What is Re-issue of Forfeited Shares?

S7-SA7-0314

Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

Re-issue of forfeited shares is when a company sells shares that were previously taken back (forfeited) from shareholders who failed to pay their dues. It's like giving a second chance for those shares to be owned by new investors, helping the company recover the unpaid money.

Simple Example

Quick Example

Imagine a snack shop owner sells a special combo meal on credit. If a customer doesn't pay for it, the owner takes back the combo meal. Then, the owner sells that exact same combo meal to a new customer to get the money they lost. Re-issuing shares is similar: the company 'takes back' shares from a non-paying shareholder and 'sells' them to a new one.

Worked Example

Step-by-Step

A company forfeited 100 shares of Rs. 10 each for non-payment of the final call of Rs. 3 per share. The company had already received Rs. 7 per share.

---1. Calculate amount already received per share: Rs. 10 (Face Value) - Rs. 3 (Unpaid Final Call) = Rs. 7 per share.

---2. Calculate total amount forfeited: 100 shares * Rs. 7 = Rs. 700.

---3. Now, the company re-issues these 100 forfeited shares at Rs. 8 per share, fully paid up.

---4. Calculate re-issue amount received: 100 shares * Rs. 8 = Rs. 800.

---5. Calculate discount allowed on re-issue (if any): Rs. 10 (Face Value) - Rs. 8 (Re-issue Price) = Rs. 2 per share. Total discount = 100 shares * Rs. 2 = Rs. 200.

---6. The maximum discount allowed on re-issue cannot exceed the forfeited amount per share (Rs. 7). Here, the discount is Rs. 2 per share, which is less than Rs. 7, so it's allowed.

---7. Calculate profit on re-issue (transferred to Capital Reserve): Amount forfeited (Rs. 700) - Discount allowed on re-issue (Rs. 200) = Rs. 500.

Answer: The company receives Rs. 800 on re-issue, and Rs. 500 is transferred to Capital Reserve.

Why It Matters

Understanding re-issue of shares is crucial for anyone interested in FinTech or Economics, as it shows how companies manage their finances and shareholding. Future engineers or entrepreneurs might use this knowledge to understand company funding. It can lead to careers in finance, accounting, or even starting your own company.

Common Mistakes

MISTAKE: Thinking the re-issue price must always be equal to the original issue price. | CORRECTION: Shares can be re-issued at a discount, at par, or at a premium. The discount, however, cannot exceed the amount originally forfeited on those shares.

MISTAKE: Transferring the entire forfeited amount to Capital Reserve after re-issue. | CORRECTION: Only the 'profit' on re-issue (Forfeited amount - Discount allowed on re-issue) for the *re-issued shares* is transferred to Capital Reserve.

MISTAKE: Calculating discount on re-issue based on the amount unpaid. | CORRECTION: Discount on re-issue is calculated based on the difference between the face value and the re-issue price, but it cannot be more than the amount already received and forfeited.

Practice Questions

Try It Yourself

QUESTION: A company forfeited 200 shares of Rs. 10 each, on which Rs. 6 was called up and Rs. 4 received. These shares were re-issued at Rs. 7 per share fully paid up. What is the amount of discount allowed on re-issue? | ANSWER: Rs. 3 per share (Rs. 10 Face Value - Rs. 7 Re-issue Price) * 200 shares = Rs. 600

QUESTION: 500 shares of Rs. 10 each were forfeited for non-payment of allotment money of Rs. 3 per share and first call of Rs. 2 per share. The application money of Rs. 5 per share was received. These shares were re-issued at Rs. 8 per share fully paid up. Calculate the amount to be transferred to Capital Reserve. | ANSWER: Rs. 1500 (Forfeited amount Rs. 5 per share * 500 shares = Rs. 2500. Discount allowed Rs. 2 per share * 500 shares = Rs. 1000. Capital Reserve = Rs. 2500 - Rs. 1000 = Rs. 1500)

QUESTION: Smart Solutions Ltd. forfeited 300 shares of Rs. 100 each for non-payment of final call of Rs. 20. The first call of Rs. 30 and application & allotment of Rs. 50 were received. 200 of these shares were re-issued at Rs. 90 per share, fully paid up. Pass the journal entry for the re-issue and calculate the amount transferred to Capital Reserve. | ANSWER: Journal Entry for Re-issue: Bank A/c Dr. (200 * 90 = 18,000), Forfeited Shares A/c Dr. (200 * 10 = 2,000) To Share Capital A/c (200 * 100 = 20,000). Amount transferred to Capital Reserve: (Amount forfeited per share Rs. 80 * 200 shares) - (Discount allowed Rs. 10 * 200 shares) = Rs. 16,000 - Rs. 2,000 = Rs. 14,000.

MCQ

Quick Quiz

What is the maximum discount at which forfeited shares can be re-issued?

The face value of the shares

The amount already received on the forfeited shares

The amount unpaid on the forfeited shares

Any amount decided by the company's board

The Correct Answer Is:

The maximum discount allowed on the re-issue of forfeited shares cannot exceed the amount that was originally forfeited (i.e., already received) on those shares. This ensures the company doesn't lose money on the re-issue.

Real World Connection

In the Real World

In India, when a company like Reliance or TCS issues shares, they expect timely payments. If a shareholder fails to pay, their shares can be forfeited. Later, these shares might be re-issued to new investors. This process helps companies maintain their capital structure and ensures financial discipline among shareholders, impacting their ability to fund big projects like new 5G networks or AI research labs.

Key Vocabulary

Key Terms

FORFEITURE: Taking back shares from a shareholder due to non-payment of calls | RE-ISSUE: Selling previously forfeited shares to new investors | CAPITAL RESERVE: A part of a company's profit that is not distributed to shareholders but kept for specific purposes, often from re-issue of shares | FACE VALUE: The nominal value of a share, printed on the share certificate | PREMIUM: When shares are issued at a price higher than their face value

What's Next

What to Learn Next

Next, you should explore 'Capital Reserve and Forfeited Shares Account.' This will help you understand how the profit from re-issuing forfeited shares is accounted for and why it's kept separate, building on your current knowledge of re-issue.