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Difficulty: MediumForfeiture and Re-issue of Shares

Sterling Logistics Plc forfeited 1,0001,000 ordinary shares of ₦1.00₦1.00 nominal value each for non-payment of a call of ���0.30���0.30 per share, after ₦0.75₦0.75 per share had been called up. The shareholder had paid ₦0.45₦0.45 per share prior to forfeiture. The shares were subsequently re-issued as fully paid for ₦0.80₦0.80 per share. What amount should be credited to the Capital Reserve Account upon re-issue?

  1. ₦250₦250Answer
  2. B
    ₦450₦450
  3. C
    ₦150₦150
  4. D
    ���800���800

Answer

The net amount to be credited to the Capital Reserve Account is ₦250₦250.
The correct answer of ₦250₦250 is obtained by taking the total cash received on the forfeited shares (1,000×₦0.45=₦4501,000 \times ₦0.45 = ₦450) and subtracting the total discount allowed on re-issuing them as fully paid (1,000×(₦1.00−₦0.80)=₦2001,000 \times (₦1.00 - ₦0.80) = ₦200). The net balance of ₦250₦250 represents a capital profit transferred to Capital Reserve.

Step-by-Step Solution

1
Calculate the total amount already paid on the forfeited shares (Amount Forfeited)
Amount Forfeited=1,000 shares×₦0.45=₦450\text{Amount Forfeited} = 1,000 \text{ shares} \times ₦0.45 = ₦450
The Forfeited Shares Account is credited with the actual money paid by the defaulting shareholder prior to forfeiture.
2
Determine the discount allowed on re-issuing the forfeited shares as fully paid
Discount per Share=₦1.00−₦0.80=₦0.20\text{Discount per Share} = ₦1.00 - ₦0.80 = ₦0.20; Total Discount Allowed=1,000×₦0.20=₦200\text{Total Discount Allowed} = 1,000 \times ₦0.20 = ₦200
When shares with nominal value ₦1.00₦1.00 are re-issued fully paid for ₦0.80₦0.80, the shortfall of ₦0.20₦0.20 per share is debited to the Forfeited Shares Account as discount allowed on re-issue.
3
Calculate the net gain transferred from Forfeited Shares Account to Capital Reserve Account
Capital Reserve Transfer=₦450−₦200=₦250\text{Capital Reserve Transfer} = ₦450 - ₦200 = ₦250
Any remaining credit balance in the Forfeited Shares Account after absorbing the re-issue discount represents a profit of a capital nature and must be transferred to Capital Reserve.

Key Concept

Surplus on Re-issue of Forfeited Shares to Capital Reserve
Estimated Time:1m 30s
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Topics

Forfeiture and Re-issue of Shares

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