Forfeited Shares

What is Forfeited Shares?

Share forfeited is a process by which the company after the approval of the board of directors cancels or forfeits the shares of an individual and is usually is done when there is a non-compliance with the purchase requirements like a failure in payment of allotment money, failure in payment of call money, selling or transferring shares during the restricted period, etc.

Shares of investors are forfeited due to the breach of conditions in the purchase agreement, like non-payment of call money within the time limit provided by the company. It can be done only after the approval of the board of directors.

Forfeited-Shares

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Process

Forfeiture of shares is a serious step as the consequences lead to the end of the shareholder’s rights and also the amount paid. Therefore, there are specific requirements for forfeiture of shares.

Process - Forfeited Shares

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Forfeited Shares Journal Entries

The accounting entriesAccounting EntriesAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. read more depends on whether the shares were issued at Premium or Par. The entries are stated as below,

  1. If the shares were issuedShares Were IssuedShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more at Par
Particulars
Share Capital A/c …….DrCalled Up Amount
To Share Allotment A/cAllotment Money not Received
To Share Call A/cCall Money not Received
To Share Forfeiture A/cMoney received
  1. If the shares were issued at Premium and the premium amount was received
Particulars
Share Capital A/c …….DrCalled Up Amount
To Share Call (1,2,3) A/cCall Money not Received
To Share Forfeiture A/cMoney received
  1. If the shares were issued at Premium and premium amount was not received
Particulars
Share Capital A/c …….DrCalled Up Amount
Security Premium A/c …….DrPremium not Received
To Share Allotment A/cAllotment Money not Received
To Share Call (1,2,3) A/cCall Money not Received
To Share Forfeiture A/cMoney received

Accounting Treatment and Reissue Accounting

When the shares are forfeited, there are two options with the company, i.e., they can dispose of the shares, or the shares can be reissued. These shares can be reissued at par, premium, and discount and the entries are as follows,

1.If reissue is at Par

ParticularsDebitCredit
Bank A/c
To Share Capital A/c

2.If reissue is at Premium

ParticularsDebitCredit
Bank A/c
To Security Premium A/c
To Share Capital A/c

3.If reissue is at Discount

ParticularsDebitCredit
Bank A/c
Share Forfeiture A/c
To Share Capital A/c

It is essential to understand that the shares can be issued only at par and premium, but reissue we can also be made at a discount by using the money forfeited from the share forfeiture.

4.Transfer of balance share forfeiture to Capital Reserve

ParticularsDebitCredit
Share Forfeiture A/c
To Capital Reserve A/c

The amount received from the above formula reduced by the amount of Share forfeiture amount used in case of reissue at a discount is transferred to Capital Reserve A/c.

Example of Share Forfeiture

Company A Ltd has made an issue of 10,000 shares at Rs. 10 per share, the face value is equal to the issue price, i.e., Rs. 10. The allotment money was Rs. 1 per share paid by all the shareholders. The first call money was Rs. 2, which was not paid by Mr. Vikram, who was allotted with 1,000 Shares, and a notice was served for payment of call money. After the non-payment of call money, the board resolved to forfeit the share. Therefore the following accounting entries are to be passed for forfeiture,

ParticularsDebit (Rs)Credit (Rs)
Share Capital A/c ……..Dr3000
To Share First Call A/c2000
To Share Forfeiture A/c1000
(Being Shares Forfeited due to Non-Payment of Call Money)

The forfeited shares were not reissued, so the entire money is transferred to capital reserve

ParticularsDebit (Rs)Credit (Rs)
Share Forfeiture A/c …….Dr1000
To Capital Reserve A/c1000
(Being share forfeiture money transferred to capital reserve)

Effects of Forfeited Shares

  1. Cessation of Membership – The members whose shares are forfeited ceases to be a member of the company, and his name is strike off from the register of members.
  2. Cessation of Liability – The liability of the member to pay future calls ceases after the shares are forfeited. However, the person is still liable to pay the unpaid call money to the company, and it can stand in books as an ordinary debtorDebtorA debtor is a person or entity that owes money to the other party in a transaction. The receiver is referred to as the creditor, and the payment terms vary for each transaction based on the terms and conditions agreed upon by the parties.read more instead of a contributory.
  3. Liability as a Past Member – If the company goes into liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more within one year of the share forfeiture, then such a person whose shares are forfeited can be considered as a List B contributory.

Conclusion

After reading the above content, we understand that there are specific requirements to be fulfilled to forfeit shares of a member, and the accounting treatment should fairly reflect the transactions.

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