Profit on Reissue and Transfer to Capital Reserve

1. The Nature of Profit on Reissue

When shares are reissued for a price that is higher than the minimum reissue price (i.e., the discount given is less than the amount forfeited), a surplus remains in the Share Forfeiture Account. This surplus is not a regular business profit earned from selling goods or services. Instead, it is a capital gain.

According to accounting principles, capital gains must be transferred to a specific reserve called the Capital Reserve. This reserve is not available for distribution as dividends to shareholders but can be used for specific purposes like writing off capital losses or issuing bonus shares.

The journal entry to transfer this profit is straightforward:

The main task is to calculate the correct amount (XXX) to be transferred.

2. Calculating the Profit on Reissue

The calculation depends on one key factor: were all the forfeited shares reissued, or only some of them?

Case 1: All Forfeited Shares are Reissued

This is the simpler scenario. If all the forfeited shares are reissued, the entire remaining balance in the Share Forfeiture account related to those shares is transferred to the Capital Reserve.

Profit = Total Amount Forfeited - Total Discount on Reissue

For example, if a company forfeited 100 shares on which ₹700 was received, and reissued all 100 shares with a total discount of ₹200, the calculation is:

• Amount Forfeited = ₹700
• Discount on Reissue = ₹200
• Profit transferred to Capital Reserve = ₹700 - ₹200 = ₹500

Case 2: Partial Reissue of Forfeited Shares (The Important Case)

This is a more common and slightly more complex scenario in exams. When only a portion of the forfeited shares are reissued, you can only transfer the profit related to the shares that have actually been reissued. The profit on the shares that remain unforfeited is not yet realized and must stay in the Share Forfeiture Account.

The core principle here is proportionality.

To understand this crucial concept, let's watch a video that explains it with a great analogy.

As explained in the video, the formula to calculate the profit to be transferred is:

$\text{Profit to Capital Reserve}=\left(\frac{\text{Total Amount Forfeited}}{\text{Total Shares Forfeited}}\times \text{No. of Shares Reissued}\right)-\text{Discount on Reissue}$

Let's break this down:

1. Calculate the Proportional Forfeited Amount: Find the amount forfeited that corresponds only to the shares being reissued.
2. Subtract the Discount: Deduct the total discount given on the reissue of those shares.
3. Result: The remaining amount is the capital profit to be transferred.

The following resource provides a clear textual explanation and a handy formula image.

The formula from the article is visualized in this table:

3. A Worked Example (Partial Reissue)

Let's apply this to a practical problem. We'll use Question 13 from the NCERT Solutions.

Problem Summary:

• A company forfeited 200 shares of ₹100 each.
• The shareholder had paid ₹90 per share (₹20 on application + ₹40 on allotment + ₹30 on first call). The premium of ₹10 was also paid with allotment.
• Total amount forfeited = 200 shares × ₹90 = ₹18,000.
• The company reissued 150 of these shares at ₹75 per share.

Calculation:

1. Journal Entry for Reissue:

   • The shares are reissued at ₹75, while the face value is ₹100. This is a discount of ₹25 per share.
   • Total discount = 150 shares × ₹25 = ₹3,750.
   • The entry is:
     • Bank A/c Dr. (150 x 75) = 11,250
     • Share Forfeiture A/c Dr. (150 x 25) = 3,750
     • To Share Capital A/c (150 x 100) = 15,000

2. Calculate Profit for Capital Reserve:

   • Proportionate Forfeited Amount for 150 shares:
     (₹18,000 Total Forfeited / 200 Total Shares) × 150 Shares Reissued = ₹13,500
   • Discount on Reissue of 150 shares: ₹3,750
   • Profit to Capital Reserve: ₹13,500 - ₹3,750 = ₹9,750

3. Journal Entry for Transfer:

   • Share Forfeiture A/c Dr. 9,750
   • To Capital Reserve A/c 9,750

You can cross-check this with the solved problem provided in the resource.

Here's another visual breakdown of a similar calculation:

Conclusion

Great job! You have now covered the entire cycle of forfeiture and reissue. This final step of transferring the profit to Capital Reserve is often where marks are lost, so understanding the proportional calculation is a huge advantage.

Key Takeaways:

• The surplus remaining in the Share Forfeiture account after reissue is a capital gain and must be transferred to the Capital Reserve Account.
• The journal entry is: Share Forfeiture A/c Dr. to Capital Reserve A/c.
• If all forfeited shares are reissued, the profit is simply the total forfeited amount minus the total reissue discount.
• If only some forfeited shares are reissued, you must calculate the proportionate forfeited amount for the reissued shares before deducting the discount.

In our next lesson, we will put everything together by preparing the Share Forfeiture Account and the Capital Reserve Account as ledger accounts. We'll also see how the balance of any un-reissued forfeited shares is shown in the company's Balance Sheet.