stock exchange concerned. According
to the Companies Act, 2013, a company cannot proceed to allot shares unless minimum
subscription is received by the company.

Minimum Subscription: A public limited company cannot make any allotment of shares
unless the amount of minimum subscription stated in the prospectus has been subscribed
and the sum payable as application money for such shares has been paid to and received by
the company. The amount of minimum subscription to be disclosed in prospectus by the
Board of Directors taking into account the following:

€] Preliminary expenses of the company,

(b) Commission payable on issue of shares,

(c) Cost of fixed assets purchased or to be purchased,

(d) Working capital requirements of the company, and

(e) Any other expenditure for the day to day operation of the business.

As per guidelines of the Securities Exchange Board of India (SEBI), the minimum subscription
to be received in an issue shall not be less than ninety per cent of the offer through offer
document [Provided that in the case of an initial public offer, the minimum subscription to be
received shall be subject to allotment of minimum number of specified securities, as
prescribed by Securities Contracts (Regulation) Rules, 1957]. If the Company does not receive
the minimum subscription of 90% of the issue, all application moneys received shall be
refunded to the applicants forthwith, but not later than:

(a) fifteen days of the closure of the issue, in case of a non-underwritten issue; and

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(b) seventy days of the closure of the issue, in the case of an underwritten issue where
minimum subscription including devolvement obligations paid by the underwriters is
not received within sixty days of the closure of the issue.

The company reserves the right to reject or accept an application fully or partially. Successful
applicants become shareholders of the company and are required to pay the second
instalment which is known as ‘Allotment Money’ and unsuccessful applicants get back their
money. However, in case of delay in refunding the money, the Company becomes liable to
pay interest on the amount of refund. Subsequent instalments, if any, to be called by the
company are known as ‘Calls’.

As per Section 39 of the Companies Act, 2013, application money must be at least 5% of the
face value of shares. However, as per SEBI Regulations, the minimum application moneys to
be paid by an applicant along with the application money shall not be less than 25% of the
issue price. According to Section 24 of the Companies Act, 2013 matters related to issue and
transfer of securities will be administered by the SEBI and not by the Company Law Board.

The issue price of shares is generally received by the company in instalments and these
instalments are known as under :

Firstinstalment | ... Application Money

Second Instalment | .. Allotment Money

Third Instalment | .. First Call Money

Fourth Instalment | ... Second Call Money and so on.

Last Instalment Final Call Money

2.4.1 Journal Entries for Issue of Shares for Cash

Upon the issue of share capital by a company, the undermentioned entries are made in the
financial books:
(1) On receipt of the application money

Bank Account Dr. (With the actual amount received.)

To Share Application Account

(Being application money received)

) On allotment of share

Share Allotment Account Dr. (With the amount due on allotment.)

Share Application Account Dr. (With the application amount received on

allotted shares.)

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 To Share Capital Account (With the amount due on allotment and
application.)

(Being the sum due on allotment and

application money transferred to capital account)

3) On receipt of allotment money

Bank Account Dr. (With the amount actually received on

allotment.)

To Share Allotment A/c

(Being money received on allotment)

Sometimes separate Application and Allotment Accounts are not prepared and
entries relating to application and allotment monies are passed through a
combined Application and Allotment Account.

On receipt of Application Money:

Bank A/c Dr

To Share Application and Allotment A/c

On allotment of shares:
Share Application & Allotment A/c Dr (With total application and allotment
amount)

To Share Capital A/c

On Allotment money being received:

Bank A/c Dr

To Share Application & Allotment A/c

) On a call being made

Share Call Account Dr. (With the amount due on the call)

To Share Capital Account

(Being share call made due at ?...)

(5) On receipt of call money

Bank Account Dr. (With the due amount actually received on call)

To Share Call Account

(Being share call money received)

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 2.5 SUBSCRIPTION OF SHARES
Accounting for issue of shares depends upon the type of subscription. Whenever a company
decides to issue shares to public, it invites applications for subscription by issuing a
prospectus. It is not necessary that company receives applications for the number of shares
to be issued by it. There are three possibilities:

2.5.1 Full Subscription

Issue is fully subscribed if the number of shares offered for subscription and the number of
shares actually subscribed by the public are same. To start discussion on accounting treatment
for issue of shares, let us assume that the issue is fully subscribed.

ILLUSTRATION 2

A company invited applications for 10,000 equity shares of ¥ 50 each payable on application
¥ 15, on Allotment ¥ 20, on first and final call ¥15. Applications are received for 10,000 shares
and all the applicants are allotted the number of shares they have applied for and instalment
money was duly received by the company. Show Journal entries in the books of the company.
SOLUTION

Journal entries in the books of a company

For application money received: Amount received along with application is accounted as follows:

Bank A/c Dr. (Application money on allotted share

i.e, 10,000 x ¥15 = 1,50,000)

To Equity Share Application A/c

At the time of allotment: Application money received from successful applicants become part
of share capital and is transferred to share capital as under:

Equity Share Application A/c Dr. (Application money on allotted share i.e., 10,000 x
%15 =% 1,50,000)

To Equity Share Capital A/c

To record amount due on allotment: When the decision is taken to allot shares, allotment
money on allotted shares falls due and is recorded as follows:

Equity Share Allotment A/c Dr. (Allotment money due at the allotted share
i.e, 10,000 x X 20 = ¥ 2,00,000)

To Equity Share Capital A/c

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For allotment money received: Allotment money received from shareholders is recorded as
follows:
Bank A/c Dr. (Allotment money received from shareholders
i.e.10,000 x ¥ 20 =X 2,00,000)

To Equity Share Allotment A/c

When decision to demand first call is made: After allotment of share, when the Board of
Directors decide to demand the next instalment from shareholders, first call money falls due
and is accounted for, as under:

Equity Share First Call A/c Dr. (No. of shares x first call money per share
i.e, 10,000 x ¥ 15 = ¥ 1,50,000)

To Equity Share Capital A/c

On receiving first and final call money: The journal entry passed to record the money received
on account of first call is as under:
Bank A/c Dr. (Amount actually received on account of
first call i.e.,, ¥ 10,000 x ¥ 15 = X 1,50,000)

To Equity First Call A/c

2.5.2 Under Subscription

It means the number of shares offered for subscription is more than the number of shares
subscribed by the public. In this case, the journal entries as discussed above are passed but
with one change i.e., calculation of application, allotment and for that matter, the call money
is based on number of shares actually applied and allotted. It must be remembered that shares
can be allotted, in this case, only when the minimum subscription is received.

ILLUSTRATION 3

On Tst April, 2021, A Ltd. issued 43,000 shares of X 100 each payable as follows:

% 20 on application;

% 30 on allotment;

% 25 on Tst October, 2021; and

% 25 on 1st February, 2022.

By 20th May, 40,000 shares were applied for and all applications were accepted. Allotment was
made on 1st June. All sums due on allotment were received on 15th July; those on Tst call were
received on 20th October. Journalise the transactions when accounts were closed on 31st March,
2022.

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SOLUTION

A Ltd.
Journal

2021 g
May 20 Bank Account Dr. 8,00,000
To Share Application A/c 8,00,000
(Application money on 40,000 shares at X 20 per
share received.)
June 1 Share Application A/c Dr. 8,00,000
To Share Capital A/c 8,00,000
(The amount transferred to Capital Account on
40,000 shares at - X 20 on application. Directors’
resolution no...... dated ......)
Share Allotment A/c Dr. 12,00,000
To Share Capital A/c 12,00,000
(Being share allotment made due at ¥ 30 per
share. Directors’ resolution no...... dated ......)

July15 Bank Account Dr. 12,00,000

To Share Allotment A/c 12,00,000
(The sums due on allotment received.)
Oct. 1 Share First Call Account Dr. 10,00,000
To Share Capital Account 10,00,000
(Amount due from members in respect of first
call-on 40,000 shares at ¥ 25 as per Directors,
resolution no... dated...)
Oct. 20 Bank Account Dr. 10,00,000
To Share First Call Account 10,00,000
(Receipt of the amounts due on first call.)
2022
Feb. 1 Share Second and Final Call A/c Dr. 10,00,000
To Share Capital A/c 10,00,000
(Amount due on 40,000 share at X 25 per share
on second and final call, as per Directors
resolution no... dated...)

© The Institute of Chartered Accountants of India

 Mar. 31 Bank Account Dr. | 10,00,000

To Share Second & Final Call A/c 10,00,000

(Amount received against the final call on 40,000
shares at X 25 per share.)

2.5.3 Over Subscription

In actual practice, issue of shares is either under or over-subscribed. If an issue is over-
subscribed, some applications may be rejected and application money refunded and in
respect of others, only a part of the shares applied for may be allotted and the excess amount
received can be utilised towards allotment or call money which has fallen due or will soon fall
due for payment. The entries are:

(1) On refund of application money to applicants to whom shares have not been allotted:

Share Application A/c Dr.

To Bank Account
(Being application money refunded)

(2) When only a part of shares applied for are allotted.

Share Application A/c Dr.

To Share Allotment* A/c (With the application money accepted for

allotment)

To Share Calls-in-Advance* A/c (With the amount received in

advance)

To Bank A/c (With any excess amount to be refunded)

(Being application money adjusted)

*Credited to Share Capital A/c subsequently.

