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Difficulty: HardForfeiture and Re-issue of Shares

Match each accounting transaction event during the forfeiture and re-issue of shares to its corresponding journal entry debit or credit treatment.

  • Cancellation of called-up capital upon forfeiture of sharesDebit Share Capital Account
  • Writing off the uncollected amounts previously called up on forfeited sharesCredit Calls-in-Arrears Account
  • Accounting for the discount granted to new subscribers upon re-issuing forfeited sharesDebit Forfeited Shares Account
  • Transferring the profit realized from re-issuing forfeited shares to capital reservesCredit Capital Reserve Account

Answer

Cancellation of called-up capital matches Debit Share Capital Account; Writing off uncollected amounts matches Credit Calls-in-Arrears Account; Accounting for re-issue discount matches Debit Forfeited Shares Account; Transferring profit on re-issue matches Credit Capital Reserve Account.
Cancellation of called-up capital requires debiting Share Capital Account. Clearing uncollected call balances requires crediting Calls-in-Arrears Account. Applying a discount on re-issue requires debiting Forfeited Shares Account up to the forfeited amount. Transferring the net capital profit requires crediting Capital Reserve Account.

Step-by-Step Solution

1
Analyze the journal entries required upon forfeiture of shares
Debit Share Capital Account with total called-up amount; Credit Calls-in-Arrears Account with unpaid amount; Credit Forfeited Shares Account with amount already paid.
Forfeiture requires reducing the called-up share capital while clearing the unpaid arrears.
2
Analyze the journal entries required upon re-issue of forfeited shares at a discount
Debit Bank Account with cash received; Debit Forfeited Shares Account with the discount offered; Credit Share Capital Account with nominal/paid-up value.
The loss or discount on re-issue is absorbed by the forfeited money accumulated in the Forfeited Shares Account.
3
Determine the accounting treatment for the final net profit on re-issue
Debit Forfeited Shares Account and Credit Capital Reserve Account with the remaining surplus.
The net remaining balance of forfeited money after absorbing any re-issue discount constitutes a capital profit.

Key Concept

Accounting for Forfeiture and Re-issue of Shares
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Topics

Forfeiture and Re-issue of Shares

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