Question

Long Answer Question

Explain the term ‘Forfeiture of Shares’ and give the accounting treatment on forfeiture.

Answer 1

If a shareholder fails to pay the allotment money and/or any subsequent calls, then the company has the right to forfeit shares by giving a proper notice to the shareholder.

 

As per the Table A of the Company Act, the procedure of forfeiting shares is mentioned below.

1. A notice is sent to default shareholder stating him/her to pay Calls in Arrears along with the interest accrued on the outstanding calls money within a period of 14 days of the receipt of notice, otherwise, the shares will be forfeited.
2. If the shareholder does not pay the amount, then the company has the right to forfeit his/her share by passing a resolution.
3. A notice of that resolution is send to the default shareholder and a public notice of the same is published in a daily newspaper.
4. The name of the shareholder is removed from the register of members (i.e. shareholders).

Accounting Treatment for Forfeiture of Shares:

i) Forfeiture of Shares that were issued at Par

Share Capital A/c	(amount called up
To Share Allotment A/c	(amount not received)
To Share Calls A/c	(amount not received)
To Share Forfeiture A/c (Shares forfeited)	(amount received)

ii) Forfeiture of Shares that were issued at Premium

a) If premium is received, then the premium is not shown.

Share Capital A/c	(amount called up
To Share Allotment A/c	(amount not received)
To Share Calls A/c	(amount not received)
To Share Forfeiture A/c (Shares forfeited)	(amount received)

b) If premium is not received, then the premium is shown.

Share Capital A/c	(amount called up excluding premium)
Share Premium A/c        To Share Allotment A/c	(amount not received)    (amount not received including premium)
To Share Calls A/c            To Share Forfeiture A/c (Share forfeited)	(amount not received)    (amount received including premium)

iii) Forfeiture of Shares that were issued at Discount

Share Capital A/c   To Discount on Issue of Shares A/c                      To Share Allotment A/c  To Share Calls A/c            To Share Forfeiture A/c (Share forfeited)	(amount called up, plus discount)   (amount of discount) (amount not received) (amount not received) (amount received)