Question

The Balance in the Share Forfeited Account relating to reissue of forfeited shares will be treated as:

• A. Capital Profit
• B. Revenue Profit
• C. Capital Loss
• D. Revenue Reserve

Answer 1

The Correct Option is A

The balance in the Share Forfeited Account when forfeited shares are reissued is treated as a Capital Profit. 

This situation occurs because the Share Forfeited Account represents the amounts that were paid by shareholders on the shares that they initially forfeited due to non-payment of all calls. When these shares are reissued, part or all of the forfeited amount is transferred to the Capital Reserve, as it is not a recurring income but rather a one-time gain related to the capital structure of the company.

Here’s a step-by-step explanation:

1. Forfeiture of Shares: When a shareholder fails to pay a call, the shares may be forfeited. The amount received on these shares up to the date of forfeiture is recorded in the Share Forfeited Account.
2. Reissue of Shares: These forfeited shares can later be reissued to new shareholders. The new issue price may be less than, equal to, or more than the original issue price.
3. Balance Treatment: If the reissued price is less than the original paid-up value, the difference is adjusted against the balance in the Share Forfeited Account. Any remaining balance in the Share Forfeited Account after such adjustments is considered a capital gain.
4. Final Accounting Treatment: This balance, as it is derived from the capital transaction of issuing shares, qualifies as Capital Profit and is transferred to the Capital Reserve Account. This ensures that it is not distributed as dividends but may be used for writing off capital losses.

Therefore, the correct option is Capital Profit.

Answer 2

When shares are forfeited, the balance in the Share Forfeited Account reflects the amount received on those shares, including any premium paid. Upon reissuing these forfeited shares, the amount received is credited to the Share Forfeited Account.

The balance in the Share Forfeited Account, after reissuing the forfeited shares, represents a gain since no further liability is attached to the reissued shares, and the amounts previously credited to the account are considered capital in nature.

The balance remaining in the Share Forfeited Account, after reissue, is typically treated as Capital Profit because it arises from the reissue of shares and is not related to the operating activities of the company.

Therefore, the correct answer is (A): Capital Profit