Forfeiture and Reissue of Shares Class 12: Meaning, Journal Entries and Solved Example

"Forfeiture of shares", "forfeited meaning in accounting" and "entry of forfeiture" are the questions behind Unit 3 "Forfeiture and Re-issue of Shares" of NEB Class 12 Accountancy (ACC12). The unit follows Unit 2 "Accounting for Shares: Issue of Shares for Cash", where you learned to record applications, allotment and calls. Forfeiture is what happens when a shareholder stops paying.

This guide explains what forfeited shares are, the journal entries for forfeiture (shares issued at par and at premium), the entries for forfeiture and reissue of shares at par, at discount and at premium, the transfer to capital reserve, pro-rata reissue, and one complete worked example with the journal in a table. The chapter itself is at Forfeiture and Re-issue of Shares.

Forfeiture of shares: meaning

Forfeiture of shares means the company cancels the shares of a shareholder who fails to pay an allotment or call amount on the due date, after giving proper notice as the Articles of Association and the law allow. The shareholder loses the shares and also loses the money already paid on them. The unpaid amount that the shareholder failed to pay is called calls in arrear. The company is not obliged to forfeit, but forfeiture is the remedy it has, and the forfeited shares can then be issued again to new investors.

When asked "forfeited meaning in accounting", write that the share capital account is debited with the called-up amount of the forfeited shares, and that the amount already received is retained by the company in a Share Forfeiture account until the shares are reissued.

Journal entries on forfeiture

When shares are issued at par, the forfeiture entry debits Share Capital with the called-up amount (the amount per share called so far, not just the face value if less has been called), credits Calls in Arrear with any amount that was due but unpaid, and credits Share Forfeiture with the amount actually received.

If the shares were issued at a premium and the premium had been received, the premium account is not touched, because the premium stays with the company. Share capital is debited only with the called-up amount of the face value, and Share Forfeiture is credited with the amount received on the face value.

If the premium had not been received (it was due with allotment and the holder defaulted), the forfeiture entry also debits Securities Premium with the unpaid premium, because the premium was credited earlier but never collected. Then Share Forfeiture gets the amount received only.

Entries for reissue of shares

Reissue means the company sells the forfeited shares again, usually as fully paid. The cash is debited to Bank, and Share Capital is credited with the full face value that is treated as paid. The three cases differ in the Share Forfeiture account.

At par: Bank is debited, Share Capital is credited with the same amount. At a discount: the discount allowed is debited to Share Forfeiture (not to a discount account). At a premium: the excess is credited to Securities Premium.

The most important rule is that the discount on reissue cannot exceed the amount in the Share Forfeiture account for those shares, that is, the amount forfeited from the original holder. Otherwise the company would be issuing the shares below the amount that it can cover.

After reissue, any balance that remains in Share Forfeiture for the reissued shares is a capital profit, and is transferred to Capital Reserve.

$$\text{Capital reserve} = \text{Share forfeiture balance of the reissued shares} - \text{Discount allowed on reissue}$$

Reissue of part of the forfeited shares

Often only some of the forfeited shares are reissued. Then only the proportion of the Share Forfeiture balance that belongs to the reissued shares is transferred to Capital Reserve, and the rest stays in the account until the remaining shares are reissued. If 100 shares were forfeited with Rs 7,000 in the account and 60 are reissued, the share related to them is 7,000 x 60/100 = Rs 4,200, and the discount allowed on those 60 shares is deducted from that to get the capital reserve.

Worked example

A company issued 1,000 shares of Rs 100 each, payable Rs 30 on application, Rs 40 on allotment and Rs 30 on first and final call. All money was received except the first and final call on 100 shares. These 100 shares were forfeited, and then reissued at Rs 90 per share fully paid. Journal entries and the capital reserve are required.

On forfeiture, the holder of 100 shares had paid Rs 30 + Rs 40 = Rs 70 per share, so Share Forfeiture is credited with Rs 7,000. The call in arrear was Rs 30 x 100 = Rs 3,000, and Share Capital is debited with the Rs 100 called up on each share, Rs 10,000. On reissue at Rs 90, the cash is Rs 9,000 and the discount of Rs 10 per share, Rs 1,000, is debited to Share Forfeiture.

The capital reserve is

$$7{,}000 - 1{,}000 = \text{Rs } 6{,}000$$

and the calls in arrear account is cleared and the Share Forfeiture account closes at zero, which is a good check for your answer.

How to write it in the exam

Begin with the meaning of forfeiture and when it happens, in two lines. Write each entry with a narration in brackets. List the working beside the journal: amount received per share, amount of the call in arrear, and the discount on reissue. State the rule that the discount cannot exceed the forfeited amount, and close with the capital reserve calculation. Check the answer by confirming the Share Forfeiture account balances to nil after the transfer.

The earlier unit on issue of shares for cash covers the application, allotment and call entries that forfeiture builds on. All chapters, solved questions and notes are on the Class 12 Accountancy page.