Questions
5–8 questions in major exams
Difficulty
Medium-Hard
Importance
Key for Class 12 boards
Overview
The Issue and Forfeiture of Share Capital covers the lifecycle of equity funding in a joint-stock company. Mastering this topic is critical as it forms the basis of the entire accounting for share capital chapter, often carrying significant weight in Class 12 board exams.
Issue of Shares at Par, Premium, and Discount
Shares can be issued at face value (par), above face value (premium), or below face value (discount, though restricted by the Companies Act). Security Premium is a capital receipt and must be treated according to Section 52 of the Companies Act, 2013.
- Issue at par: Issue Price = Face Value
- Issue at premium: Issue Price > Face Value
- Discount on issue: Only allowed for Sweat Equity Shares
- Security Premium account cannot be used as dividend
Calls in Arrears and Calls in Advance
Calls in Arrears represent amounts due but unpaid by shareholders, while Calls in Advance represent amounts received before the actual demand. These affect the bank balance and necessitate specific ledger entries at the time of allotment or final call.
- Interest on Calls in Arrears: Max 10% p.a. (Table F)
- Interest on Calls in Advance: Max 12% p.a. (Table F)
- Calls in Arrears shown as deduction from Subscribed Capital
- Calls in Advance shown under Current Liabilities
Forfeiture and Reissue of Shares
Forfeiture occurs when a shareholder defaults on payment, resulting in the cancellation of their membership and retention of paid money by the company. Reissue is the subsequent sale of these forfeited shares, often at a discount not exceeding the amount already forfeited.
- Forfeiture amount is credited to Share Forfeiture A/c
- Reissue discount is debited to Share Forfeiture A/c
- Balance in Share Forfeiture A/c transferred to Capital Reserve
- Forfeiture entry: Debit Share Capital with called-up value
Formula Sheet
Amount transferred to Capital Reserve = (Total Forfeited - Discount on Reissue) * (Shares Reissued / Shares Forfeited)
Interest on Calls in Arrears = Arrear Amount * Rate * (Period/12)
Interest on Calls in Advance = Advance Amount * Rate * (Period/12)
Exam Tip
Always track the 'Called-Up' amount strictly; if a share is forfeited, the Share Capital must be debited by the exact amount the company has demanded up to that point, not the face value.
Common Mistakes
- Using the face value instead of the called-up value when debiting the Share Capital account during forfeiture.
- Forgetting to limit the discount on reissue to the amount already available in the Share Forfeiture account.
- Incorrectly calculating the amount to be transferred to Capital Reserve without adjusting for the proportion of shares reissued.
More Revision Notes
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