(Note: This type of share allotment is termed as Pro-rata allotment and has been discussed in
detail in para 2.8)

ILLUSTRATION 4

Pant Ltd. invited applications for 50,000 equity shares at X 50 each, which are payable as on
application X 20, on allotment X 10 and on first and final call X 20. The company received
applications for 60,000 shares. The directors accepted application for 50,000 shares and rejected
the rest. Show Journal entries if company refunded the application money to rejected applicants
and allotment money was received for 45,000 shares.

© The Institute of Chartered Accountants of India

SOLUTION

Pant Ltd.
Journal

R R

Bank A/c Dr. 12,00,000

To Equity Share Application A/c 12,00,000

(Being the application money received for 60,000 shares at
R 20 per share)

Equity Share Application A/c Dr. 12,00,000

To Equity Share Capital A/c 10,00,000

To Bank A/c 2,00,000

(Being share allotment made for 50,000 shares and excess

refunded.)

Equity Share Allotment A/c Dr. 5,00,000

To Equity Share Capital A/c 5,00,000

(Being allotment amount due on 50,000 equity shares at < 10

per share as per Directors’ resolution no... dated...)

Bank A/c Dr. 4,50,000

Calls in Arrears A/c Dr. 50,000

To Equity Share Allotment A/c 5,00,000

(Being allotment money received for 45,000 shares at ¥ 10

per share.)

ILLUSTRATION 5

The Delhi Artware Ltd. issued 50,000 equity shares of X 100 each and 1,00,000 preference shares
of X 100 each. The Share Capital was to be collected as under:

Equity Shares ) Preference Shares (%)

On Application 25 20

On Allotment 20 30
First Call 30 20
Final Call 25 30

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All these shares were subscribed. Final call was received on 42,000 equity shares and 88,000
preference shares. Prepare the cash book and journalise the remaining transactions in the books
of the company.

SOLUTION

Delhi Artware Ltd.

Cash Book
Dr. Cr.

R R

To | Equity Shares Applications 12,50,000 | By Balance c/d 14,440,000

Account (application money on
50,000 shares at X 25)

To | Preference Share Application 20,00,000

A/c
(application money on 1,00,000
shares at< 20)

To | Equity Share Allotment A/c 10,00,000

(allotment money on 50,000
shares at X 20)

To | Preference Share Allotment A/c 30,00,000

(allotment money on 1,00,000
shares at X 30)

To | Equity Shares First Call A/c } 30 15,00,000

on 50,000 shares)

To | Preference Share First Call A/c 20,00,000

(3 20 on 1,00,000 shares)

To | Equity Shares Final Call A/c ] 10,50,000

25 on 42,000 shares)

To | Preference Share Final A/c (X 30 26,40,000

on 88,000 shares)

1,44,40,000 1,44,40,000

To | Balance b/d 1,44,40,000

© The Institute of Chartered Accountants of India

 Journal

¢ ¢
Equity Share Application A/c Dr. | 12,50,000
Equity Share Allotment A/c Dr. | 10,00,000

To Equity Share Capital A/c 22,50,000

[The Credit to share capital on allotment of 50,000 equity

shares at ¥ 45 per share (X 25 on application and X 20 on
allotment) allotted as per Directors resolution no.... dated.....]
Preference Share Application A/c Dr. 20,00,000

Preference Share Allotment A/c Dr. 30,00,000

To Preference Share Capital A/c 50,00,000

[The credit to Preference Share Capital on allotment of

1,00,000 preference shares at I 50 per share X 20 on
application and Y30 on allotment), allotted as per Directors’
resolution no... dated...]
Equity Share First Call A/c Dr. 15,00,000

To Equity Share Capital A/c 15,00,000

(Amount due on 50,000 equity shares at ¥ 30 per share as per

Directors’ resolution no... dated...)
Preference Share First Call A/c Dr. 20,00,000

To Preference Share Capital A/c 20,00,000

(Amount due on 1,00,000 preference shares at X 20 per share,

as per Directors’ resolution no...dated...)
Equity Share Final Call A/c Dr. 12,50,000

To Equity Share Capital A/c 12,50,000

(Amount due on final call on 50,000 equity shares at X 25 per

share, as per Directors’ resolution no... dated...)

Preference Share Final Call A/c Dr. 30,00,000

To Preference Share Capital A/c 30,00,000

(Amount due on final call on 1,00,000 preference shares at % 30

per share, as per Directors’ resolution no... dated...)

Note: Students may note that cash transactions have not been journalised as these have been
entered in the Cash Book.

© The Institute of Chartered Accountants of India

(™ 2.6 SHARES ISSUED AT DISCOUNT
Shares are regarded to be issued at a discount, if issue is at an amount less than the nominal
or par value of shares. The excess of the nominal value over the issue price represents discount
on the issue of shares. For example, when a share of the nominal value of ¥ 100 is issued at ¥
98, it is said to have been issued at a discount of 2 per cent.

According to Section 53 of the Companies Act, 2013, a Company cannot issue shares at a
discount except in the case of issue of sweat equity shares (issued to employees and directors).
Thus, any issue of shares at discount shall be void.

G 2.7 SHARES ISSUED AT PREMIUM

When a company issues its securities at a price more than the face value, it is said to be an
issue at a premium. Premium is the excess of issue price over face value of the security. It is
quite common for the financially strong, and well-managed companies to issue their shares
at a premium, i.e. at an amount more than the nominal or par value of shares. Thus, where a
share of the nominal value of ¥ 100 is issued at ¥ 105, it is said to have been issued at a
premium of 5 per cent.

When the issue is at a premium, the amount of premium may technically be called at any
stage of share capital transactions. However, premium is generally called with the amount due
on allotment, sometimes with the application of money and rarely with the call money.

2.7.1 Accounting Treatment

When shares are issued at a premium, the premium amount is credited to a separate account
called “Securities Premium Account” because it is not a part of share capital. Rather, it
represents a gain of a capital nature to the company.

Being a credit balance, Securities premium Account is shown under the heading, “Reserves
and Surplus”. However, ‘Reserves and Surplus’ is shown as ‘shareholders’ funds in the Balance
Sheet as per Schedule . According to Section 52 of the Companies Act, 2013, Securities
Premium Account may be used by the company:

(a) Towards issue of un-issued shares of the company to be issued to members of the
company as fully paid bonus securities.

(b) To write off preliminary expenses of the company.

() To write off the expenses of, or commission paid, or discount allowed on any of the
securities or debentures of the company.

© The Institute of Chartered Accountants of India

(d) To provide for premium on the redemption of redeemable preference shares or
debentures of the company.

(e) For the purchase of own shares or other securities.

Note : It may be noted that certain class of Companies as prescribed under Section 133 of the
Companies Act, 2013, whose financial statements comply with the accounting standards
prescribed for them (i.e. those companies to whom Indian Accounting Standards are applicable),
can't apply the securities premium account for the purposes (b) and (d) mentioned above.

When shares are issued at a premium, the journal entries are as follows:

(a) Premium amount called with Application money

(i) Bank A/c Dr. [Total Application money +

Premium Amount]

To Share Application A/c [Amount received]

(Money received on applications

For Shares @X______ per

share including premium)

(ii) Share Application A/c Dr. [No. of Shares Applied for x

Application Amount per share]

To Securities Premium A/c [No. of Shares allotted x Premium

Amount per share]

To Share Capital A/c [No. of Shares allotted x Nominal

value per share for capital]

(b) Premium Amount called with Allotment Money

0] Share Allotment A/c Dr. [No. of Shares Allotted x Allotment

and Premium Money per share]

To Share Capital A/c [No. of Shares Allotted x Allotment

Amount per share]

To Securities Premium A/c [No. of Share Allotted x Premium

Amount per share]

(Amount due on allotment of

shares @ % per share

including premium)

© The Institute of Chartered Accountants of India

 (ii) Bank A/c Dr.

To Share Allotment A/c

(Money received including premium

consequent upon allotment).

ILLUSTRATION 6

On Tst October, 2022 Pioneer Equipment Limited received applications for 2,50,000 Equity
Shares of ¢ 100 each to be issued at a premium of 25 per cent payable as :

On Application 725

On Allotment ¢ 75 (including premium)

Balance Amount on Shares As and when required

The shares were allotted by the Company on October 20, 2022 and the allotment money was
duly received on October 31, 2022.

Record journal entries in the books of the company to record the transactions in connection with
the issue of shares.

