What are Forfeited Shares?

Shares of investors are forfeited due to the breach of conditions in the purchase agreement, like non-payment of call money within the time limit provided by the company. It can be done only after the approval of the board of directors.

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Process

Forfeiture of shares is a serious step as the consequences lead to the end of the shareholder’s rights and also the amount paid. Therefore, there are specific requirements for the forfeiture of shares.

  • Powered by Articles of AssociationArticles Of AssociationArticles of association is a legally binding document that states the corporate rules, regulations, and purpose. It serves as a user’s guide for executing the organizational tasks, directors’ appointment and recording the financial information.read more – Share forfeiture must be under the provisions mentioned in the articles of association.Proper Notice – A proper notice is to be served to the defaulting shareholders mentioning the amount to be paid, and the notice should be sent 14 days before the payment date. The purpose of the notice is to allow the shareholders to pay off the call money and any interest thereupon and save the shares from getting forfeitedResolution by Board of Directors – If the shareholders fail to pay the monies due even after being served by a valid notice, then the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals.
  • read more can forfeit the shares by passing a resolution.

Forfeited Shares Journal Entries

The accounting entriesAccounting EntriesAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. read more depend on whether the shares were issued at Premium or Par. The entries are stated as below,

  • If the shares were issuedShares Were IssuedShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more at Par

  • If the shares were issued at PremiumShares Were Issued At PremiumShare premium is the difference between the issue price and the par value of the stock and is also known as securities premium. The shares are said to be issued at a premium when the issue price of the share is greater than its face value or par value. This premium is then credited to the share premium account of the company.read more and the premium amount was received

  • If the shares were issued at Premium and premium amount was not received

Accounting Treatment and Reissue Accounting

When the shares are forfeited, there are two options with the company, i.e., they can dispose of the shares, or the shares can be reissued. These shares can be reissued at par, premium, and discount, and the entries are as follows,

1.If reissue is at Par

2.If reissue is at Premium

3.If reissue is at Discount

It is essential to understand that the shares can be issued only at par and premium, but reissue can also be made at a discount by using the money forfeited from the share forfeiture.

4.Transfer of balance share forfeiture to Capital Reserve

The amount received from the above formula reduced by the Share forfeiture amount used in case of reissue at a discount is transferred to Capital Reserve A/c.

Example of Share Forfeiture

Company A Ltd has issued 10,000 shares at Rs. 10 per share; the face value is equal to the issue price, i.e., Rs. 10. The allotment money was Rs. 1 per share paid by all the shareholders. The first call money was Rs. 2, which was not paid by Mr. Vikram, who was allotted 1,000 Shares, and a notice was served for payment of call money. After the non-payment of call money, the board resolved to forfeit the share. Therefore the following accounting entries are to be passed for forfeiture,

The forfeited shares were not reissued, so the entire money is transferred to the capital reserve

Effects of Forfeited Shares

  • Cessation of Membership – The member whose shares are forfeited ceases to be a member of the company, and his name is struck off from the register of members.Cessation of Liability – The liability of the member to pay future calls ceases after the shares are forfeited. However, the person is still liable to pay the unpaid call money to the company, and it can stand in books as an ordinary debtorDebtorA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion.
  • read more instead of a contributory.Liability as a Past Member – If the company goes into liquidationLiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more within one year of the share forfeiture, then such a person whose shares are forfeited can be considered a List B contributory.

Conclusion

After reading the above content, we understand that there are specific requirements to be fulfilled to forfeit shares of a member, and the accounting treatment should fairly reflect the transactions.

This article has been a guide to What is Forfeited Shares and their meaning. Here we discuss the process of forfeited shares, its journal entries, an example, and its effects. You can learn more about it from the following articles –

  • Bonus Shares ExamplesOrdinary SharesDiluted SharesClass A Shares Examples