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CMA Intermediate · Corporate Accounting and Auditing · Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares

Eka Ltd forfeited shares for non-payment of a call. Which statement about the treatment of the Share Forfeiture Account after re-issue of those shares is correct under standard company accounting practice?

After re-issue, the discount allowed is set against the Share Forfeiture Account and the remaining balance is transferred to Capital Reserve, because the gain from forfeiture is capital in nature and not a revenue profit.

  1. AAny balance after adjusting the discount on re-issue is transferred to Capital ReserveCorrect
  2. BThe whole balance is credited to the Statement of Profit and Loss
  3. CThe balance is transferred to General Reserve
  4. DThe balance is credited to Securities Premium

Explanation

Forfeited amount is a capital gain. On re-issue the discount allowed is debited to the Forfeiture Account, and any remaining balance relating to those shares is capital in nature, so it is transferred to Capital Reserve. It is not a revenue item and so does not go to profit and loss or General Reserve.

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