SOLUTION

Pioneer Equipment Limited

Journal

Date Particulars L.F. Debit Credit

Amount | Amount

2022 (R000) (2000)

Oct. 1 Bank A/c Dr. 6,250

To Equity Share Application A/c 6,250

(Money received on applications for 2,50,000

shares @ X 25 per share)

Oct. 20 | Equity Share Application A/c Dr. 6,250

To Equity Share Capital A/c 6,250

(Transfer of application money on allotment to

share capital)

Oct. 20 | Equity Share Allotment A/c Dr. 18,750

To Equity Share Capital A/c 12,500

© The Institute of Chartered Accountants of India

 To Securities Premium A/c 6,250

(Amount due on allotment of 2,50,000 shares @

% 75 per share including premium)

Oct. 31 | Bank A/c Dr. 18,750

To Equity Share Allotment A/c 18,750

(Money received including premium consequent

upon allotment)

Note: Bifurcation of Allotment amount

Security premium per share =25% x 3100
=325

Money received on allotment per share =375

Premium Capital

Per Share (75) %25 350

No. of Shares (in '000) 250 250

Total Amount (In '000) 36,250 312,500

G 2.8 OVER SUBSCRIPTION AND PRO-RATA

ALLOTMENT
Over subscription is the application money received for more than the number of shares
offered to the public by a company. It usually occurs in the case of good issues and depends
on many other factors like investors’ confidence in the company, general economic conditions,
pricing of the issue etc. When the shares are oversubscribed, the company cannot satisfy all
the applicants. It means that a decision is to be made on how the shares are going to be
allotted. Shares can be allotted to the applicants by a company in any manner it thinks proper.
The company may reject some applicants in full, i.e., no shares are allotted to some applicants
and application money is refunded. Usually, multiple applications by the same persons are
not considered. Allotment may be given to the rest of the applicants in full, i.e., for the number
of shares they have applied for. A third alternative is that a company may allot shares to the
applicants on pro-rata basis. ‘Pro-rata allotment’ means allotment in proportion of shares
applied for.

For example, a company offers to the public 10,000 shares for subscription. The company
receives applications for 12,000 shares. If the shares are to be allotted on pro-rata basis,

© The Institute of Chartered Accountants of India

applicants for 12,000 shares are to be allotted 10,000 shares, i.e., on the 12,000: 10,000 or 6:5
ratio. Any applicant who has applied for 6 shares will be allotted 5 shares.

Under pro-rata allotment, the excess application money received is adjusted against the
amount due on allotment or calls. Surplus money after making adjustment against future calls
is returned to the applicants. The applicants are informed about the allotment procedure
through an advertisement in leading newspapers.

When there is a pro-rata allotment, the total application money paid by an applicant is more
than the exact amount due on application. The excess amount is treated as an advance against
allotment or any other future calls. The net amount due on allotment or any other calls is the
difference between the amount due on allotment or any other calls and the excess amount
received in application.

Accounting Entries

€] For rejected applications:

Share Application Account Dr.

To Bank Account
(Being application money refunded for rejected applications
as per Board’s Resolution No....dated....)

(b) For pro-rata allotment:

Share Application Account Dr.

To Share Allotment Account

(Being excess application money adjusted against allotment
money as per Board's Resolution No....dated....)

lllustration 7
JHP Limited is a company with an authorised share capital of 10,00,000 in equity shares of ¥ 10
each, of which 6,00,000 shares had been issued and fully paid on 30th June, 2021. The company
proposed to make a further issue of 1,00,000 of these ¥ 10 shares at a price of ¥ 14 each, the
arrangements for payment being:

(a) ¥ 2 per share payable on application, to be received by Tst July, 2021;

(b) Allotment to be made on 10th July, 2021 and a further ¥ 5 per share (including the
premium) to be payable;

(c) The final call for the balance to be made, and the money received by 30th April, 2022.

© The Institute of Chartered Accountants of India

Applications were received for 3,55,000 shares and were dealt with as follows:

0] Applicants for 5,000 shares received allotment in full;

(i) Applicants for 30,000 shares received an allotment of one share for every two applied
for; no money was returned to these applicants, the surplus on application being used to
reduce the amount due on allotment;

(iiij) Applicants for 3,20,000 shares received an allotment of one share for every four applied
for; the money due on allotment was retained by the company, the excess being returned
to the applicants; and

(iv) the money due on final call was received on the due date.

You are required to record these transactions (including cash items) in the Journal of JHP
Limited.
SOLUTION

Journal of JHP Limited

Date ] ]

2021 Particulars
Bank A/c (Note 1 — Column 3) Dr. 7,10,000

July 1 To Equity Share Application A/c 7,10,000

(Being application money received on 3,55,000 shares

@R 2 per share)

July 10 | Equity Share Application A/c Dr.| 7,10,000

To Equity Share Capital A/c 2,00,000

To Equity Share Allotment A/c (Note 1 4,30,000

Column 5)

To Bank A/c (Note 1 — Column 6) 80,000

(Being application money on 1,00,000 shares

transferred to Equity Share Capital Account; on
2,15,000 shares adjusted with allotment and on
40,000 shares refunded as per Board's Resolution
No....dated...)

Equity Share Allotment A/c Dr. 5,00,000

To Equity Share Capital A/c 1,00,000

© The Institute of Chartered Accountants of India

 To Securities Premium a/c 4,00,000

(Being allotment money due on 1,00,000 shares @

% 5 each including premium at X 4 each as per Board's
Resolution No....dated....)

Bank A/c (Note 1 — Column 8) Dr. 70,000

To Equity Share Allotment A/c 70,000

(Being balance allotment money received)

2022 Equity Share Final Call A/c Dr. 7,00,000

To Equity Share Capital A/c 7,00,000

(Being final call money due on 1,00,000 shares @ X 7

per share as per Board's Resolution No....dated....)

April 30 | Bank A/c Dr. 7,00,000

To Equity Share Final Call A/c 7,00,000

(Being final call money on 1,00,000 shares @ X 7 each

received)

Working Notes:

Calculation for Adjustment and Refund

Category | No. of No. of Amount Amount | Amount |Refund| Amount | Amount

Shares | Shares | Received |Required on| adjusted |[3-4 +| dueon | received
Applied | Allotted on Application on 5] | Allotment on
for Application Allotment Allotment

(1) ) (3) (4) (5) (6) 7 8)

(i) 5,000 5,000 10,000 10,000 Nil Nil 25,000 25,000

(ii) 30,000 15,000 60,000 30,000 30,000 Nil 75,000 45,000

(iii) 3,20,000{ 80,000 6,40,000 1,60,000, 4,00,000 80,000/ 4,00,000 Nil

TOTAL 3,55,000| 1,00,000 7,110,000 2,00,000| 4,30,000( 80,000 5,00,000 70,000

Also,

(i) Amount Received on Application (3) = No. of shares applied for (1) x¥ 2

(i) Amount Required on Application (4) = No. of shares allotted (2) x X 2

© The Institute of Chartered Accountants of India

G 2.9 CALLS-IN-ARREARS AND CALLS-IN-ADVANCE

At the time of receiving the value of ’

shares in instalments (calls)

Share calls money received Calls-in-arrears i.e. money Calls-in-advance i.e. money
in full received is less than due of future instalments
received before hand

“Bank A/c" is debited with “Calls-in-arrears A/c” is ’

full money received debited with the entry for “Calls-in-advance A/c" is
i Bank A/c credited with entry for “Bank
A/

Calls-in-Arrears
Sometimes shareholders fail to pay the amount due on allotment or calls. The total unpaid
amount on one or more instalments is known as Calls-in-Arrears or Unpaid Calls. Such amount
represents the uncollected amount of capital from the shareholders; hence, it is shown by way
of deduction from ‘called-up capital’ to arrive at paid-up value of the share capital.

For recording ‘Calls-in-Arrears’, the following journal entry is recorded :

Calls-in-Arrears A/c Dr. [Amount of Unpaid Calls]

Bank A/c Dr. [Amount received]

To Share Allotment A/c [Total allotment money due]

To Share Calls A/c [Total Call money due]

(Being call money/ allotment money received on .... shares at X.... per share.)

Calls-in-Advance
Some shareholders may sometimes pay a part, or whole, of the amount not yet called up, such
amount is known as Calls-in-advance. According to Table F, interest at a rate not exceeding
12 per cent p.a. is to be paid on such advance call money. This amount is credited in Calls-in-
Advance Account. The following entry is recorded:

Bank A/c Dr. [Call amount received in advance]

To Call-in-Advance A/c

When calls become actually due, calls-in-advance account is adjusted at the time of the call.
For this the following journal entry is recorded:

Calls-in-Advance A/c Dr. [Call amount received in advance]

© The Institute of Chartered Accountants of India

Bank A/c Dr. [Remaining call money received, if any]

To Particular Call A/c [Call money due]

(Being call in advance adjusted and call money due received)

ILLUSTRATION 8

Shreyas Ltd. did not receive the first call on 10,000 equity shares @ X 3 per share which was due
on 1.7.2021. This amount was received on 1.4.2022.
Open Calls in arrears account and journalise the entries in the books of the company on 1.7.2021
and 1.4.2022.

SOLUTION

Shreyas Ltd

Journal

Date Particulars L.F. Amount | Amount

Dr. Cr.
1.7.2021 | Calls in Arrears A/c Dr. 30,000
To Equity Share First Call A/c 30,000
(Being amount due on first call on 10,000 shares
at X 3 per share transferred to calls in arrears
account)
1.4.2022 | Bank A/c Dr. 30,000
To Calls in Arrears A/c 30,000
(Being calls in arrears received)

G 2. 10 INTEREST ON CALLS-IN-ARREARS AND CALLS-

IN-ADVANCE
Interest on calls in arrears is recoverable and that in respect of calls in advance is payable,
according to provisions in this regard in the articles of the company, at the rates mentioned
therein or those to be fixed by the directors, within the limits prescribed by the Articles. Table
F prescribes 10% and 12% p.a. as the maximum rates respectively for calls in arrears and those
in advance.

Interest on Calls in Arrears Interest on Calls in Advance

It is payable by shareholders to company on | It is payable by the Company to
the calls due but remaining unpaid. Shareholders on the call money received in
advance but not yet due.

