Mada za sehemu hiiCompany AccountsMada 7
- Introduction to companies account
- Raising of share capital
- Accounting entries for issued shares
- Accounting for Forfeiture and re-issue of shares
- Redemption of preference shares
- Redemption of Debentures
- Final Accounts of companies
If a shareholder fails to pay the due amount of allotment and/or any call on shares issued by the company, and therefore the call-in arrears remains unpaid for a long time the directors if authorized by articles of association, may cancel the shares issued to those members. The cancellation of the shares is called forfeiture of shares and it has to be handled through an account called "Forfeiture of shares account".
The action of cancelling shares would imply that shares which were earlier recognized as issued shares should be removed from issued share capital account since they are no longer in possession with shareholders. In addition, the amount which was unpaid and treated as calls in arrears will have to be written off since the shareholders will not be called upon to make the payment any more. In that case any share premium recognized should as well be written off from the share premium account. The accounting treatment for forfeiture of shares will be different for shares that were issued at par, at premium, and at a discount. These treatments are provided below:
In this case, the company debits the share capital account with the up-to-date called up capital of the shares forfeited, crediting the forfeiture of shares account. It also credits the calls in arrears account with the amount unpaid in respect of the calls made, debiting the forfeiture of shares account. Alternatively, if the calls in arrears account is not maintained, the treatment is to credit the calls account.
When shares issued at par are forfeited the accounting treatment will be as follows:
- Dr. Share capital account xx Cr. Forfeiture of shares account xx (With the par value of forfeited shares whether received or not, per share up to the time of forfeiture)
- Dr. Forfeiture of shares account xx Cr. Calls in arrears account xx (With the amount due on forfeited shares)
Note:
- Amount called up = No. of shares × Amount called-up per share
- Amount paid = No. of shares × Amount paid per share
- Amount called but not paid = No. of shares × Amount called-up = (i) – (ii) above
Example
Zedi, a shareholder, holding 1,000 equity shares of TZS 100 each has paid application money of TZS 20 per share and allotment money of TZS 35 per share, but has failed to pay the first call of TZS 25 per share and second call of TZS 20 per share. His shares were forfeited.
Required: Make the necessary journal entries to record the forfeiture of shares.
Solution
Journal entry
| Details | Dr. | Cr. |
|---|---|---|
| Equity share capital account (1,000 × 100) | 100,000 | |
| Forfeiture of shares account | 100,000 | |
| (Being the par value of forfeited equity shares) | ||
| Forfeiture of shares account (1,000 × 45) | 45,000 | |
| Calls in arrears account | 45,000 | |
| (Being amount due on forfeited shares) |
In case shares applied for are more than the issued shares, the scheme of allotment is to allot shares in the ratio of shares applied to shares offered for subscription. This is called the allotment of shares on a pro-rata basis.
In case of pro-rata allotment, the excess money received on applications is transferred to the share allotment account from the share application account.
In case a shareholder fails to make payment on allotment and calls money for shares held, the unpaid amount will be calculated as follows:
Formulae for calculation
- Number of shares applied for allotment: Total No. of shares applied × Shares allotted to defaulter / Total shares allotted
- Excess applications received: Number of shares applied for allotment - Number of shares allotted
- Excess application money received: Excess number of applied shares × Money called per share on application
- Amount unpaid on allotment: Amount due on allotment - Excess application money adjusted towards allotment
In case shares are issued at premium and thereafter forfeited there exist two possible situations:
- Amount of premium on shares has been received prior to the forfeiture.
- Amount of premium on shares has not been received and it still stands credited to the share premium account.
When share premium amount has been received
If the amount of premium on forfeited shares has been received by the company prior to the forfeiture of shares, the share premium account will not be affected. In this case the journal entry of forfeiture of shares will be similar to the entry made as if the shares had been issued at par.
O Software Ltd. issued TZS 500,000,000 capital divided into equity shares of TZS 1,000 each. The shares were issued at a premium of TZS 400 per share and were payable as:
- TZS 300 per share on application,
- TZS 700 (including premium) per share on allotment, and
- The balance on call.
All the shares were applied for and duly allotted. All the money was duly received except on 5,000 shares on which the call money was not received. Company decided to forfeit these shares.
Required: Make journal entry to record the forfeiture of 5,000 shares.
