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Difficulty: EasyForfeiture and Re-issue of Shares

When forfeited shares are re-issued at a price that leaves a net profit after covering all defaulted calls, to which of the following accounts is this profit transferred?

  1. Capital Reserve AccountAnswer
  2. B
    Profit and Loss Account
  3. C
    Share Premium Account
  4. D
    General Reserve Account

Answer

Capital Reserve Account
When forfeited shares are re-issued, any surplus money retained from the defaulting shareholder (after deducting any discount granted on re-issue) is classified as a capital profit. By accounting convention, this capital profit is credited directly to the Capital Reserve Account.

Step-by-Step Solution

1
Determine the accounting nature of the gain realized on the re-issue of forfeited shares.
The amount forfeited on shares, less any discount allowed upon their re-issue, represents a profit resulting from a capital transaction.
Since forfeiture and re-issue pertain to capital transactions rather than standard trading operations, the net balance is a capital profit.
2
Identify the ledger account used to record this capital profit.
The remaining balance in the Forfeited Shares Account is credited to the Capital Reserve Account.
Capital profits are not available for distribution as dividends and must be locked into a capital reserve account.

Key Concept

Treatment of Gain on Re-issue of Forfeited Shares
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Topics

Forfeiture and Re-issue of Shares

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