Corporate Share Forfeiture: Process & Accounting Entries

Understanding Share Forfeiture

Share forfeiture occurs when a shareholder fails to pay the required call money (either in part or full) on the shares issued to them. When this happens, the company may forfeit the shares as a means of canceling the unpaid shares and reclaiming the unpaid amount. This process is crucial for maintaining the integrity of a company's share capital.

The Share Forfeiture Process

1. Failure to Pay Calls: If a shareholder does not pay the call money on shares within the prescribed time, the company can initiate the forfeiture process.
2. Board Resolution: The company's board of directors must pass a formal resolution to forfeit the shares due to non-payment of calls.
3. Notice of Forfeiture: A formal notice is sent to the defaulting shareholder, informing them of the impending forfeiture.
4. Cancellation of Shares: Upon forfeiture, the company cancels the shares, and the shareholder loses all rights associated with them.

Reissue of Forfeited Shares at a Discount

Yes, forfeited shares can be reissued at a discount. However, the discount allowed on reissue cannot exceed the amount already received on the forfeited shares. This means the reissue price, when added to the amount originally paid by the defaulting shareholder, must be equal to or greater than the face value of the share.

For example, if a shareholder paid ₹5 on a share with a face value of ₹10 (meaning ₹5 is unpaid), the company can reissue the share for a minimum of ₹5. The maximum discount allowed would be ₹5 (the amount already received).

Journal Entries for Share Forfeiture & Reissue

1. Forfeiture of Shares Entry

When shares are forfeited, the following journal entry is passed:

Example: Suppose a shareholder holds 100 shares of ₹10 each. ₹7 is paid, and ₹3 is unpaid.

Journal entry for forfeiture:

2. Reissue of Forfeited Shares Entry

When forfeited shares are reissued (even at a discount), the following journal entry is made:

Example: Suppose the same 100 shares (forfeited with ₹3 unpaid) are reissued at ₹8 each.

Calculations:

• Amount Received (Bank): 100 shares × ₹8 = ₹800
• Face Value (Share Capital): 100 shares × ₹10 = ₹1,000
• Discount on Reissue (Forfeited Shares A/c Debit): ₹10 (Face Value) - ₹8 (Reissue Price) = ₹2 per share. Total discount = 100 shares × ₹2 = ₹200

Journal entry for reissue:

In this case, the company reissues the shares at a discount (₹8 reissue price instead of the original ₹10 face value). The discount of ₹2 per share (total ₹200) is debited to the Forfeited Shares Account. The balance remaining in the Forfeited Shares Account (₹700 received on forfeiture - ₹200 discount on reissue = ₹500) is a capital profit and should be transferred to the Capital Reserve Account.

3. Transfer of Forfeited Shares Balance to Capital Reserve

Any surplus amount remaining in the Forfeited Shares Account after the reissue of all forfeited shares is a capital profit and must be transferred to the Capital Reserve Account.

Example (Continuing from above):

Balance in Forfeited Shares Account = ₹700 (from forfeiture) - ₹200 (used for discount on reissue) = ₹500.

This transfer ensures that capital profits are not distributed as dividends, adhering to accounting principles.