Question

Assertion (A): When the shares are forfeited, share capital account is debited with the amount called up and credited to (i) respective unpaid calls account i.e., calls in arrears and (ii) share forfeiture account with the amount already received on shares.
Reason (R): When the shares are forfeited, all entries relating to the shares forfeited, except those relating to securities premium, already recorded in accounting records must be reversed.
Choose the correct option from the following:

• A. Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
• B. Both Assertion (A) and Reason (R) are correct, but Reason (R) is {not} the correct explanation of Assertion (A).
• C. Assertion (A) is incorrect, but Reason (R) is correct.
• D. Assertion (A) is correct, but Reason (R) is incorrect.

Hint:

During forfeiture of shares, always reverse the share capital and unpaid amounts, but securities premium remains intact.

Answer 1

The Correct Option is A

When shares are forfeited, the share capital account is debited by the amount called up on the shares. The credited entries include: - Calls in Arrears account for unpaid amounts, and - Share Forfeiture account for amounts already received. The securities premium account, if any, is not reversed during forfeiture because it represents a legitimate premium received on the shares and is not affected by forfeiture. Thus, both the Assertion (A) and Reason (R) are correct, and Reason (R) correctly explains the Assertion (A).