© The Institute of Chartered Accountants of India

 As per Table F maximum prescribed rate is As per Table F maximum prescribed rate is
10%. 12%.

Period considered : From the date call Period considered: From the date money
money was due to the date money is finally was received to the day call was finally
received. made due.
Directors have a right to waive off such Shareholders are not entitled for any
interest in individual cases at their own dividend on calls in advance.
discretion.
It is a nominal account in nature and is It is a nominal account in nature with
credited to statement of profit and loss as interest being an expense for the company.
an income.

The book entries to be passed for the adjustment of such interest are much the same as those
in case of temporary borrowings or loans raised, the only difference being that debits are
raised and credits are given to Sundry Members Account (and not the individual accounts of
shareholders) in respect of interest recoverable on calls in arrear or that payable on call
received in advance, the corresponding entries being made in the Interest Receivable on Calls
in Arrears and Interest Payable on Calls in Advance, respectively.

The journal entries for calls-in-arrears are as follows :

0] For interest receivable on calls-in-arrears

Shareholders’ A/c Dr.

To Interest on calls-in-arrears A/c

(Being interest on calls in arrears at the rate of ...% made due)

(ii) For receipt of interest

Bank A/c Dr.

To Shareholders’ A/c

(Being interest money received)

The accounting treatment of interest on Calls-in-Advance is as follows:

0] Interest Due

Interest on Calls-in-Advance A/c Dr. [Amount of interest due for

payment]

To Shareholder’s A/c

(Being interest on calls in advance made due)

© The Institute of Chartered Accountants of India

(ii) Payment of Interest

Shareholder’s A/c Dr. [Amount of interest paid]

To Bank A/c

(Being interest paid on calls-in-advance)

ILLUSTRATION 9

Rashmi Limited issued at par 1,00,000 Equity shares of X10 each payable X2.50 on application;
X3 on allotment; X 2 on first call and balance on the final call. All the shares were fully subscribed.
Mr. Nair who held 10,000 shares paid full remaining amount on first call itself. The final call
which was made after 3 months from first call was fully paid except a shareholder having 1000
shares who paid his due amount after 2 months along with interest on calls in arrears. Company
also paid interest on calls in advance to Mr. Nair. Give journal entries to record these
transactions.
SOLUTION

Date | Particulars L.F. Debit Credit

Amount | Amount
® ®Q
Bank A/c Dr. 2,50,000

To Equity Share Application A/c 2,50,000

(Money received on applications for
1,00,000 shares @ X 2.50 per share)

Equity Share Application A/c Dr. 2,50,000

To Equity Share Capital A/c 2,50,000

(Transfer of application money on 1,00,000

shares to share capital)

Equity Share Allotment A/c Dr. 3,00,000

To Equity Share Capital A/c 3,00,000

(Amount due on the allotment of 1,00,000

shares @ X 3 per share)

Bank A/c Dr. 3,00,000

To Equity Share Allotment A/c 3,00,000

(Allotment money received)

© The Institute of Chartered Accountants of India

 Equity Share First Call A/c Dr. 2,00,000

To Equity Share Capital A/c 2,00,000

(Being first call made due on 1,00,000 shares

at 2 per share)
Bank A/c Dr. 2,25,000

To Equity Share First Call A/c 2,00,000

To Calls in Advance A/c 25,000

(Being first call money received along with

calls in advance on 10,000 shares at ¥ 2.50
per share)
Equity Share Final Call A/c Dr. 2,50,000

To Equity Share Capital A/c 2,50,000

(Being final call made due on 1,00,000 shares

at< 2.50 each)
Bank A/c Dr. 2,22,500

Calls in Advance A/c Dr. 25,000

Calls in Arrears A/c Dr. 2,500

To Equity Share Final Call A/c 2,50,000

(Being final call received for 89,000 shares

and calls in advance for 10,000 shares
adjusted)
Interest on Calls in Advance A/c Dr. 750

To Shareholders A/c 750

(Being interest made due on calls in advance

of 25,000 at the rate of 12% p.a.)

Shareholders A/c Dr. 750

To Bank A/c 750

(Being payment of interest made to

shareholder)
Shareholders A/c Dr. 41.67

To Interest on Calls in Arrears A/c 41.67

(Being interest on calls in arrears made due

at the rate of 10%)

© The Institute of Chartered Accountants of India

 Bank A/c Dr. 2,541.67

To Calls in Arrears A/c 2,500

To Shareholders A/c 41.67

(Being money received from shareholder for

calls in arrears and interest thereupon)

G 2.11 FORFEITURE OF SHARES

The term ‘forfeit’ actually means taking away of property on breach of a condition. It is very
common that one or more shareholders fail to pay their allotment and/or calls on the due dates.
Failure to pay call money results in forfeiture of shares. Forfeiture of shares is the action taken
by a company to cancel the shares. The directors are usually empowered by the Articles of
Association to forfeit those shares by serving proper notice to the defaulting shareholder(s).
When shares are forfeited, the title of such shareholder is extinguished but the amount paid to
date is not refunded to him. The shareholder then has no further claim on the company. The
power of forfeiture must be exercised strictly having regard to the rules and regulations
provided in the Articles of Association and it should be bonafide in the interests of the company.

The Articles of a company usually authorise the Directors to forfeit shares of a member on
account of non-payment of a call or interest thereon after serving him a prior notice as
prescribed by the Articles. Directors also have the right to cancel such forfeiture before the
forfeited shares are re-allotted.

Accounting Entries

At the time of passing entry for forfeiture of shares, students must be careful about the
following matters:

(i) Amount called-up (i.e., amount credited to capital) in respect of forfeited shares.

(ii) Amount already received in respect of those shares.

(iii) Amount due but has not been received in respect of those shares.

We know that shares can be issued at par or at a premium. Accounting entries for forfeiture
will vary according to situations.

2.11.1 Forfeiture of Shares which were issued at Par

In this case, Share Capital Account will be debited with the called-up value of shares forfeited.
Allotment or Calls Account will be credited with the amount due but not paid by the
shareholder(s). (Alternatively, Calls-in-Arrears Account can be credited for all amount due, if

© The Institute of Chartered Accountants of India

it was transferred to Calls-in-Arrears Account). Forfeited Shares Account or Shares Forfeiture
Account will be credited with the amount already received in respect of those shares.

Share Capital Account Dr. [No. of shares x called-up value per share]

To Forfeited Shares Account [Amount already received on forfeited

shares]

To Share Allotment Account [If amount due, but not paid]

To Share First Call Account [If amount due, but not paid]

To Share Final Call Account [If amount due, but not paid]

Where all amounts due on allotment, first call and final call have been transferred to Calls-in-
Arrears Account, the entry will be :

Share Capital Account Dr. [No. of shares x called-up value per share]

To Calls-in-Arrears Account [Total amount due, but not paid]

To Forfeited Shares Account [Amount received]

ILLUSTRATION 10

A Ltd forfeited 30,000 equity shares of X 10 fully called-up, held by Mr. X for non-payment of
final call @ X 4 each. However, he paid application money @ X 2 per share and allotment money
@ 4 per share. These shares were originally issued at par. Give Journal Entry for the forfeiture.
SOLUTION

In the books of A Ltd.

Journal

Date Particulars ] g

Equity Share Capital A/c (30,000 x X 10) Dr. | 3,00,000

To Equity Share Final Call A/c (30,000 x X 4) 1,20,000

To Forfeited Shares A/c (30,000 x X 6) 1,80,000

(Being the forfeiture of 30,000 equity shares of X 10

each fully called-up for non-payment of final call
money @ X 4 each as per Board's Resolution No....
dated....)

© The Institute of Chartered Accountants of India

ILLUSTRATION 11

X Ltd forfeited 20,000 equity shares of X 10 each, X 8 called-up, for non-payment of first call money
@R 2 each. Application money @ X 2 per share and allotment money @ X 4 per share have already
been received by the company. Give Journal Entry for the forfeiture (assume that all money due is
transferred to Calls-in-Arrears Account).

SOLUTION

In the books of X Ltd

Journal

Date Particulars ] g

Equity Share Capital A/c (20,000 x X 8) Dr. | 1,60,000

To Calls-in-Arrears A/c (20,000 x X 2) 40,000

To Forfeited Shares A/c (20,000 x X 6) 1,20,000

(Being the forfeiture of 20,000 equity shares of

% 10each, X 8 called-up for non-payment of first
call money @ R 2 each as per Board's Resolution
No.....dated.....)

2.11.2 Forfeiture of Shares which were issued at a Premium

In this case, Share Capital Account will be debited with the called-up value of shares forfeited.
If the premium on such shares has not been paid by the shareholder, the Securities Premium
Account will be debited to cancel it (if it was credited earlier). Allotment, Calls and Forfeited
Accounts will be credited in the usual manner.
If the premium has already received by the company, it cannot be cancelled even if
the shares are forfeited in the future.

