Question 56 of 61advanced🔧 ApplyNumerical8 marks

Alfa Limited invited applications for 4,00,000 of its equity shares of Rs.10 each on the following terms:

Payable on application Rs.5 per share Payable on allotment Rs.3 per share Payable on first and final call Rs.2 per share

Applications for 5,00,000 shares were received. It was decided:

(a) to refuse allotment to the applicants for 20,000 shares; (b) to allot in full to applicants for 80,000 shares; (c) to allot the balance of the available shares’ pro-rata among the other applicants; and (d) to utilise excess application money in part as payment of allotment money.

One applicant, whom shares had been allotted on pro-rata basis, did not pay the amount due on allotment and on the call, and his 400 shares were forfeited. The shares were reissued @ Rs.9 per share. Show the journal and prepare Cash book to record the above. (Answer: Capital Reserve = Rs. 2,100)

Correct Answer

Journal Entries in the books of Alfa Limited

DateParticularsL.F.Debit (Rs.)Credit (Rs.)
1.Bank A/c Dr.25,00,000
To Equity Share Application A/c25,00,000
(Being application money received on 5,00,000 shares @ Rs. 5 per share)
2.Equity Share Application A/c Dr.25,00,000
To Equity Share Capital A/c20,00,000
To Equity Share Allotment A/c4,00,000
To Bank A/c1,00,000
(Being application money adjusted and excess refunded)
3.Equity Share Allotment A/c Dr.12,00,000
To Equity Share Capital A/c12,00,000
(Being allotment money due on 4,00,000 shares @ Rs. 3 per share)
4.Bank A/c Dr.7,99,300
Calls-in-Arrears A/c Dr.700
To Equity Share Allotment A/c8,00,000
(Being allotment money received, adjusting excess application money)
5.Equity Share First and Final Call A/c Dr.8,00,000
To Equity Share Capital A/c8,00,000
(Being first and final call money due @ Rs. 2 per share)
6.Bank A/c Dr.7,99,200
Calls-in-Arrears A/c Dr.800
To Equity Share First and Final Call A/c8,00,000
(Being call money received except on 400 shares)
7.Equity Share Capital A/c Dr.4,000
To Calls-in-Arrears A/c (Allotment)700
To Calls-in-Arrears A/c (Call)800
To Forfeited Shares A/c2,500
(Being 400 shares forfeited for non-payment)
8.Bank A/c Dr.3,600
Forfeited Shares A/c Dr.400
To Equity Share Capital A/c4,000
(Being forfeited shares reissued @ Rs. 9 per share)
9.Forfeited Shares A/c Dr.2,100
To Capital Reserve A/c2,100
(Being profit on reissue transferred to Capital Reserve)

Cash Book (Bank Column Only)

DateParticularsAmount (Rs.)DateParticularsAmount (Rs.)
To Equity Share Application A/c25,00,000By Equity Share Application A/c1,00,000
To Equity Share Allotment A/c7,99,300By Balance c/d40,02,100
To Equity Share First and Final Call A/c7,99,200
To Equity Share Capital A/c3,600
Total41,02,100Total41,02,100

Working Notes:

1. Calculation of Pro-rata and Excess Application Money:

  • Total Applications: 5,00,000 shares.
  • Rejected (Category a): 20,000 shares. Refund = 20,000 × Rs. 5 = Rs. 1,00,000.
  • Allotted in Full (Category b): 80,000 shares. Application money utilized = 80,000 × Rs. 5 = Rs. 4,00,000.
  • Pro-rata Category (Category c):
    • Applications received: 5,00,000 - 20,000 - 80,000 = 4,00,000 shares.
    • Shares available for allotment: 4,00,000 - 80,000 = 3,20,000 shares.
    • Pro-rata Ratio: 3,20,000 : 4,00,000 or 4 : 5.
    • Application money received: 4,00,000 × Rs. 5 = Rs. 20,00,000.
    • Application money utilized: 3,20,000 × Rs. 5 = Rs. 16,00,000.
    • Excess Application Money: Rs. 20,00,000 - Rs. 16,00,000 = Rs. 4,00,000. This is adjusted against Allotment.

2. Calculation of Arrears on Allotment:

  • Allotment Money Due: 4,00,000 shares × Rs. 3 = Rs. 12,00,000.
  • Less: Excess Application Money Adjusted: Rs. 4,00,000.
  • Net Amount Payable on Allotment: Rs. 8,00,000.
  • Defaulter's Calculation (400 shares):
    • Shares Allotted: 400.
    • Shares Applied for: (400×5400 \times 5) / 4 = 500 shares.
    • Application Money Paid: 500 × Rs. 5 = Rs. 2,500.
    • Application Money Adjusted: 400 × Rs. 5 = Rs. 2,000.
    • Excess Application Money: Rs. 500.
    • Allotment Money Due: 400 × Rs. 3 = Rs. 1,200.
    • Excess Adjusted: Rs. 500.
    • Arrears on Allotment: Rs. 1,200 - Rs. 500 = Rs. 700.

3. Amount Forfeited & Capital Reserve:

  • Amount received from defaulter (Application money): Rs. 2,500.
  • Credit to Forfeited Shares A/c: Rs. 2,500.
  • Loss on Reissue: 400 shares × (Rs. 10 - Rs. 9) = Rs. 400.
  • Capital Reserve: Rs. 2,500 - Rs. 400 = Rs. 2,100.
Exercise: Questions for Practice - Numerical Questions | Q: 19 | (Page 72)
For More Understanding

Explanation

This solution demonstrates the accounting treatment for oversubscription, pro-rata allotment, forfeiture of shares, and reissue of forfeited shares. The key steps involve calculating the pro-rata ratio to determine excess application money, which is then utilized to cover allotment dues. For the defaulting shareholder, we calculate the specific shares applied for to determine the exact amount forfeited. The final Capital Reserve is derived by subtracting the loss on reissue from the amount initially forfeited.

Solution Steps

  1. Step 1: Calculate application money status. Total received Rs. 25,00,000. Refund for rejected 20,000 shares is Rs. 1,00,000. Utilized for capital Rs. 20,00,000. Excess Rs. 4,00,000 is transferred to Allotment.

  2. Step 2: Determine Net Allotment Receivable. Total Allotment Due Rs. 12,00,000. Less: Excess Application Money Rs. 4,00,000. Net Receivable Rs. 8,00,000.

  3. Step 3: Calculate Defaulter's Position. Allotted 400 shares. Applied for 500 shares. Paid Rs. 2,500 on application. Adjusted Rs. 2,000 to capital, Rs. 500 to allotment. Arrears on Allotment = Rs. 700. Arrears on Call = Rs. 800.

  4. Step 4: Pass Journal Entries. Record application receipt and adjustment, allotment due and receipt (noting arrears), call due and receipt (noting arrears), forfeiture (credit Share Forfeiture with Rs. 2,500), reissue (discount Rs. 400), and transfer to Capital Reserve.

  5. Step 5: Prepare Cash Book. Total receipts from application, allotment, call, and reissue. Deduct refunds. Calculate closing balance.

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