FORFEITURE AND RE-ISSUE OF SHARES ALLOTTED ON PRO-RATA BASIS IN CASE OF OVER-SUBSCRIPTION :
In case, the shares of a Company are over-subscribed, it is not possible for the company to satisfy the demand of all the applicants. In such a case allotment may be made on pro-rata basis, i.e., proportionately. For example, 10,000 shares are allotted pro-rata among the applicants for 12,000 shares. In this case, the ratio between allotment of shares and application for shares will be 10,000: 12,000 or 5:6, i.e., those applying for every 6 shares will be allotted 5 shares.
If shares are allotted on pro-rata basis, the excess application money received on shares allotted will be retained by the company and adjusted subsequently against allotment money and/or call money.
If such shares are subsequently forfeited for non-payment of allotment money and/or call money, the entries will be the same, but it may involve some difficulty in calculation. In such a case, it is to be noted carefully that if there is any excess amount received along with the application and it is adjusted against the allotment money which is failed by the shareholder, such amount should be deducted from the amount due on allotment to arrive at the net amount defaulted by the shareholder.
Illustration :
A limited company issued a prospectus inviting applications for 2,000 shares of Rs.10 each at a premium of Rs.2 per share payable as follows:
On Application — Rs. 2
On Allotment – Rs. 5 (including premium)
On First Call — Rs.3
On Second and Final Call — Rs. 2
Applications were received for 3,000 shares and allotment was made pro-rata to the applicants of 2,400 shares. Money overpaid on applications was employed on account of sum due on allotment.
Ramesh, to whom 40 shares were allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited. Mohan, the holder of 60 shares failed to pay the two calls and his shares were forfeited after the second and final call.
Of the shares forfeited, 80 shares were sold to Krishna credited as fully paid for Rs.9 per share, the whole of Ramesh’s share being included. Show journal and cash book entries and the Balance Sheet.
Solution:
Working Notes:
1. Ratio between allotment of shares and application for shares = 2,000: 2,400 = 5: 6,
2. Ramesh was allotted 40 shares.
Therefore, Ramesh must have applied for 40 x 6/5 = 48 shares.
3. Ramesh must have paid excess application money on (48 – 40) = 8
Excess applications @ Rs. 2 per share, i.e., 8 x Rs.2 = Rs.16 retained by the company for adjustment
against allotment money.
4. Allotment money due from Ramesh on 40 shares @ Rs.5 per share = 40 xRs.5 = Rs. 200.
5. As the allotment money was failed by Ramesh against which excess money paid on application was adjusted, the net amount failed by Ramesh on Allotment =Rs.(200 – 16) = Rs.184.
6. As Mohan paid the allotment money and the excess amount paid by him along with the application had already been adjusted, pro rata allotment in this case has no significance.
7. Amount to be transferred to Capital Reserve A/c from Shares Forfeited A/c has to be determined as follows:
Amount forfeited on 40 shares held by Ramesh (48 x Rs.2) |
96 |
Amount forfeited on 60 shares held by Mohan (60 x Rs.5) |
300 |
Total amount credited to Shares Forfeited A/c |
396 |
Less: Amount on 20 forfeited shares held by Mohan which are not yet re-issued (20 xRs. 5) |
100 |
296 |
|
Less: Discount allowed @ Rs.1 on 80 shares (80 x Rs. 1) 80 |
80 |
Net gain on 80 forfeited shares which are reissued to |
________ |
be transferred to Capital Reserve |
216 |
Dr. Cash Book (Bank Column) Cr.