If premium not received

Share Capital A/c Dr. [Called-up value]

Securities Premium A/c Dr. [Amount of Security premium not received]

To Share Allotment Account [If amount due, but not paid]

To Share First Call Account [If amount due, but not paid]

To Share Final Call Account [If amount due, but not paid]

To Forfeited Shares Account [Amount received on forfeited shares]

© The Institute of Chartered Accountants of India

If premium received

Share Capital A/c Dr. [Called-up value]

To Share Allotment Account [If amount due, but not paid]

To Share First Call Account [If amount due, but not paid]

To Share Final Call Account [If amount due, but not paid]

To Forfeited Shares Account [Amount received on forfeited shares]

ILLUSTRATION 12

X Ltd. forfeited 5,000 equity shares of X100 each fully called-up which were issued at a premium of
20%. Amount payable on shares were: on application X 20; on allotment X 50 (including premium);
on First and Final call 50. Only application money was paid by the shareholders in respect of these
shares. Pass Journal Entries for the forfeiture.

SOLUTION

In the books of X Ltd.

Journal

Date Particulars ] g

Equity Share Capital A/c (5,000 x ¥ 100) Dr. | 5,00,000

Securities Premium A/c (See Note) Dr. | 1,00,000

To Equity Share Allotment A/c (5,000 x X 50) 2,50,000

To Equity Share First and Final Call A/c (5000 x X 50) 2,50,000

To Forfeited Shares A/c (5000 x X 20) 1,00,000

(Being the forfeiture of 5,000 equity shares of ¥ 100

each fully called-up, issued at a premium of 20%, for
non-payment of allotment and call money as per
Board's Resolution No.....dated....)

Tutorial Note: Share premium @ X 20 on 5,000 shares has not been received by the company.
Therefore, at the time of forfeiture, Securities Premium Account will be debited to cancel it
(because Securities Premium Account was credited at the time of allotment).

Also, in case of pro-rata allotment where shares are issued at premium, the excess money
received on application will be first adjusted to capital account and then for securities
premium.

© The Institute of Chartered Accountants of India

ILLUSTRATION 13

Mr. Shami has applied for 1,000 shares of Company XYZ Ltd. paying application money @ X 2
per share but has been allotted only 600 shares. The shares have a face value of X 10 and a
premium of X 2 per share, which are payable as: on Allotment-X 5 (including premium) and on
final callX 5. Now in case Mr. Shami doesn't pay allotment money and final call and his shares
are forfeited, then following entry will be passed on forfeiture:

SOLUTION

Share Capital A/c (600 x X 10) Dr. | 6,000

Securities Premium A/c (600 x X 2) Dr.| 1,200

To Share Forfeiture A/c 2,000

To Share Allotment A/c 2,200

To Share Final Call A/c (600 x 5) 3,000

(Being 600 shares forfeited due to non-payment of allotment

money and call money as per Board Resolution no..... dated.....)

Note:

Total Amount Received on application (1,000 x 2) 2,000

Less: Amount used for application money (600 x 2) (1,200)

Excess money received on application 800

Amount due on Allotment (600 x 5) 3,000

For premium (600 x 2) 1,200

For Capital A/c (600 x 3) 1,800

Thus amount not received on allotment (3,000 - 800) 2,200

For Premium A/c For Capital A/c

Amount not received on allotment (2,200) 31,200 < 1,000

2.11.3 Forfeiture of Fully Paid-Up Shares

Forfeiture for non-payment of calls, premium, or the unpaid portion of the face value of the
shares is one of the many causes for which a share may be forfeited. But fully paid-up shares
may be forfeited for realization of debts of the shareholder if the Articles specifically provide
it.

© The Institute of Chartered Accountants of India

 (™ 2.12 RE-ISSUE OF FORFEITED SHARES
A forfeited share is merely a share available to the company for sale and remains vested in
the company for that purpose only. Reissue of forfeited shares is not allotment of shares but
only a sale.

The share, after forfeiture, in the hands of the company is subject to an obligation to dispose
it off. In practice, forfeited shares are disposed off by auction. These shares can be re-issued
at any price so long as the total amount received (from the original allottee and the second
purchaser) for those shares is not less than the face value on those shares.

Accounting Entries :

(a) Bank Account Dr. [Actual amount received]

Forfeited Shares Account Dr. [Loss on re-issue]

To Share Capital Account

(Being the re-issue of...shares @ X .... each as per Board's Resolution No.... dated.)

(b) Forfeited Shares Account Dr.

To Capital Reserve Account

(Being the profit on re-issue, transferred to capital reserve).

2.12.1 Points for Consideration

In connection with re-issue, the following points are important:

1. Loss on re-issue should not exceed the forfeited amount.

2. If the loss on re-issue is less than the amount forfeited, the surplus should be
transferred to Capital Reserve.

3. The forfeited amount on shares (amount originally paid-up) not yet reissued should
be shown under the heading ‘share capital.’

4. When only a portion of the forfeited shares are re-issued, then the profit made on re-
issue of such portion of shares only must be transferred to Capital Reserve.

5. When the shares are re-issued at a loss, such loss is to be debited to “Forfeited Shares
Account”.

6. If the shares are re-issued at a price which is more than the face value of the shares,
the excess amount will be credited to Securities Premium Account.

© The Institute of Chartered Accountants of India

7. If the re-issued amount and forfeited amount (taken together) exceeds the face value
of the shares re-issued, it is not necessary to transfer such amount to Securities
Premium Account.

2.12.2 Calculation of Profit on Re-Issue of Forfeited Shares

Students will appreciate that the credit balance of forfeited shares account cannot be
considered a surplus until the shares forfeited have been re-issued, because the company
may, on re-issue, allow the discount to the new purchaser equivalent to the amount held in
credit in this regard in the forfeited shares Account. Suppose 120 shares of a nominal value
of ¥ 10 have been forfeited upon which ¥ 5 per share was paid up and transferred to Forfeited
Share Account. Afterwards, 50 shares are re-issued, ¥ 6 per share being collected to make
them fully paid up; ¥ 200 (50 shares x ¥ 10- 50 shares x ¥ 6) out of shares forfeited will be
credited to Share Capital Account to make up the deficiency on re-issued shares, and % 50 (50
shares x ¥ 5 - ¥ 200) will be transferred to the Capital Reserve Account being the surplus on
re-issue of the 50 shares. It would have in the Forfeited shares Account balance equivalent to
the amount collected on the remaining 70 forfeited shares i.e. ¥ 350 which will be carried
forward till these are re-issued.
In the above case, it has been assumed that the amount paid up on all the 120 forfeited shares
was % 5 per share. But in practice, shares may be forfeited on which varying amounts are out-
standing. For instance, if in the above case 70 shares were forfeited with ¥ 5 paid up thereon
and 50 shares with ¥ 7.50 was paid up thereon then:

Share Forfeited Account Balance = (70 x 5) + (50 x 7.50)

=% 725

Thus if 50 shares with ¥ 7.50 paid up are re-issued for ¥ 6 per share then Capital Reserve
balance will be as follows:
% (7.50 + 6 -10) x 50 shares =% 175

ILLUSTRATION 14
Mr. Long who was the holder of 2,000 preference shares of X 100 each, on which X 75 per share
has been called up could not pay his dues on Allotment and First call each at X 25 per share.
The Directors forfeited the above shares and reissued 1500 of such shares to Mr. Short at X 65
per share paid-up as X 75 per share.

Give Journal Entries to record the above forfeiture and re-issue in the books of the company.

© The Institute of Chartered Accountants of India

SOLUTION

Particulars ] ]

Preference Share Capital A/c (2,000 x X 75) Dr. | 1,50,000

To Preference Share Allotment A/c

To Preference Share First Call A/c

To Forfeited Share A/c

(Being the forfeiture of 2,000 preference shares X 75 each

being called up for non-payment of allotment and first call
money as per Board’s Resolution No.... dated

Bank A/c (1,500 x X 65) Dr. 97,500

Forfeited Shares A/c (1,500 x X 10) Dr. 15,000

To Preference Share Capital A/c 1,12,500

(Being re-issue of 1500 shares at X 65 per share paid-up as

% 75 as per Board's Resolution No.....dated....)

Forfeited Shares A/c Dr. 22,500

To Capital Reserve A/c (Note 1) 22,500

(Being profit on re-issue transferred to Capital/Reserve)

Working Note:

Calculation of amount to be transferred to Capital Reserve

Forfeited amount per share = ¥ 50,000/2000 25

Loss on re-issue = X 75 -X 65 10

Surplus per share re-issued 15

Transferred to capital Reserve ¥ 15 x 1500 % 22,500

ILLUSTRATION 15

Beautiful Co. Ltd issued 30,000 equity shares of X 10 each payable as X 3 per share on
application, X 5 per share (including X 2 as premium) on allotment and X 4 per share on call. All
the shares were subscribed. Money due on all shares was fully received except from Ram, holding
500 shares, who failed to pay the Allotment and Call money and Shyam, holding 1,000 shares,
who failed to pay the Call Money. All those 1,500 shares were forfeited. Of the shares forfeited,
1,250 shares (including whole of Ram’s shares) were subsequently re-issued to Jadu as fully paid
up at a discount of X 2 per share.

© The Institute of Chartered Accountants of India

Pass the necessary entries in the Journal of the company to record the forfeiture and re-issue of
the share. Also prepare the Balance Sheet of the company.

SOLUTION

In the books of Beautiful Co. Ltd.

Journal

Date | Particulars ] g
Equity Share Capital A/c (1,500 x X 10) Dr.| 15,000

Securities Premium A/c (500 x X 2) Dr. 1,000

To Equity Share Allotment A/c (500 x X 5) 2,500

To Equity Share Call A/c (1,500 x X 4) 6,000

To Forfeited Shares A/c 7,500

(Being forfeiture of 1,500 equity shares for non

payment of allotment and call money on 500 shares
and for non-payment of call money on 1,000 shares as
per Board’s Resolution No....dated ....)

