The Profit on reissue of forfeited shares is transferred to:
The Profit on reissue of forfeited shares is transferred to:
Solution
When shares are forfeited due to non-payment of calls, the amount already received from the defaulting shareholder is credited to Share Forfeiture Account. This represents the amount forfeited from the shareholder.
Upon reissue of these forfeited shares, they may be reissued at par, at premium, or at discount (but not exceeding the amount originally forfeited). The company receives fresh capital on reissue.
After accounting for the reissue, any balance remaining in the Share Forfeiture Account represents the net gain or profit on the entire transaction (forfeiture + reissue). This profit arises because:
- Amount forfeited from original shareholder > Discount allowed to new shareholder
This profit is a capital profit as it does not arise from normal business operations but from a capital transaction involving share capital. According to accounting principles, all capital profits must be transferred to Capital Reserve.
Capital Reserve is created out of capital profits and cannot be distributed as dividends to shareholders. It can only be utilized for specific purposes like writing off capital losses or issuing fully paid bonus shares.
The journal entry for transfer is:
| Account | Debit | Credit |
|---|---|---|
| Share Forfeiture A/c | xxx | |
| Capital Reserve A/c | xxx |
Correct Answer: Option 3 - Capital Reserve
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2025: 22 May Shift 1