Journal entry - Forfeiture of shares
| Details | Dr. (Debit) | Cr. (Credit) |
|---|---|---|
| Equity Share Capital Account (5,000 × 1,000) | 5,000,000 | |
| Forfeiture of Shares Account | 5,000,000 | |
| Forfeiture of Shares Account (5,000 × 400) | 2,000,000 | |
| Calls in Arrears Account | 2,000,000 |
When share premium amount has not been received
When shares are forfeited on which the amount of premium has been made due but has not been received, either wholly or partially, the share premium account will be cancelled by debiting the share premium account, and crediting the forfeiture of shares account. The journal entry will be as follows:
- Cancellation of issued share capital for the shares being forfeited Dr. Share capital account xx Cr. Forfeiture of shares account xx (With the amount per share which was credited to share capital before cancellation)
- Cancellation of the calls in arrears which shareholders will not be called to make good for those shares being cancelled. Dr. Forfeiture of shares account xx Cr. Calls in arrears account xx (With unpaid amount in calls in arrears account on share being cancelled)
- Cancellation of unpaid share premium on shares being cancelled Dr. Share Premium account xx Cr. Forfeiture of shares account xx (With the unpaid share premium if any. This entry is to ensure that unrealized gain is not taken into books of accounts in respect of unpaid premium)
The balancing figure in the forfeiture of shares account is the amount which was paid on the shares being cancelled before they were forfeited. This amount should be retained by the company and not refunded back to the shareholders. At balance sheet date, the balance in forfeiture of shares account should appear separately under reserves as forfeiture of shares.
Example
BINAMU Ltd. has an authorized capital of 25,000,000 equity shares of TZS 1,000 each, of these 1,000,000 shares were issued to the public at TZS 1,100. All shares were subscribed, and the payments were as follows:
- TZS 500 at application stage on 15th January, 2022;
- TZS 400 (including premium) at allotment stage on 15th February, 2022;
- TZS 200 at first call stage on 15th March, 2022.
Shareholders who applied for 2,000 shares failed to pay allotment and first call money on due date. On 15th April, 2022 directors of BINAMU Ltd. decided to forfeit all shares in arrears for allotment and first call money.
Required: Open the ledger accounts to record the above transactions in books of BINAMU Ltd. for the year ended 31st December, 2022
Bank Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th Jan., 2022 | Application | 500,000 | 31st Dec., 2022 | Balance c/d | 1,098,800 |
| 15th Feb., 2022 | Allotment (W1) | 399,200 | |||
| 15th March, 2022 | First Call (W2) | 199,600 | |||
| 1st Jan., 2023 | Balance b/d | 1,098,800 |
Application Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th Feb., 2022 | Equity Share Capital | 500,000 | 15th Jan., 2022 | Bank | 500,000 |
Equity Share Capital Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th April., 2022 | Forfeiture of Share | 2,000 | 31st Dec., 2022 | Balance c/d | 998,000 |
| 15th Feb., 2022 | Application | 500,000 | |||
| 15th Feb., 2022 | Allotment | 300,000 | |||
| 15th March, 2022 | First Call | 200,000 |
Allotment Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th Feb., 2022 | Share Capital | 300,000 | 15th Feb., 2022 | Bank | 399,200 |
| 15th Feb., 2022 | Share Premium | 100,000 | |||
| 15th Feb., 2022 | Call in Arrears | 800 |
Share Premium Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th April., 2022 | Forfeiture of Share | 200 | 31st Dec., 2022 | Balance c/d | 99,800 |
| 15th Feb., 2022 | Allotment | 100,000 | 1st Jan., 2023 | Balance b/d | 100,000 |
First Call Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th March, 2022 | Equity Share Capital | 200,000 | 15th March, 2022 | Bank | 199,600 |
| 15th March, 2022 | Calls in Arrears | 400 |
Call in Arrears Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th Feb., 2022 | Allotment | 800 | 15th March, 2022 | First Call | 400 |
| 15th April, 2022 | Forfeiture of Share | 1,200 | |||
| 1st Jan., 2023 | Balance b/d | 1,200 |
Forfeiture of Share Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th April, 2022 | Call in Arrears | 1,200 | 31st Dec., 2022 | Balance c/d | 1,000 |
| 1st Jan., 2023 | Equity Share Capital | 2,000 | |||
| 1st Jan., 2023 | Share Premium | 200 |
Discount on issue of shares is a loss to the company. When shares issued at a discount are forfeited for non-payment of the amount due, the discount allowed on such shares is written back. At the time of issue of shares, discount on issue of shares account is debited and when forfeited, this account is credited to cancel the discount allowed on such shares. In this case the following journal entry is made:
Journal entry - Forfeiture of shares
| Details | Dr. (Debit) | Cr. (Credit) |
|---|---|---|
| Forfeiture of Shares Account (Par Value of Forfeited Shares) | xx | |
| Share Capital Account | xx | |
| Forfeiture of Shares Account (Non-Payment of Dues) | xx | |
| Calls in Arrears Account | xx | |
| Discount on Issue of Shares | xx |
Example
The Greenland Ltd. invited applications for 200,000 shares of TZS 500 each at a discount of 8% payable as follows:
- On application TZS 100 per share
- On allotment TZS 200 per share
- On call TZS 160 per share
Whole of the issue was subscribed and paid for except the calls money on 1,800 shares which were then forfeited by the company.
Required: Make journal entry to record the forfeiture of shares.