Bank A/c Dr.| 10,000

Forfeited Shares A/c Dr. 2,500

To Equity Share Capital A/c 12,500

(Being re-issue of 1250 shares @ X 8 each as per

Board's Resolution No.....dated....)

Forfeited Shares A/c Dr. 3,500

To Capital Reserve A/c 3,500

(Being profit on re-issue transferred to Capital Reserve)

Balance Sheet of Beautiful Limited as at......

Particulars Notes No. g
EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1 2,99,000
Reserves and Surplus 2 62,500
Total 3,61,500

© The Institute of Chartered Accountants of India

 ASSETS
Current assets
Cash and cash equivalents (bank) 3,61,500

Total 3,61,500

Notes to accounts

R R

1. | Share Capital
Equity share capital
Issued share capital
30,000 Equity shares of ¥ 10 each 3,00,000

Subscribed, called up and paid up share capital

29,750 Equity shares of ¥ 10 each 2,97,500

Add: Forfeited shares 1,500 2,99,000

2. | Reserves and Surplus

Securities Premium 59,000

Capital Reserve 3,500 62,500

Working Note :

(U] Calculation of Amount to be Transferred to Capital Reserve

Amount forfeited per share of Ram %3 Amount forfeited per share of | 6

Shyam
Less: Loss on re-issue per share R2 Less: Loss on re-issue per share | X 2)
Surplus ha ) Surplus 4
Transferred to Capital Reserve: % 500
Ram share (500 x ¥ 1)
Shyam'’s Share (750 xX 4) % 3,000
Total % 3,500

(2) Balance of Security Premium

Total Premium amount receivable on allotment =

Less: Amount reversed on forfeiture
1S3
=3
=]
[0

Balance remaining

© The Institute of Chartered Accountants of India

ILLUSTRATION 16

A holds 2,000 shares of X 10 each on which he has paid X 2 as application money. B holds
4,000 shares of X 10 each on which he has paid X 2 per share as application money and X 3
per share as allotment money. C holds 3,000 shares of X 10 each and has paid X 2 on
application, X 3 on allotment and X 3 for the first call. They all fail to pay their arrears on the
second and final call and the directors, therefore, forfeited their shares. The shares are re-
issued subsequently for X 12 per share fully paid-up. Journalise the transactions relating to the
forfeiture and re-issue.

SOLUTION

Journal

Date | Particulars ] g
Share Capital A/c (9,000 x X 10) Dr. 90,000

To Share Allotment A/c (2,000 x X 3) 6,000

To Share First Call A/c (6,000 x X 3) 18,000

To Share Final Call A/c (9,000 x X 2) 18,000

To Forfeited Shares A/c 48,000

(Being forfeiture of 9,000 shares of ¥ 10 each for non-

payment of allotment, first and final call money as per
Board's Resolution No.....dated....)
Bank A/c (9,000 x X 12) Dr. | 1,08,000
To Share Capital A/c 90,000

To Securities Premium A/c 18,000

(Being the re-issue of 9,000 shares of ¥ 10 each @ ¥ 12 as

per Board’s Resolution No.....dated...)
Forfeited Shares A/c Dr. 48,000

To Capital Reserve A/c 48,000

(Being profit on re-issue transferred to Capital

Reserve).

Working Note:

Shareholders Money Received Money Not Received On

Application |Allotment |First Call |Final Call |Allotment | First Call| Final Call
A 2,000 = = = 2,000 2,000 2,000
B 4,000 4,000 = = = 4,000 4,000
GC 3,000 3,000 3,000 = = = 3,000

© The Institute of Chartered Accountants of India

 TOTAL 9,000 7,000 3,000 = 2,000 6,000 9,000
Money %2 33 33 %2 33 33 32
Receivable 318,000 321,000/ 9,000 36,000/ ¥18,000| < 18,000

ILLUSTRATION 17

X Limited invited applications for issuing 75,000 equity shares of ¥ 10 each at a premium of 5
per share. The total amount was payable as follows:

- ¥ 9 per share (including premium) on application and allotment

- Balance on the First and Final Call

Applications for 3,00,000 equity shares were received. Applications for 2,00,000 equity shares
were rejected and money refunded. Shares were allotted on pro-rata basis to the remaining
applicants. The first and final call was made. The amount was duly received except on 1,500
shares applied by Mr. Raj. His shares were forfeited. The forfeited shares were re-issued at a
discount of ¥ 4/- per share.

Pass necessary journal entries- for the above transactions in the books of X Limited.

SOLUTION

Journal

Dr. Cr.

1 | Bank Account Dr. | 27,00,000

To Share Application & Allotment A/c 27,00,000

(Being Application money on 3,00,000 shares at * 9 per

share received.)
2 | Share Application & Allotment A/c Dr. | 27,00,000

To Share Capital A/c (75,000 x * 4) 3,00,000

To Securities premium A/c (75,000 x * 5) 3,75,000

To Bank A/c (2,00,000 x * 9) 18,00,000

To Share First & Final Call A/c 2,25,000

(Being application money transferred)

3 | Share First & Final Call A/c (75,000 x6) Dr.| 4,50,000

To Share Capital Account 4,50,000

(Amount First & Final Call A/c due from members as per
Directors, resolution no...... dated.....)

© The Institute of Chartered Accountants of India

 4 | Bank Account A/c Dr. | 2,21,625

Calls in arrear A/c Dr. 3,375

To Share First & Final Call Account 2,25,000

(Being Receipt of the amounts due on first call.)

5 | Equity share capital A/c Dr. 11,250
To Share forfeiture A/c 7,875

To Calls in arrear A/c 3,375

(Being 1,125 shares forfeited for non payment of final
call))
6 | Bank Account A/c (1,125
x X 6) Dr. 6,750

Share forfeiture A/c (1,125 x X 4) 4,500

To Share Capital Account (1,125 x ¥ 10) 11,250

(Being forfeited shares reissued at ¥ 4 discount)

7 | Share forfeiture A/c 3,375

To Capital reserve A/c 3,375

(Being share forfeiture transferred to capital reserve*)

Working notes:

1.

Shares | Shares Money Money Money Excess Share | Amount | Money

Applied | Allotted | Receivedon | Transferred | Transferred | Application | Firstand | received | pofingeq
Application | to Share to Security Money | FinalCall | from
@39/ Capital@ Premium @ Share
24/ s/ %6/- | Firstand
Final Call
after
adjusting
excess
appl.
money
2,00000 - 18,00,000 - - - - - | 18,00,000
1,00,000 | 75,000 9,00,000 3,00,000 3,75,000 2,25,000 | 4,50,000 | 2,25,000*
3,00,000 [ 75000 | 27,00,000 3,00,000 3,75,000 2,25,000 | 4,550,000 | 4,46,625* | 18,00,000

*4,50,000 less 2,25,000

**% 4,50,000 less X 3,375.

2. Number of shares allotted to Mr. Raj = 1,500 x 75,000 / 1,00,000 = 1,125 shares

© The Institute of Chartered Accountants of India

3. Calculation of calls in arrear

Application money received from Raj (1,500 x9) 13,500

Less: actual application money 1,125 x9 10,125
Excess Application & Allotment Money Adjusted 3,375
with first and final call
Final call due from Raj 6,750

Less: Adjusted with final call (3,375)

Calls in arrear 3,375

@ 2.13 ISSUE OF SHARES FOR CONSIDERATION OTHER

THAN CASH
Public limited companies, generally, issue their shares for cash and use such cash to buy the
various types of assets needed in the business. Sometimes, however, a company may issue
shares in a direct exchange for land, buildings or other assets. Shares may also be issued in
payment for services rendered by promoters, lawyers in the formation of the company. These
shares should be shown separately under the heading ‘Share Capital’.

Within specified time of allotment, the company must produce before the Registrar a written
contract of sale of service in respect of which shares have been allotted.

Under accounting standards, if an asset is acquired, or partly acquired, by the issue of shares
or other securities, the acquisition cost is the fair value of the securities issued (which, in
appropriate cases, may be indicated by the issue price as determined by statutory authorities).
The fair value may not necessarily be equal to the nominal or par value of the securities issued.

Accounting Entries

When assets are purchased in exchange of shares

Assets Account Dr.

To Share Capital Account

ILLUSTRATION 18

X Co. Ltd. was incorporated with an authorized share capital of 90,000 equity shares of ¥ 10
each. The company purchased land and buildings from Y Co. Ltd for ¥4,00,000 payable in fully
paid-up shares of the company. The balance of the shares were issued to the public, which were
fully subscribed and paid for.

You are required to pass Journal Entries and to prepare the Balance Sheet.

© The Institute of Chartered Accountants of India

SOLUTION

Journal

Date | Particulars 4 4
Land and Buildings A/c Dr. 4,00,000

ToY Co. Ltd A/c 4,00,000

(Being the land and buildings purchased from Y Co. Ltd
as per agreement dated...).
Y. Co. Ltd A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000

(Being 40,000 shares of ¥ 10 each issued to Y Co. Ltd. on

purchase of land and building)
Bank A/c Dr. 5,00,000

To Equity Share Application and Allotment A/c 5,00,000

(Being the issue of 50,000 shares of ¥ 10 each as per
Board's Resolution No.....dated...)
Equity Share Application and Allotment A/c Dr 5,00,000
To Equity Share Capital A/c 5,00,000

(Being shares allotted for application money

received.)

