Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

Principles and Practice of Accounting

CA CPT : Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

The document Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev is a part of the CA CPT Course Principles and Practice of Accounting.
All you need of CA CPT at this link: CA CPT

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.
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.

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.
The total capital of the company is divided into shares, the capital of the company is called Rs Share Capital Rs. 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:
(i) Authorised Share Capital or Nominal Capital : A company estimates its maximum capital requirements. This amount of capital is mentioned in Rs Capital Clause Rs of the Rs Memorandum of Association Rs 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 Rs Authorised Capital Rs. It is shown in the balance sheet at face value.
(ii) 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 Rs Issued CapitalRs. Issued capital means and includes the nominal value of shares issued by the company for:

  1. Cash, and
  2. Consideration other than cash to:
    (a) Promoters of a company; and
    (b) Others.

It is also shown 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 RsUn-issued CapitalRs. It is not shown in the balance sheet.

(iii) 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 installments. The portion of the issue price of shares which a company has demanded or called from shareholders is known as RsCalled-up CapitalRs 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 Rsunpaid callsRs or Rsinstallments (or Calls) in ArrearsRs. Thus, installments 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 installments in arrears is deducted from called up capital. In balance sheet, called-up and paid-up capital are shown together.

(vi) Reserve Share Capital : As per Section 65 of the Companies Act, 2013 an unlimited Company on conversion into a limited Company may decide by passing a special 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 RsReserves and SurplusRs 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.

Illustration 1
A company had a authorised capital of Rs1,00,000 divided into 10,000 equity shares of Rs10 each. It decided to issue 6,000 shares for subscription and received applications for 7,000 shares. It allotted 6,000 shares and rejected remaining applications. Upto 31-12-2014, it has demanded or called Rs9 per share. All shareholders have duly paid the amount called, except one shareholder, holding 500 shares who has paid only Rs7 per share.
Prepare a balance sheet assuming there are no other details.

Solution
Balance Sheet as at december, 2014

Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

Notes to accounts

Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

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.

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
(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 yearRss 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 arrears of dividend are then shown in the balance sheet as a contingent liability. In India, a preference share is considered cumulative unless otherwise stated. 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.

(c) 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 RsNon-participating Preference Shares.Rs Unless otherwise specified, the preference shares are generally non-participating.

(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 companyRss discretion. The repayment on these shares is called redemption and is governed by Section 55 of the Companies Act, 2013.
(f) 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.

(g) 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 Non­convertible 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

  1. for cash or
  2. for consideration other than cash.

4. ISSUE OF SHARES FOR CASH
To issue shares, private companies depend upon RsPrivate PlacementRs of shares. Public companies issue a Rs Prospectus Rs 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 Rs Equity Rs is replaced with the word Rs Preference Rs.

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 installment paid along with application is called Rs Application Money Rs. As per Section 39 of the Companies Act, 2013. Application money must be atleast 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:

  1. Preliminary expenses of the company,
  2. Commission payable on issue of shares,
  3. Cost of fixed assets purchased or to be purchased,
  4. Working capital requirements of the company, and
  5. Any other expenditure for the day to day operation of the business.

As per guidelines of the Securities Exchange Board of India (SEBI), a company must receive a minimum of 90% subscription against the entire issue (including devolvement on underwriters in case of underwritten issue) before making any allotment of shares or debentures to the public. It is applicable for public and right issue, and not in case of offer for sale of securities. If the Company does not receive the minimum subscription of 90% of the issue, the entire subscription shall be refunded to the applicants within 15 days after the date of closure of issue in case of non- underwritten issue and 7 days after the date of closure of issue in case of underwritten.

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 RsAllotment MoneyRs 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 RsCallsRs.

As per Section 39 of the Companies Act 2013, application money must be atleast 5% of the face value of shares. However, as per SEBI Regulations, the minimum application moneys to be paid by an applicant alongwith 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 :

First instalment
…………..
Application Money
Second Instalment
…………..
Allotment Money
Third Instalment
…………..
First Call Money
Fourth Instalment
…………..
Second Call Money and so on.
Last Instalment
…………..
Final Call Money


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:

Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevUnit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

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 :

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 Rs 50 each payable on application Rs 15, on Allotment Rs 20, on first and final call Rs 15. Applications are received for 10,000 shares and all the applicants are allotted the number of shares they have applied for and installment 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 alongwith application is accounted as follows:

Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

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

Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

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:

Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev2.5.2 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 1st April, 2017, A Ltd. issued 43,000 shares of  ₹ 100 each payable as follows:
₹ 20 on application;
₹ 30 on allotment;
₹ 25 on 1st October, 2017; and
₹ 25 on 1st February, 2018.
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 1st call were received on 20th October. Journalise the transactions when accounts were closed on 31st March, 2018.
SOLUTION
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

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:
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevUnit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev(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 ₹50 each, which are payable as on application ₹20, on allotment ₹10 and on first and final call ₹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.
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevILLUSTRATION 5
The Delhi Artware Ltd. issued 50,000 equity shares of ₹ 100 each and 1,00,000 preference shares of ₹ 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

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
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

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

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.