Journal entry - Forfeiture of shares
| Details | Dr. (Debit) | Cr. (Credit) |
|---|---|---|
| Forfeiture of Shares Account (Par Value of 1,800 Forfeited Shares) | 900,000 | |
| Equity Share Capital Account | 900,000 | |
| Forfeiture of Shares Account (Amount Due on 1,800 Forfeited Shares) | 360,000 | |
| Calls in Arrears Account | 360,000 | |
| Discount on Issue of Shares (For 1,800 Forfeited Shares) | 72,000 | |
| Forfeiture of Shares Account | 72,000 |
Shares are forfeited because only a part of the due amount in respect of such shares is received and the balance remains unpaid. On forfeiture, the membership of the original allottee is cancelled. Such shares become the property of the company. Subsequently, the company may decide to resale these shares to the public. Such sale of shares is called 're-issue of shares'. Thus reissue of shares means issue/resala of the shares which were previously forfeited for various reasons. Reissue of shares will involve reinstating the issued share capital at par value to the extent to which other shares are appearing credited to share capital account.
It will involve receipt of money on the reissue based on the reissue price. The price at which forfeited shares can be reissued should be in such a way that, the reissue price plus amount paid per share before cancellation is equal to or more than the nominal value per share. If that is not the case, then it will imply that the shares will be issued at a discount and the company will be compelled to conform to the strict conditions for issuing shares at a discount as laid down in the Companies Act, 2002. The reissue of shares should be handled through "reissue of shares account".
Journal entry - Reissue of shares
| Details | Dr. (Debit) | Cr. (Credit) |
|---|---|---|
| Reinstating the Issued Share Capital for Shares Being Reissued | xx | |
| Share Capital Account | xx | |
| Cash Received on the Reissued Shares (Based on Reissue Price) | xx | |
| Bank Account | xx | |
| Amount Paid Before Forfeiture Transferred from Forfeiture of Shares Account | xx | |
| Forfeiture of Shares Account | xx | |
| Gain on Reissue Transferred to Capital Reserve | xx | |
| Capital Reserve | xx |
Example
BINAMU Ltd. has an authorized capital of 25,000,000 Equity shares of TZS 1,000 each, of these 1,000,000 shares were issued to the public at TZS 1,100. All shares were subscribed and the payments were as follows:
- TZS 500 at application stage at 15th January, 2022;
- TZS 400 (including premium) at allotment stage on 15th February, 2022;
- TZS 200 at first call stage at 15th March, 2022.
Shareholders who applied for 2,000 shares failed to pay allotment and first call money on due date. On 1st April, 2022 directors of BINAMU Ltd. decided to forfeit all shares in arrears for allotment and first call money. On 8th April, 2022 all shares so forfeited were reissued for TZS 1,000.
You are required to prepare the necessary ledger accounts in books BINAMU Ltd.
Bank Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th Jan., 2022 | Application | 500,000 | 15th Feb., 2022 | Allotment | 399,200 |
| 15th March, 2022 | First Call | 199,600 | 08th April, 2022 | Reissue of Share | 2,000 |
| 1st Jan., 2023 | Balance b/d | 1,100,800 | 30th Dec., 2022 | Balance c/d | 1,100,800 |
Application Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th Feb., 2022 | Equity Share Capital | 500,000 | 15th Jan., 2022 | Bank | 500,000 |
Equity Share Capital Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 1st April, 2022 | Forfeiture of Share | 2,000 | 31st Dec., 2022 | Balance c/d | 1,000,000 |
| 15th Feb., 2022 | Application | 500,000 | 1st Jan., 2023 | Balance c/d | 1,002,000 |
| 15th Feb., 2022 | Allotment | 300,000 | 1st Jan., 2023 | Reissue of Shares | 2,000 |
| 15th March, 2022 | First Call | 200,000 |
Allotment Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th Feb., 2022 | Equity Share Capital | 300,000 | 15th Feb., 2022 | Bank | 399,200 |
| 15th Feb., 2022 | Share Premium | 100,000 | 15th Feb., 2022 | Call in Arrears | 800 |
Share Premium Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 1st April, 2022 | Forfeiture of Share | 200 | 31st Dec., 2022 | Balance c/d | 99,800 |
| 15th Feb., 2022 | Allotment | 100,000 | 1st Jan., 2023 | Balance b/d | 100,000 |
First Call Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th March, 2022 | Equity Share Capital | 200,000 | 15th March, 2022 | Bank | 199,600 |
| 15th March, 2022 | Calls in Arrears | 400 |
Call in Arrears Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 15th Feb., 2022 | Allotment | 800 | 15th March, 2022 | First Call | 400 |
| 1st April, 2022 | Forfeiture of Shares | 1,200 |
Forfeiture of Shares Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 1st April, 2022 | Call in Arrears | 1,200 | 8th April, 2022 | Reissue of Shares | 2,000 |
| 8th April, 2022 | Equity Share Capital | 2,000 | 8th April, 2022 | Share Premium | 200 |
Reissue of Shares Account
| Date | Details | Amount (TZS '000) | Date | Details | Amount (TZS '000) |
|---|---|---|---|---|---|
| 8th April, 2022 | Equity Share Capital | 2,000 | 8th April, 2022 | Capital Reserve | 1,000 |
| 8th April, 2022 | Bank | 2,000 | 8th April, 2022 | Forfeiture of Shares | 1,000 |
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