Balance Sheet of X Company Limited as at....

Particulars Notes No. k¢

EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1 9,00,000

Total 9,00,000
ASSETS
1. | Non-current assets
a Fixed assets
i. Plant Property and Equipment 2 4,00,000
2. | Current assets
Cash and cash equivalents 3 5,00,000

Total 9,00,000

© The Institute of Chartered Accountants of India

Notes to accounts

k¢

1. | Share Capital

Equity share capital

Authorised share capital

90,000 Equity shares of ¥ 10 each 9,00,000

Issued share capital

90,000 Equity shares of ¥ 10 each 9,00,000

Subscribed Share Capital

90,000 Equity Shares of % 10 each 9,00,000

Called up and Paid up Capital

90,000 Equity Shares of X 10 each 9,00,000

(Out of the above 40,000 shares have been allotted as fully paid up
pursuant to contract(s) without payment being received in cash)

2. | Plant Property and Equipment

Land and Building 4,00,000

3. | Cash and cash equivalents

Balances with banks 5,00,000

SUMMARY
3 Total capital of the company is divided into a number of small indivisible units of a
fixed amount and each such unit is called a share.
3 The total capital of the company is divided into shares, the capital of the company is
called 'Share Capital'.

. Share capital of a company is divided into following categories:

(i) Authorised Share Capital or Nominal Capital; (ii) Issued Share Capital; (iii)
Subscribed Share Capital (iv) Called-up Share Capital; (v) Paid-up Share Capital; (vi)
Reserve Share Capital

© The Institute of Chartered Accountants of India

 Types of shares are:

(i) Preference Shares. Preference shares can be of various types, e.g. (a)
Cumulative Preference Shares (b) Non-cumulative Preference Shares (c)
Participating Preference Shares (d) Non-participating Preference Shares (e)
Redeemable Preference Shares (f) Non-redeemable Preference Shares (g)
Convertible Preference Shares (h) Non-convertible Preference Shares.

(ii) Equity Shares

A company can issue shares either

[©) for cash or

@) for consideration other than cash.

A public limited company cannot make any allotment of shares unless the amount of
minimum subscription stated in the prospectus has been subscribed and the sum
payable as application money for such shares has been paid to and received by the
company.
When a company issues its securities at a price more than the face value, it is said to
be an issue at a premium. Premium is the excess of issue price over face value of the
security.

According to Section 52 of the Companies Act, 2013, Securities Premium Account may
be used by the company:

©)] Towards issue of un-issued shares of the company to be issued to members of

the company as fully paid bonus securities.

(b) To write off preliminary expenses of the company.

(c) To write off the expenses of, or commission paid, or discount allowed on any
of the securities or debentures of the company.

(d) To provide for premium on the redemption of redeemable preference shares

or debentures of the company.

(e) For the purchase of own shares or other securities.

Sometimes shareholders fail to pay the amount due on allotment or calls. The total
unpaid amount on one or more instalments is known as Calls-in-Arrears or Unpaid
Calls.
Some shareholders may sometimes pay a part, or whole, of the amount not yet called
up, such amount is known as Calls-in-advance.

© The Institute of Chartered Accountants of India

 Interest on calls in arrear is recoverable and that in respect of calls in advance is
payable, according to provisions in this regard in the articles of the company, at the
rates mentioned therein or those to be fixed by the directors, within the limits
prescribed by the Articles. Table F prescribes 10% and 12% p.a. as the maximum rates
respectively for calls in arrears and those in advance.

The term ‘forfeit’ actually means taking away of property on breach of a condition. It
is very common that one or more shareholders fail to pay their allotment and/or calls
on the due dates. Failure to pay call money results in forfeiture of shares.

Aforfeited share is merely a share available to the company for sale and remains vested
in the company for that purpose only. Reissue of forfeited shares is not allotment of
shares but only a sale.

Public limited companies, generally, issue their shares for cash and use such cash to
buy the various types of assets needed in the business. Sometimes, however, a
company may issue shares in a direct exchange for land, buildings or other assets.
These shares should be shown separately under the heading ‘Share Capital’.

TEST YOUR KNOWLEDGE

True and False

Liability of a holder of shares is limited to the face value of shares acquired by them.

Authorised capital appears in the balance sheet at face value.

N

The rate of dividend on preference shares may vary From year to year.
W

A company may issue shares at a discount to the public in general.

A

Sweat equity shares are those which are issued to employees & directors at a discount.
U

As per table F, rate of interest on calls in arrears is 12%.

O

As per Table F, rate of interest on calls in advance is 10%.

N

Non-participating preference shareholders enjoy voting rights.

Forfeited shares are available to the company for the purpose of resale.
©

Loss on reissue should exceed the forfeited amount.

S

© The Institute of Chartered Accountants of India

Multiple Choice Questions
1. The excess price received over the par value of shares, should be credited to

(a) Calls-in-advance account

) Share capital account

(c) Securities premium account

2. The Securities Premium amount may be utilized by a company for

(a) Writing off any loss on sale offixed asset

) Writing off any loss of revenue nature

(c) Writing off the expenses/discount on the issue of debentures

3. When shares are forfeited, the share capital account is debited with and the
share forfeiture account is credited with

(a) Paid-up capital of shares forfeited; Called up capital of shares forfeited

) Called up capital of shares forfeited; Calls in arrear of shares forfeited

(c) Called up capital of shares forfeited; Amount received on shares forfeited

4. T Ltd. proposed to issue 6,000 equity shares of ¥ 100 each at a premium of 40%. The
minimum amount of application money to be collected per share as per the Companies
Act, 2013

(@ ¥5.00
(b) T6.00
() ¥700
5. Dividends are usually paid as a percentage of .

(a) Authorized share capital

) Net profit

() Paid-up capital

6. As per the SEBI guidelines, on issue of shares, the application money should not be less
than
(a) 2.5% of the nominal value of shares

) 2.5% of the issue price of shares

(© 25.0% of the issue price of shares

© The Institute of Chartered Accountants of India

7. G Ltd. acquired assets worth ¥ 7,50,000 from H Ltd. by issue of shares of ¥ 100 at a
premium of 25%. The number of shares to be issued by G Ltd. to settle the purchase
consideration = ?
(a) 6,000 shares

) 7,500 shares

(c) 9,375 shares

Securities Premium is presented as a part of

(a) Reserves & Surplus

) Share Capital

(c) Liabilities

Schedule 11l of Companies Act 2013 prescribes the format for

(a) Financial statements

) Directors’ Report

(c) Auditors' Report

70. Dividend on shares have to be paid before dividend on shares.

(a) Equity, Preference

) Preference, Equity

(c) Convertible, Non-Cumulative

11. Preference shares are unless expressly stated otherwise.

(a) Non-participating

) Convertible

(c) Interest-bearing

Theory Questions
1. Write short notes on:
0] Utilization of securities premium account

(ii) Re-issue of forfeited shares

Distinguish between:

0] Calls-in-Arrears and Calls-in-advance

© The Institute of Chartered Accountants of India

 (ii) Issue of shares for cash and Issue of Shares for Consideration other than Cash

3. Can a company issue shares at discount?

Practical Questions
1. X Ltd. invited applications for 10 lakhs shares of € 100 each payable as follows:

<
On Application 20
On Allotment (on 1st May, 2022) 30
On First Call (on Tst Oct., 2022) 30
On Final Call (on Tst Feb., 2023) 20

All the shares were applied for and allotted. A shareholder holding 20,000 shares paid
the whole of the amount due along with allotment. Journalise the transactions, assuming
all sums due were received. Interest was paid to the shareholder concerned on 1st
February, 2023.

2. A limited Company, with an authorized capital of ¥ 20,00,000 divided into shares of

¥ 100 each, issued for subscription 10,000 shares payable at ¥ 25 per share on
application, T 30 per share on allotment, <20 per share on first call three months after
allotment and the balance as and when required.

The subscription list closed on January 31, 2022 when application money on 10,000
shares was duly received and allotment was made on March 1, 2022. All amounts due
were received within one month of the date they were called.

The allotment amount was received in full but, when the first call was made, one
shareholder failed to pay the amount on 1,000 shares held by him and another
shareholder with 500 shares paid the entire amount on his shares.

Give journal entries in the books of the Company to record these share capital
transactions.
3. A Ltd. forfeits 100 shares of Rs.10 each fully called upon. The shareholder failed to pay
the first call money of Rs. 4 per share and the second and final Call Money of Rs. 4 per
share. Give journal entry to show the effect of this transaction.

4. B Ltd. issued 20,000 equity shares of ¥ 100 each at a premium of < 20 per share payable
as follows: on application ¥ 50; on allotment < 50 (including premium); on final call ¥ 20.
Applications were received for 24,000 shares. Letters of regret were issued to applicants
for 4,000 shares and shares were allotted to all the other applicants. Mr. A, the holder of
150 shares, failed to pay the allotment and call money, the shares were forfeited. Show
the Journal Entries and Cash Book in the books of B Ltd.

