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.
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.
- Powered by Articles of Association – Share forfeiture must be under the provisions mentioned in the articles of association.
- Proper Notice – A proper notice is to be served to the defaulting shareholders mentioning the amount to be paid, and the notice should be sent 14 days before the payment date. The purpose of the notice is to allow the shareholders to pay off the call money, any interest thereupon, and save the shares from getting forfeited.
- Resolution by Board of Directors – If the shareholders fail to pay the monies due even after being served by a valid notice, then the board of directors can forfeit the shares by passing a resolution.
Forfeited Shares Journal Entries
The accounting entries depends on whether the shares were issued at Premium or Par. The entries are stated as below,
- If the shares were issued at Par
- If the shares were issued at Premium and the premium amount was received
- If the shares were issued at Premium and premium amount was not 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,
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1.If reissue is at Par
2.If reissue is at Premium
3.If reissue is at Discount
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
If only some shares are reissued, then the amount to be transferred to Capital reserve would be proportionate and can be calculated using the following formula,
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,
The forfeited shares were not reissued, so the entire money is transferred to capital reserve
Effects of Forfeited Shares
- 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.
- 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 debtor instead of a contributory.
- Liability as a Past Member – If the company goes into liquidation within one year of the share forfeiture, then such a person whose shares are forfeited can be considered as a List B contributory.
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.
This article has been a guide to What is Forfeited Shares, and it’s meaning. Here we discuss the process of forfeited shares, its journal entries along with an example, and its effects. You can learn more about from the following articles –