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 III. 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 of preliminary expenses of the company.
(c) To write of 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.

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, 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

Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevUnit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev(b) Premium Amount called with Allotment Money
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

ILLUSTRATION 6
On 1st October, 2017 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
₹ 25
On Allotment  
₹75 (including premium)
Balance Amount on Shares
As and when required

The shares were allotted by the Company on October 20, 2017 and the allotment money was duly received on October 31, 2017.

Record journal entries in the books of the company to record the transactions in connection with the issue of shares
SOLUTION
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

Note: Bifurcation of Allotment amount Security premium per share   = 25% x ₹100

= ₹25
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev2.8 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, 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.
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevILLUSTRATION 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, 2016. 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 1st July, 2016;
(b) Allotment to be made on 10th July, 2016 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, 2017.

Applications were received for 3,55,000 shares and were dealt with as follows:
(i) Applicants for 5,000 shares received allotment in full;
(ii) 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;
(iii) 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
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Working Notes: 
Calculation for Adjustment and Refund

Category

No. of Shares Applied for

(1)

No. of Shares Allotted

(2)

Amount

Received

on

Application

(3)

Amount

Required

on

Application

(4)

Amount

adjusted

on

Allotment

(5)

Refund [3 - 4 + 5]

(6)

Amount due on Allotment

(7)

Amount

received

on

Allotment

(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

7,10,000

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
(ii)  Amount Required on Application (4) = No. of shares allotted (2) x ₹2

2.9 CALLS-IN-ARREARS AND CALLS-IN-ADVANCE 
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

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:
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevCalls-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:
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevILLUSTRATION 8
Shreyas Ltd. did not receive the first call on 10,000 equity shares @ ₹ 3 per share which was due on 1.7.2016. This amount was received on 1.4.2017.
Open Calls in arrears account and journalise the entries in the books of the company on 1.7.2016 and 1.4.2017. Also show an extract of Balance Sheet on 31.3.2017.
SOLUTION
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

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 the calls due but  remaining unpaid.
It is payable by the Company to Shareholders on the call money received in advance but not yet due.
As per Table F maximum prescribed rate is 10%.
As per Table F maximum prescribed rate is 12%.
Period considered: From the date call money was due to the date money is finally received.
Period considered: From the date money was received to the day call was finally made due.
Directors have a right to waive off such interest in individual cases at their own discretion.
Shareholders are not entitled for any dividend on calls in advance.
It is a nominal account in nature and is credited to statement of profit and loss as an income.
It is a nominal account in nature with interest being an expense for the company.

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 dierence 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:
(i) For interest receivable on calls-in-arrears

Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevUnit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevILLUSTRATION 9
Rashmi Limited issued at par 1,00,000 Equity shares of ₹10 each payable ₹2.50 on application; ₹3 on allotment; ₹ 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
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
           Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
          Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

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 nonpayment 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 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.
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevWhere all amounts due on allotment, first call and final call have been transferred to Calls-in-Arrears Account, the entry will be:Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevILLUSTRATION 10
A Ltd forfeited 30,000 equity shares of `10 fully called-up, held by Mr. X for non-payment of final call @ ₹4 each. However, he paid application money @ ₹2 per share and allotment money @ ₹4 per share. These shares were originally issued at par. Give Journal Entry for the forfeiture.
SOLUTION
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

ILLUSTRATION 11
X Ltd forfeited 20,000 equity shares of ₹ 10 each, ₹ 8 called-up, for non-payment of first call money @ ₹ 2 each. Application money @ ₹ 2 per share and allotment money @ ₹ 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
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
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.
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRevUnit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev


ILLUSTRATION 12
X Ltd. forfeited 5,000 equity shares of  ₹100 each fully called-up which were issued at a premium of 20%. Amount payable on shares were: on application ₹ 20; on allotment ₹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
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev

Tutorial Note: Share premium @ ₹ 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.

ILLUSTRATION 13
Mr. Shami has applied for 1,000 shares of Company XYZ Ltd. paying application money @ ₹ 2 per share but has been allotted only 600 shares. The shares have a face value of ₹ 10 and a premium of ₹ 2 per share, which are payable as: on Allotment- ₹ 5 (including premium) and on final call ₹ 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
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
Unit 2: Issue, Forfeiture and Re-Issue of Shares (Part - 1) CA CPT Notes | EduRev
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.

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