What is Re-issue of Forfeited Shares? | Class 12 Accounts

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What is Re-issue of Forfeited Shares Accounting?

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 accounting is the process of recording the sale of shares that a company had previously taken back (forfeited) from shareholders who failed to pay their dues. When these forfeited shares are sold again to new shareholders, the company needs to properly account for the money received and any profit or loss made on the re-issue.

Simple Example

Quick Example

Imagine a company, 'Bharat Bikes', sells 100 shares for Rs. 10 each. A customer paid Rs. 6 per share but then stopped paying. Bharat Bikes took back these shares (forfeited them). Later, Bharat Bikes sells these same 100 shares to a new customer for Rs. 9 each. The accounting for selling these shares again is what we call 're-issue of forfeited shares accounting'.

Worked Example

Step-by-Step

A company forfeited 100 shares of Rs. 10 each, on which Rs. 7 per share had been called up and Rs. 5 per share received. The company re-issued these 100 shares at Rs. 8 per share, fully paid up.

Step 1: Calculate the amount received on forfeiture: 100 shares * Rs. 5/share = Rs. 500.
---Step 2: Calculate the minimum re-issue price. The discount on re-issue cannot exceed the forfeited amount. So, minimum re-issue price = Called up amount - Forfeited amount per share = Rs. 7 - Rs. 5 = Rs. 2 per share. (Here, re-issued at Rs. 8, which is more than Rs. 2, so it's valid).
---Step 3: Pass journal entry for re-issue: Bank A/c Dr. (100 * Rs. 8) Rs. 800 | To Share Forfeiture A/c (for discount, if any) Rs. 0 | To Share Capital A/c (100 * Rs. 10) Rs. 1000. (Wait, this example says fully paid up at Rs. 8. So, the discount is Rs. 2 per share).
---Step 3 (Corrected): Pass journal entry for re-issue: Bank A/c Dr. (100 * Rs. 8) Rs. 800 | Share Forfeiture A/c Dr. (100 * Rs. 2) Rs. 200 | To Share Capital A/c (100 * Rs. 10) Rs. 1000.
---Step 4: Calculate the gain on re-issue: Forfeited amount per share (Rs. 5) - Discount allowed on re-issue per share (Rs. 2) = Rs. 3 per share. Total gain = 100 shares * Rs. 3 = Rs. 300.
---Step 5: Transfer the gain to Capital Reserve: Share Forfeiture A/c Dr. Rs. 300 | To Capital Reserve A/c Rs. 300.
Answer: The company receives Rs. 800 on re-issue, allows a discount of Rs. 200 from the forfeiture account, and transfers Rs. 300 to Capital Reserve.

Why It Matters

Understanding re-issue of shares is crucial for financial analysts and accountants in FinTech companies managing investment portfolios. It helps in accurately valuing a company's shares and understanding its capital structure, which is vital for careers in investment banking, corporate finance, and even for evaluating startups in Biotechnology or EVs for funding.

Common Mistakes

MISTAKE: Students often forget to transfer the 'gain on re-issue' to the Capital Reserve Account. | CORRECTION: After re-issuing forfeited shares, always calculate the profit (forfeited amount minus discount allowed on re-issue) and transfer this profit to the Capital Reserve Account.

MISTAKE: Assuming the re-issue price can be any amount, even less than the amount already received on forfeited shares. | CORRECTION: The discount allowed on re-issue cannot exceed the amount already forfeited on those shares. The minimum re-issue price must be at least the difference between the face value (or called-up amount) and the forfeited amount.

MISTAKE: Not debiting the 'Share Forfeiture Account' for the discount allowed on re-issue. | CORRECTION: When shares are re-issued at a discount, this discount is adjusted against the balance in the 'Share Forfeiture Account'. So, the 'Share Forfeiture Account' must be debited with the amount of discount.

Practice Questions

Try It Yourself

QUESTION: Alpha Ltd. forfeited 200 shares of Rs. 10 each, on which Rs. 6 per share was received. These shares were re-issued at Rs. 9 per share, fully paid up. What amount will be transferred to Capital Reserve? | ANSWER: Rs. 600

QUESTION: Gamma Ltd. forfeited 300 shares of Rs. 10 each, issued at a premium of Rs. 2 per share. Rs. 7 (including premium) was called up, and Rs. 5 (excluding premium) was received. All these shares were re-issued at Rs. 8 per share, fully paid up. Pass the journal entry for the re-issue and the transfer to Capital Reserve. | ANSWER: Re-issue Entry: Bank A/c Dr. Rs. 2,400, Share Forfeiture A/c Dr. Rs. 600, To Share Capital A/c Rs. 3,000. Capital Reserve Entry: Share Forfeiture A/c Dr. Rs. 900, To Capital Reserve A/c Rs. 900.

QUESTION: A company forfeited 500 shares of Rs. 100 each, on which Rs. 70 per share was called up and Rs. 40 per share was paid. Out of these, 300 shares were re-issued at Rs. 60 per share, fully paid up. Calculate the balance in the Share Forfeiture Account after the re-issue and the amount transferred to Capital Reserve. | ANSWER: Balance in Share Forfeiture A/c = Rs. 8,000 (for the remaining 200 un-reissued shares). Amount transferred to Capital Reserve = Rs. 6,000.

MCQ

Quick Quiz

When forfeited shares are re-issued at a discount, this discount cannot exceed:

The face value of the shares

The amount received on forfeiture of those shares

The amount paid by the new shareholder

The capital reserve balance

The Correct Answer Is:

The discount allowed on re-issue of forfeited shares is limited to the amount already received and forfeited on those shares. This ensures the company does not incur a loss on the re-issue.

Real World Connection

In the Real World

In the world of FinTech and investment, companies like Zerodha or Groww help people buy and sell shares. If a company they invested in had to forfeit shares from some investors (maybe due to non-payment on rights issues) and then re-issued them, the accounting for this re-issue is crucial for the company's financial health and for the accurate reporting seen in financial statements by platforms like these.

Key Vocabulary

Key Terms

Forfeiture: Taking back shares due to non-payment by shareholders | Re-issue: Selling previously forfeited shares again to new investors | Capital Reserve: A reserve created out of capital profits, like the gain on re-issue of forfeited shares | Called-up Amount: The portion of the share's face value that the company has asked shareholders to pay | Fully Paid Up: When the entire face value of the share has been paid by the shareholder.

What's Next

What to Learn Next

Great job learning about re-issue of forfeited shares! Next, explore 'Pro-rata Allotment of Shares' to understand how companies handle oversubscription of shares, which often leads to complex forfeiture scenarios. This will deepen your understanding of equity accounting.