Hello! Welcome back.
In our last lesson, we learned the journal entries for reissuing forfeited shares, focusing on the three scenarios: reissue at par, at a premium, and at a discount. We established that any discount on reissue is absorbed by debiting the Share Forfeiture Account.
Today, we will focus on one crucial rule that governs this process. The learning outcome for this lesson is to: Determine the maximum permissible discount on the reissue of forfeited shares. This is a small but vital concept that is frequently tested in multiple-choice questions and is essential for correctly solving larger problems.
1. The Maximum Discount Rule
When a company reissues shares at a discount, it cannot offer an unlimited discount. There is a strict legal and logical limit.
The Rule: The maximum discount that can be allowed on the reissue of a forfeited share is equal to the amount that was already paid by the original shareholder and subsequently forfeited by the company.
In simpler terms: Maximum Discount on Reissue = Amount Forfeited
Let's watch a short video that explains this rule very clearly.
Forfeiture & reissue of shares CONCEPT | Issue of Shares - 8 | Class 12 Accounts (2024-25)
In this clip from the video 'Forfeiture & reissue of shares CONCEPT' by CA Parag Gupta, the instructor directly explains the concept of the maximum permissible discount and links it to the amount credited to the Share Forfeiture account during the forfeiture entry.
Watch the segment from 23:08 to 25:21. Pay close attention to how he defines the maximum discount as the 'face value received at the time of forfeiture'.
2. The Logic Behind the Rule
The logic is straightforward. The company's primary goal is to ensure that it receives, in total, at least the face value of the share. The total amount received for a share comes from two sources:
- The amount paid by the original (defaulting) shareholder.
- The amount paid by the new shareholder upon reissue.
Therefore:Amount from Original Shareholder (Forfeited Amount) + Amount from New Shareholder (Reissue Price) ≥ Face Value of Share
This means the reissue price cannot be less than the amount that was originally unpaid on the share.
Let's break this down with a quick example:
- A company issues a share with a face value of ₹10.
- The original shareholder pays ₹6 (application and allotment) but fails to pay the final call of ₹4.
- The company forfeits the share. The amount in the Share Forfeiture Account for this share is ₹6.
- According to the rule, the maximum discount the company can offer on reissue is ₹6.
- This also means the minimum reissue price is ₹4 (₹10 Face Value - ₹6 Maximum Discount).
Notice that the minimum reissue price (₹4) is exactly the amount that was unpaid by the original shareholder. By reissuing it for at least ₹4, the company ensures it has collected the full face value of ₹10 in total (₹6 from the old shareholder + at least ₹4 from the new one).
The following resource provides a concise, textbook definition of this rule.
Accounting for Share Capital notes for CBSE Class 12 ...
The 'Accounting for Share Capital' notes by TopperLearning provide a clear and formal definition of the maximum permissible discount.
Read the subsection titled 'Maximum Permissible Discount'. It clearly states the rule and also rephrases it in terms of the minimum reissue price.
Test your understanding!
A share with a face value of ₹100 was forfeited. The shareholder had paid only the application money of ₹30. What is the maximum discount that can be allowed on the reissue of this share? What is the minimum price at which it can be reissued?
Show answer
- Maximum Discount: The maximum discount is equal to the amount forfeited, which is ₹30.
- Minimum Reissue Price: The minimum reissue price is the face value minus the maximum discount (₹100 - ₹30), which is ₹70. This is also the amount that was unpaid on the share.
3. Scenario: Reissuing at the Maximum Possible Discount
What happens if the company actually reissues the shares at the maximum possible discount? This is an interesting case that demonstrates the limit of the rule.
Let's watch a clip that walks through this specific scenario.
Issue of Shares | Forfeiture and Re issue | Class 12 | Accounts | Part 7
In this video by Rajat Arora, he explains what happens when shares are reissued for the maximum possible discount. This will also give you a small preview of our next lesson's topic.
Watch the segment from 18:29 to 21:01. Notice how the entire forfeited amount is used up to cover the discount on reissue.
As you saw, when shares are reissued at the maximum discount:
- The entire amount in the Share Forfeiture account (related to the reissued shares) is used to cover the discount.
- The journal entry for the discount will be:
Share Forfeiture A/c Dr. [Full forfeited amount]. - Since the entire forfeited amount is used up, there is no surplus or "profit" left to transfer to the Capital Reserve. We will explore this transfer in detail in our next lesson.
Final Check
Let's solidify your understanding with a problem straight from a practice sheet.
Test your understanding!
A company forfeited 200 shares of Mr. X, with a face value of ₹20 per share. Mr. X had paid ₹10 per share on application but failed to pay the allotment money of ₹5 and the 1st call of ₹3 per share.
What is the maximum discount per share the company can offer at the time of reissue?
(This question is adapted from resource LINK)
Show answer
The maximum discount per share is equal to the amount forfeited per share. In this case, Mr. X had paid ₹10 per share. Therefore, the maximum permissible discount on reissue is ₹10 per share.
Conclusion
Excellent work! You have now mastered a small but very important rule in accounting for share capital.
Key Takeaways:
- The maximum permissible discount on the reissue of a forfeited share is the amount credited to the Share Forfeiture Account for that share.
- The logic is to ensure that the company receives at least the face value of the share in total from both the original and new shareholders.
- The minimum reissue price is therefore equal to the unpaid amount on the forfeited share.
In our next lesson, we will address the final step in this process: calculating the profit on reissue and recording its transfer to the Capital Reserve. This happens when the discount given on reissue is less than the amount forfeited, leaving a surplus.