PRACTICAL QUESTION Merflow Ltd invited applications for 7 million equity shares
ID: 2334381 • Letter: P
Question
PRACTICAL QUESTION
Merflow Ltd invited applications for 7 million equity shares of $2.75 each payable as follows:
$0.50 per share on application
$1.50 per share on allotment
$0.75 per share on final call
On 1/8/2016, applications were received for 35,000,000 million shares (that is, 28,000,000 million in excess of the number of shares on offer).
Merflow’s constitution allows the company to apply any excess monies received to satisfy future amounts payable on allotment and on call. Therefore, the board of directors decide to make a 1:5 pro-rata allotment of the shares applied for to every applicant. This means that applicants received one share for every 5 they applied for.
The shares were issued on 1/9/2016. The call monies were payable on 9/1/2017.
The final call was payable on 9/1/2017. However, shareholders of 500,000 partly paid shares (i.e. until this date shareholders have paid $2.00 per share) failed to pay by the due date for the final call.
The forfeited partly paid shares were auctioned to existing shareholders on 1/3/2017. The 500,000 shares were taken up at $2.00 per share.
Any remaining funds after re-issuance of the forfeited shares were returned to the original shareholders on 1/4/2017.
Required:
6) Journalize the forfeiture of the unpaid shares.
7) Record the receipt of payment for the auctioned shares.
8) Record the refund paid to the defaulting shareholders.
Explanation / Answer
Answer :(6)
9/1/2017
Equity Share Capital A/c Dr. $ 13,75,000
To Equity Share First & Final Call A/c $ 3,75,000
To Forfeited Shares A/c $ 10,00,000
(Forfeited 500,000 partly paid shares have paid $2.00 per share failed to pay final call.)
Answer :(7)
1/3/2017
Bank A/c Dr. (500000*$2) $ 10,00,000
Share Forfeited A/c Dr. $ 3,75,000
To Share Capital A/c $ 13,75,000
(forfeited partly paid shares were auctioned to existing shareholders 500,000 shares
at $2.00 per share.)
Answer :(8)
1/4/2017
Share Forfeited A/c Dr. $ 6,25,000
To Share Holder (Original) A/c $ 6,25,000
(Being remaining funds after re-issuance of forfeited shares were returned to
original shareholders)
Share Holder (Original) A/c Dr. $ 6,25,000
To Bank $ 6,25,000
(Being Amount Paid to original shareholders)
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