| Particulars | Rs. | Particulars | Rs. |
| To Share application A/c | 6,000 | By Share Application A/c | 1,200 |
| (Application money on 3000 (Refund of application shares @ Rs.2 per share) | (Refund of application money on 600 shares rejected @ Rs.2 per share) | ||
| To Shares Allotment A/c | 6,000 | By Balance c/d | 24,036 |
| (Balance of allotment money on 2,000 shares less amount failed by Ramesh) | |||
| To Share First Call A/c | 5,700 | ||
| (First call money on 1900 shares, i.e., 2000 shares – (40 + 60) shares @ Rs. 3 per share) | |||
| To Shares Final call A/c | 3,700 | ||
| (Final call money on 1900 shares, i.e., 1960 shares less 60 shares held by Mohan who failed @Rs.2 per share) | |||
| To Share Capital A/c | 720 | ||
| (Amount received on re-issue of 80 forfeited shares @ Rs.9 per share) | _______ | ________ | |
| 25,236 | 25,236 | ||
| To Balance b/d | 24,026 |
Journal Entries
| Particulars | Dr. (Rs.) | Cr. (Rs.) |
| Share Application A/c Dr. | 4,000 | |
| To Share Capital A/c | 4,000 | |
| (Transfer of application money to share capital account as per Board’s resolution dated…) | ||
| Share Allotment A/c Dr. | 10,000 | |
| To Share Capital A/c | 6,000 | |
| To Securities Premium A/c | 4,000 | |
| (Allotment of 2000 shares to the applicants for 2400 shares pro-rata and allotment money due @ ` 5 per share including premium of ` 2 per share as per Board’s resolution dated…) | ||
| Share Application A/c Dr. | 800 | |
| To Share Allotment A/c | 800 | |
| (Surplus application money adjusted towards share allotment account) | ||
| Share First Call A/c Dr. | 6,000 | |
| To Share Capital A/c | 6,000 | |
| (First call money due on 2000 shares @ ` 3 per share as per Board’s resolution dated…) | ||
| Share Capital A/c Dr. | 320 | |
| Securities Premium A/c Dr. | 80 | |
| To Shares Forfeited A/c | 96 | |
| To Share Allotment A/c | 184 | |
| To Share First Call A/c | 120 | |
| (Forfeiture of 40 shares held by Ramesh for non-payment of allotment of money @ Rs. 5 per share including premium @ Rs. 2 per share and first call money @ Rs. 3 per share as per Board’s resolution dated…) | ||
| Share Final Call A/c Dr. | 3,920 | |
| To Share Capital A/c | 3,920 | |
| (Share final call due on 1960 shares (i.e., 2000 shares-Ramesh’s 40 shares forfeited) @ ` 2 per share as per Board’s resolution dated…) | ||
| Share Capital A/c Dr. | 600 | |
| To Shares Forfeited A/c | 300 | |
| To Share First Call A/c | 180 | |
| To Share Final Call A/c | 120 | |
| (Forfeited of 60 shares held by Mohan for non-payment of first call money @Rs. 3 per share and final call money @Rs. 2 per share as per Board’s resolution dated…) | ||
| Shares Forfeited A/c Dr. | 80 | |
| To Share Capital A/c | 80 | |
| (Discount allowed on re-issue of 80 forfeited share @ Re. 1 per Board’s resolution dated…) | ||
| Shares Forfeited A/c Dr. | 216 | |
| To Capital Reserve A/c | 216 | |
| (Transfer of net gain on re-issue of 80 forfeited shares to capital Reserve A/c) |
Balance Sheet of…..Ltd. as at…..
| Particulars | Note No. | Amount (Rs.`) |
| I Equity and Liabilities
Shareholders’ Funds |
||
| Share Capital | 1 | 19,9,00 |
| Reserves and Surplus | 2 | 4,136 |
| Total | 24,036 | |
| II Assets Current Assets |
||
| Cash and Cash Equivalents | 3 | 24,036 |
| Total | 24,036 |
| Notes: | ||
| 1. Share Capital | ||
| Authorised | ||
| Issued: | ||
| 2,000 Equity Shares of Rs.10 each | 20,000 | |
| Subscribed and Paid-up : | ||
| 1,980 Equity Shares of Rs.10 each, fully paid-up | 19,800 | |
| Add: Shares Forfeited | ____100 | 19,900 |
| 2. Reserves and Surplus | ||
| Capital Reserve Account | 216 | |
| Securities Premium Account | 3,920 | |
| 4,136 | ||
| 4. Cash and Cash Equivalent | ||
| Balance with Bank | 24,036 |