Question 53 of 61advanced🔧 ApplyNumerical8 marks

Prince Limited issued a prospectus inviting applications for 20,000 equity shares of Rs.10 each at a premium of Rs.3 per share payable as follows:

With Application Rs.2 On Allotment (including premium) Rs.5 On First Call Rs.3 On Second Call Rs.3

Applications were received for 30,000 shares and allotment was made on pro-rata basis. Money overpaid on applications was adjusted to the amount due on allotment.

Mr. Mohit whom 400 shares were allotted, failed to pay the allotment money and the first call, and his shares were forfeited after the first call. Mr. Joly, whom 600 shares were allotted, failed to pay for the two calls and hence, his shares were forfeited.

Of the shares forfeited, 800 shares were reissued to Supriya as fully paid for Rs.9 per share, the whole of Mr. Mohit’s shares being included.

Record journal entries in the books of the Company and prepare the Balance Sheet. (Answer: Capital Reserve = Rs. 2,000)

Correct Answer

Journal Entries in the books of Prince Limited:

  1. Bank A/c Dr. 60,000 To Equity Share Application A/c 60,000 (Being application money received on 30,000 shares @ Rs. 2)

  2. Equity Share Application A/c Dr. 60,000 To Equity Share Capital A/c 40,000 To Equity Share Allotment A/c 20,000 (Being application money transferred to Share Capital and excess adjusted to Allotment)

  3. Equity Share Allotment A/c Dr. 1,00,000 To Equity Share Capital A/c 40,000 To Securities Premium Reserve A/c 60,000 (Being allotment money due on 20,000 shares @ Rs. 5 including premium)

  4. Bank A/c Dr. 78,400 Calls-in-Arrears A/c Dr. 1,600 To Equity Share Allotment A/c 80,000 (Being allotment money received; Mohit failed to pay on 400 shares)

  5. Equity Share First Call A/c Dr. 60,000 To Equity Share Capital A/c 60,000 (Being first call money due on 20,000 shares @ Rs. 3)

  6. Bank A/c Dr. 57,000 Calls-in-Arrears A/c Dr. 3,000 To Equity Share First Call A/c 60,000 (Being first call money received; Mohit and Joly failed to pay)

  7. Equity Share Capital A/c Dr. 2,800 Securities Premium Reserve A/c Dr. 1,200 To Share Forfeited A/c 1,200 To Calls-in-Arrears A/c 2,800 (Being 400 shares of Mr. Mohit forfeited for non-payment of allotment and first call)

  8. Equity Share Second Call A/c Dr. 60,000 To Equity Share Capital A/c 60,000 (Being second call money due on 19,600 shares @ Rs. 3)

  9. Bank A/c Dr. 58,200 Calls-in-Arrears A/c Dr. 1,800 To Equity Share Second Call A/c 60,000 (Being second call money received; Joly failed to pay)

  10. Equity Share Capital A/c Dr. 6,000 To Share Forfeited A/c 2,400 To Calls-in-Arrears A/c 3,600 (Being 600 shares of Mr. Joly forfeited for non-payment of two calls)

  11. Bank A/c Dr. 7,200 Share Forfeited A/c Dr. 800 To Equity Share Capital A/c 8,000 (Being 800 forfeited shares reissued @ Rs. 9 per share fully paid)

  12. Share Forfeited A/c Dr. 2,000 To Capital Reserve A/c 2,000 (Being profit on reissue of forfeited shares transferred to Capital Reserve)

Balance Sheet of Prince Limited

I. Equity and Liabilities:

  1. Shareholders' Funds: (a) Share Capital: Rs. 1,98,800 (b) Reserves and Surplus:
    • Securities Premium Reserve: Rs. 58,800
    • Capital Reserve: Rs. 2,000 Total: Rs. 2,59,600

II. Assets:

  1. Current Assets:
    • Cash at Bank: Rs. 2,59,600

Notes to Accounts:

  1. Share Capital:
    • Issued Capital: 20,000 shares of Rs. 10 each = Rs. 2,00,000
    • Subscribed Capital: 19,800 shares (Net of reissued forfeited shares)
    • Called-up Capital: 19,800 shares x Rs. 10 = Rs. 1,98,000
    • Add: Share Forfeited Reserve (Balance) = Rs. 800
    • Total = Rs. 1,98,800
Exercise: Questions for Practice - Numerical Questions | Q: 16 | (Page 71)
For More Understanding

Explanation

The solution involves calculating pro-rata adjustments for oversubscription and handling share forfeiture for two different shareholders with varying default patterns. For Mr. Mohit, the shares were forfeited after the first call, meaning the second call money was not due on his shares. Crucially, the premium unpaid by Mohit is debited to Securities Premium Reserve during forfeiture. For Mr. Joly, shares were forfeited after the second call. The Capital Reserve calculation considers the gain on reissue (Credit balance in Share Forfeited minus Discount on Reissue). The Share Forfeited balance for Joly's remaining 200 shares (Rs. 800) is added to Share Capital in the Balance Sheet.

Solution Steps

  1. Step 1: Calculate application money adjustment. Received 30,000 x 2 = 60,000. Due 20,000 x 2 = 40,000. Excess 20,000 adjusted to allotment.

  2. Step 2: Calculate Mohit's arrears on allotment. Applied for 600 (Pro-rata 3:2), allotted 400. Paid 600x2=1200. Due 400x2=800. Excess 400. Allotment due 400x5=2000. Net Arrears = 2000 - 400 = 1600.

  3. Step 3: Determine Mohit's forfeiture amount. Called-up = 10 (App 2 + Allot 5 + First Call 3). Unpaid = 1600 (Allot) + 1200 (First Call) = 2800. Paid = 1200. Share Forfeited Credit = 1200.

  4. Step 4: Determine Joly's forfeiture amount. Paid Application (2) and Allotment (5). Total paid = 7. Capital paid = 4 (2 App + 2 Allot Cap). Premium paid = 3. Share Forfeited Credit = 600 shares x 4 = 2400.

  5. Step 5: Calculate Capital Reserve. Mohit's gain: Credit 1200 - Discount 400 = 800. Joly's gain (400 shares): Credit 1600 - Discount 400 = 1200. Total Capital Reserve = 800 + 1200 = 2000.

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