© The Institute of Chartered Accountants of India

ANSWERS/ HINTS

True and False

1. False: Liability of the holder of shares is limited to the issue price of shares acquired by
them.
True: Authorised capital is the amount of capital mentioned in ‘capital clause’ of the
‘Memorandum of Association’. Authorised capital is considered only as presentation
and not considered in total of balance sheet.
False: Rate of preference dividend is always fixed.

False: According to Section 53 of the Companies Act, 2013, a Company cannot issue
shares at a discount except in the case of issue of sweat equity shares (issued to
employees and directors). Thus any issue of shares at discount shall be void.

True: According to Section 53 of the Companies Act, 2013, a Company cannot issue
shares at a discount except in the case of issue of sweat equity shares (issued to
employees and directors).

False: As per table F, rate of interest on calls in arrears is 10%.

False: As per Table F, rate of interest on calls in advance is 12%.

False: A share on which only a fixed rate of dividend is paid every year, without any
accompanying additional rights in profits and in the surplus on winding-up, is called
‘Non-participating Preference Shares. Non-participating preference shareholders do
not enjoy voting rights.

9. True: Reissue of forfeited shares is not allotment of shares but only a sale.

10. False: Loss on re-issue should not exceed the forfeited amount.

Multiple Choice Questions

1. © 2. © | 3. © | 44 | @ | 5 | © | 6 | ©
7 @ | 8 | @ | o @ | 10. | ® | 11. | @

Theoretical Questions
1. (i) Refer para 2.7.1 for utilization of securities premium account.

(ii) A forfeited share is merely a share available to the company for sale and
remains vested in the company for that purpose only. Reissue of forfeited

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 shares is not allotment of shares but only a sale. The share, after forfeiture, in
the hands of the company is subject to an obligation to dispose it off. In
practice, forfeited shares are disposed off by auction. These shares can be re-
issued at any price so long as the total amount received (from the original
allottee and the second purchaser) for those shares is not less than the amount
in arrears on those shares.
2. (i) Calls-in-Arrears: Sometimes shareholders fail to pay the amount due on
allotment or calls. The total unpaid amount on one or more instalments is
known as Calls-in-Arrears or Unpaid Calls. Such amount represents the
uncollected amount of capital from the shareholders; hence, it is shown by way
of deduction from ‘called-up capital’ to arrive at paid-up value of the share
capital.

Calls-in-advance: Some shareholders may sometimes pay a part, or whole, of

the amount not yet called up, such amount is known as Calls-in-advance.

(ii) The shares can be issued by a company either for cash or for consideration
other than cash. Public limited companies, generally, issue their shares for cash
and use such cash to buy the various types of assets needed in the business.
Sometimes, however, a company may issue shares in a direct exchange for land,
buildings or other assets.

3. According to Section 53 of the Companies Act, 2013, a Company cannot issue shares
at a discount except in the case of issue of sweat equity shares (issued to employees
and directors). Thus any issue of shares at discount shall be void.

Practical Question
1. Journal of X Ltd.

2022 Rin Rin

lakhs lakhs
May 1 Bank A/c Dr. 200

To Share Application A/c 200

(Receipt of applications for 10 lakh shares along

with application money of X 20 per share.)

May 1 Share Application A/c Dr. 200

Share Allotment A/c Dr. 300

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 To Share Capital A/c 500

(The allotment of 10 lakh shares: payable on

application ¥ 20 share and X 30 on allotment as per
Directors’ resolution no... dated...)

May 1 Bank A/c Dr. 310

To Shares Allotment A/c 300

To Calls in Advance A/c 10

[Receipt of money due on allotment @ X 30, also

the two calls (X 30 and X 20) on 20,000 shares.]

Oct. 1 Share First Call A/c Dr. 300

To Share Capital A/c 300

(The amount due on 10 lakh shares @ X 30 on first

call, as per Directors, resolution no... dated...)

Bank A/c Dr. 294

Calls in Advance A/c Dr.

To Share First Call A/c 300

(Receipt of the first call on 9.80 lakh shares, the

balance having been previously received and now
debited to call in advance account.)

2023

Feb. 1 Share Final Call A/c Dr. 200

To Share Capital A/c 200

(The amount due on Final Call on 10 lakh shares @

% 20 per share, as per Directors’ resolution no...
dated...)

Feb. 1 Bank A/c Dr. 196

Calls in Advance A/c Dr.

To Share Final Call A/c 200

(Receipt of the moneys due on final call on 9.80

lakhs shares, the balance having been previously
received.)

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 Feb. 1 Interest on calls in Advance A/c Dr. 0.66

To Shareholder A/c 0.66

(Being interest on call in advance made due)

Feb 1 Shareholder A/c Dr. 0.66

To Bank A/c 0.66

(Being interest paid)

Working Note:

The interest on calls in advance paid @ 12% on : 3

% 6,00,000 (first call) from 1st May to 1st Oct., 2022-5 months 30,000

% 4,00,000 (final call) from 1st May to 1st Feb., 2023-9 months 36,000

Total Interest Amount Due 66,000

Journal Entries in the Books of the Company

Date Particulars L.F. Debit Credit

2022 Amount | Amount

Q) Q)
Jan. 31 Bank A/c Dr. 2,50,000

To Equity Share Application 2,50,000

A/c

(Money received on applications for

10,000 shares @ X 25 per share)

March 1 | Equity Share Application A/c Dr. 2,50,000

To Equity Share Capital A/c 2,50,000

(Transfer of application money on 10,000

shares to share capital)

March 1 | Equity Share Allotment A/c Dr. 3,00,000

To Equity Share Capital A/c 3,00,000

(Amount due on the allotment of 10,000

shares @ X 30 per share)

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 April 1 Bank A/c Dr. 3,00,000

To Equity Share Allotment A/c 3,00,000

(Allotment money received)

June 1 Equity Share First Call A/c Dr. 2,00,000

To Equity Share Capital A/c 2,00,000

(First call money due on 10,000 shares @

% 20 per share)

July 1 Bank A/c Dr. 1,92,500

Calls-in-Arrears A/c Dr. 20,000

To Equity Share First Call A/c 2,00,000

To Calls-in-Advance A/c 12,500

(First call money received on 9000 shares

and calls-in-advance on 500 shares @
X 25 per share)

In the Books of A Ltd.

Journal Entries

Date Particulars

Equity Share Capital A/c (100X10) Dr. 1,000

To Share First Call A/c (100X4)
To Second and Final Call A/c (100X4) 400
To Share Forfeiture A/c (100X2) 200
(Being share forfeiture of 100 shares as per Board's
Resolution No....dated...)

In the Books of B Ltd.

Cash Book (Bank column only)

Date Particulars ¥|Date |Particulars

To Equity Share By Equity Share
Application A/c 12,00,000 Application A/c 2,00,000
(Being application (Being excess money
money received on refunded on 4,000 shares
24,000 shares @ @ X 50 each as per Board's
% 50 each) Resolution No...dated....)

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 To Equity Share| 9,92,500 By Balance c/d 23,89,500
Allotment A/c
(Being allotment
money received on
19,850 shares @
% 50 each)
To Equity Share| 3,97,000
Final Call A/c
(Being final call
money received on
19,850 shares @
% 20 each)
25,89,500 25,89,500

Journal Entries

Date | Particulars ] g
Equity Share Application A/c Dr. | 10,00,000

To Equity Share Capital A/c 10,00,000

(Being application money on 20,000 shares @I 50

each transferred to Equity Share Capital Account as
per Board’s Resolution No.....dated...)

Equity Share Allotment A/c Dr. | 10,00,000

To Equity Share Capital A/c 6,00,000

To Securities Premium A/c 4,00,000

(Being allotment money @ X 50 per share including

premium of X 20 per share being made due as per
Board's Resolution No.....dated....)

Equity Share Capital A/c (150 x % 100) Dr. 15,000

Securities Premium A/c (150 x X 20) Dr. 3,000

To Equity Share Allotment A/c 7,500

To Equity Share Final Call A/c 3,000

To Forfeited Shares A/c 7,500

(Being forfeiture of 150 shares for non-payment

of allotment money and final call money as per
Board's Resolution No....dated...)

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 Equity Share Final Call A/c (19,850 x X 20) Dr. 3,97,000

To Equity Share Capital A/c 3,97,000

(Being final call money received for X 20 per share

being made as per Board's resolution No.... dated ......)

Note: Here, securities premium on forfeited shares has not been realised, so Securities
Premium Account will be debited at the time of forfeiture of these shares.
Also, alternatively Calls in arrears A/c could have been used in which case following entries
would have been passed in place of the entry (given above) for forfeiture:

On non- receipt of allotment money:

Calls in Arrears A/c Dr.| 7,500

To Equity Share Allotment A/c 7,500

(Being allotment money on 150 shares @ ¥ 50 not received

transferred to calls in arrears.)
On non - receipt of Call money:
Calls in Arrears A/c Dr.| 3,000

To Equity Share Final Call A/c 3,000

(Being final call on 150 shares @ X 20 not received transferred to

calls in arrears)
On Forfeiture:
Share Capital A/c (150 x X 100) 15,000

Securities Premium A/c (150 x X 20) 3,000

To Calls in Arrears A/c 10,500

To Share Forfeiture A/c 7,500

(Being forfeiture of 150 shares for non-payment of allotment

money and final call money as per Board's Resolution
No....dated...)

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