Page 52 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 2: Forfeiture of Shares

Let us take an example to make it clearer. S.K. Ltd. issued 100000 shares of 10 each payable as Notes
2 on application, 2 on allotment, 3 on first call and 3 on second and final call. Mr. Harish,
the allottee of 100 shares, fails to pay the second and final call money made by the company. In
this case if the Board of Directors decide to forfeit his shares, his membership will be cancelled
and the amount of 700 paid by him (on 100 shares 2 on application, 2 on allotment and 3
on first call per share) will be forfeited. Now Mr. Harish will no longer be the member of the
company and the issued capital of the company will be reduced by 1000.

Procedure of Forfeiture of Shares

The authority to forfeit shares is given to the Board of Directors in Articles of Association of the
company. The Board of Directors has to give at least fourteen days notice to the defaulting
members calling upon them to pay outstanding amount with or without interest as the case may
be before the specified date. The notice must also state that if the shareholders fail to remit the
amount mentioned therein within the stipulated period, their shares will be forfeited. If they
still fail to pay the amount within the specified period of time, the Board of Directors of the
company may decide to forfeit such shares by passing a resolution. The decision regarding the
forfeiture of shares should be communicated to the concerned allottees and should be asked to
return the allotment letters and share certificates of the forfeited shares to the company.

Self Assessment

Fill in the blanks:
1. If a shareholder fails to pay the due amount on shares, the board of directors may decide
to ...................................... shares.
2. The authority to forfeit shares is given by company’s ......................................
3. The Board of Directors has to give at least ...................................... days notice
to the defaulting members.

2.2 Accounting Treatment

You have learnt that shares can be issued at par, at discount and at premium. Accounting treatment
for forfeiture of shares in these three situations can be explained as under:

Forfeiture of shares issued at Par

When shares issued at par are forfeited the accounting treatment will be as follows:
(i) Debit Share Capital Account with amount called up (whether received or not) per share up
to the time of forfeiture.
(ii) Credit Share Forfeited A/c. with the amount received up to the time of forfeiture.
(iii) Credit ‘Unpaid Calls A/c’ with the amount due on forfeited shares. This cancels the effect
of debit to such calls which take place when the amount is made due.
The journal entry is:
Share capital A/c Dr
(Amount called up)

To share forfeited A/c
(Amount paid)

LOVELY PROFESSIONAL UNIVERSITY 45