The Orient Company Limited offered for public subscription 20,000 equity shares of Rs.10 each at a premium of 10% payable at Rs.2 on application; Rs.4 on allotment including premium; Rs.3 on First Call and Rs.2 on Second and Final call. Applications for 26,000 shares were received. Applications for 4,000 shares were rejected. Pro-rata allotment was made to the remaining applicants. Both the calls were made and all the money were received except the final call on 500 shares which were forfeited. 300 of the forfeited shares were later reissued as fully paid at Rs.9 per share. Give journal entries and prepare the balance sheet. (Answer: Capital Reserve = Rs. 2,100)
JOURNAL ENTRIES IN THE BOOKS OF ORIENT COMPANY LIMITED
| Date | Particulars | L.F. | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|---|---|
| 1. | Bank A/c Dr. | 52,000 | ||
| To Equity Share Application A/c | 52,000 | |||
| (Being application money received on 26,000 shares @ Rs.2 each) |
| 2. | Equity Share Application A/c Dr. | | 52,000 | | | | To Equity Share Capital A/c | | | 40,000 | | | To Equity Share Allotment A/c | | | 4,000 | | | To Bank A/c | | | 8,000 | | | (Being application money transferred; excess adjusted to allotment; refund for rejected applications) | | | |
| 3. | Equity Share Allotment A/c Dr. | | 80,000 | | | | To Equity Share Capital A/c | | | 60,000 | | | To Securities Premium A/c | | | 20,000 | | | (Being allotment money due on 20,000 shares @ Rs.4 including premium Rs.1) | | | |
| 4. | Bank A/c Dr. | | 76,000 | | | | To Equity Share Allotment A/c | | | 76,000 | | | (Being allotment money received after adjusting excess application money) | | | |
| 5. | Equity Share First Call A/c Dr. | | 60,000 | | | | To Equity Share Capital A/c | | | 60,000 | | | (Being first call money due @ Rs.3 per share) | | | |
| 6. | Bank A/c Dr. | | 60,000 | | | | To Equity Share First Call A/c | | | 60,000 | | | (Being first call money received in full) | | | |
| 7. | Equity Share Second & Final Call A/c Dr. | | 40,000 | | | | To Equity Share Capital A/c | | | 40,000 | | | (Being final call money due @ Rs.2 per share) | | | |
| 8. | Bank A/c Dr. | | 39,000 | | | | Calls-in-Arrears A/c Dr. | | 1,000 | | | | To Equity Share Second & Final Call A/c | | | 40,000 | | | (Being final call money received on 19,500 shares; arrears on 500 shares) | | | |
| 9. | Equity Share Capital A/c Dr. | | 5,000 | | | | To Share Forfeited A/c | | | 4,000 | | | To Calls-in-Arrears A/c | | | 1,000 | | | (Being 500 shares forfeited for non-payment of final call) | | | |
| 10. | Bank A/c Dr. | | 2,700 | | | | Share Forfeited A/c Dr. | | 300 | | | | To Equity Share Capital A/c | | | 3,000 | | | (Being 300 forfeited shares reissued as fully paid @ Rs.9 per share) | | | |
| 11. | Share Forfeited A/c Dr. | | 2,100 | | | | To Capital Reserve A/c | | | 2,100 | | | (Being profit on reissue transferred to Capital Reserve) | | | |
BALANCE SHEET (EXTRACTS) AS ON...
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders' Funds | ||
| (a) Share Capital | 1 | 1,99,600 |
| (b) Reserves and Surplus | 2 | 22,100 |
| Total | 2,21,700 | |
| II. ASSETS | ||
| 1. Current Assets | ||
| Cash and Cash Equivalents | 3 | 2,21,700 |
| Total | 2,21,700 |
NOTES TO ACCOUNTS:
Note 1: Share Capital
| Particulars | Amount (Rs.) |
|---|---|
| Issued Capital: 20,000 shares of Rs.10 each | 2,00,000 |
| Subscribed Capital: 19,800 shares of Rs.10 each fully called up | 1,98,000 |
| Add: Share Forfeited Account (200 shares × Rs.8) | 1,600 |
| Total | 1,99,600 |
Note 2: Reserves and Surplus
| Particulars | Amount (Rs.) |
|---|---|
| Securities Premium | 20,000 |
| Capital Reserve | 2,100 |
| Total | 22,100 |
Note 3: Cash and Cash Equivalents
| Particulars | Amount (Rs.) |
|---|---|
| Bank Balance | 2,21,700 |
WORKING NOTES:
1. Pro-rata Allotment Calculation:
- Applications received: 26,000 shares
- Applications rejected: 4,000 shares
- Applications for pro-rata: 22,000 shares
- Shares offered: 20,000 shares
- Pro-rata ratio: 20,000/22,000 = 10/11
2. Application Money Adjustment:
- Application money received: 26,000 × Rs.2 = Rs.52,000
- Refund for rejected applications: 4,000 × Rs.2 = Rs.8,000
- Excess application money: Rs.4,000 (adjusted to allotment)
3. Share Forfeiture Calculation:
- Amount paid on forfeited shares (500 shares): | Application | Rs. | Rs.1,000 | | Allotment (excluding premium) | Rs. | Rs.1,500 | | First Call | Rs. | Rs.1,500 | | Total credited to Share Forfeited A/c | | Rs.4,000 |
4. Capital Reserve Calculation:
- Amount in Share Forfeited A/c for 300 shares = (300/500) × Rs.4,000 = Rs.2,400
- Less: Discount on reissue (300 × Rs.1) = Rs.300 | Capital Reserve | | Rs.2,100 |
Explanation
This question tests the complete accounting treatment for share issue with oversubscription, pro-rata allotment, forfeiture, and reissue. The key points are: (1) Premium received on allotment goes to Securities Premium Account and is NOT included in Share Forfeited Account upon forfeiture; (2) Pro-rata allotment requires adjusting excess application money against allotment; (3) Capital Reserve is calculated as the proportionate forfeited amount minus discount on reissue. The answer of Rs.2,100 Capital Reserve is correct because only the share capital portion (excluding premium) is credited to Share Forfeited Account.
Solution Steps
Step 1: Calculate application money received (26,000 × Rs.2 = Rs.52,000) and refund for rejected applications (4,000 × Rs.2 = Rs.8,000)
Step 2: Adjust excess application money (Rs.4,000) towards allotment
Step 3: Pass journal entries for application, allotment, calls, forfeiture and reissue
Step 4: Calculate Share Forfeited amount = Application (Rs.2) + Allotment excluding premium (Rs.3) + First Call (Rs.3) = Rs.8 per share × 500 shares = Rs.4,000
Step 5: Calculate Capital Reserve = (300/500 × Rs.4,000) - (300 × Rs.1 discount) = Rs.2,400 - Rs.300 = Rs.2,100
Step 6: Prepare Balance Sheet with Share Capital showing forfeited shares amount and Reserves showing Securities Premium and Capital Reserve