The notice shown below appeared in the Financial News on 1 October 2017. ARGAN N

Question

The notice shown below appeared in the Financial News on 1 October 2017.

ARGAN NL

Notice of Sale of Forfeited Shares

All shares on which the call of fifty cents per share, due for payment on 1 September 2017, remains unpaid, will be sold by public auction on 1 November 2017, at 11 a.m. at the Australian Securities Exchange, Sydney, NSW.

Assume the following:

• 1 000 000 shares were forfeited

• the forfeited shares were all paid to $1.50 per share

• all the shares were sold at the auction for $1.80 per share and will be credited to $2.00

• costs of forfeiture and reissue amounted to $4000

• the balance of the Forfeited Shares account will be refunded to the former shareholders.

Required

Discuss the benefits to a company from forfeiting and reissuing shares, and prepare journal entries to record the forfeiture and reissue above.

Explanation / Answer

The Company has made a call to collect the unpaid amounts on shares. The forfeiture is done only in those cases where the amount called is not paid by the existing shareholders. Doing so, then company can clean up the share capital account and the share register. Here, the company can ensure that all shareholders are paid up to the same amount on their shares. This makes it easier in the future when dividends are declared on a per share basis in that all shareholders are paid up to the same amount and no proportionate dividends need to be calculated.

Date Particulars Debit($) Credit ($) 1-Nov-2017 Share Capital 2,000,000 To Share Call Account 500,000 To Forfeited Shares Liability Account 1,500,000 ( Being Forfeiture of 1,000,000 shares called to $2 for non-payment of 50c call) Cash 1,800,000 Forfeited Shares Liability Account 200,000 To Share Capital 2,000,000 (Being reissue of forfeited shares at public auction for $1.80, paid to $2) Forfeited Shares Liability Account 4,000 To Cash 4,000 (Expense for forfeiture and reissue) Forfeited Shares Liability Account 1,296,000 To Cash 1,296,000 (Refund to former shareholders)

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