Step 1: Understanding the Concept:
When a company forfeits shares, it has the legal authority to reissue those shares to new buyers to recover the lost capital.
A reissue is not technically an "issue of shares" but a "sale of shares" owned by the company.
Because the company has already gained some money from the previous shareholder (the forfeited amount), it can afford to offer a discount to the new buyer.
The term "fully paid-up" used during reissue means that the new shareholder is credited with the full face value of the share in the company's books, regardless of the price they actually paid.
For example, if a \( 10 \) share is reissued as fully paid-up for \( 9 \), the company treats it as if the shareholder has paid the entire \( 10 \), even though the company only received \( 9 \) in cash.
The difference of \( 1 \) is considered a "Discount on Reissue."
According to the Companies Act, the maximum discount a company can give on the reissue of forfeited shares is limited to the amount originally forfeited on those shares. This discount is debited to the "Share Forfeiture Account" rather than a "Discount on Issue" account.
Step 2: Key Formula or Approach:
The discount on reissue is the shortfall between the value credited to the capital account and the cash received.
\[ \text{Discount per share} = \text{Paid-up Value (Face Value)} - \text{Reissue Price} \]
To find the total discount:
\[ \text{Total Discount on Reissue} = \text{Number of Shares Reissued} \times \text{Discount per share} \]
Step 3: Detailed Explanation:
Let us calculate the discount for the 400 shares reissued by the company:
1. The company is reissuing 400 shares that were previously forfeited.
2. The Face Value of these shares is given as \( 10 \) per share.
3. The shares are reissued as "fully paid-up." This implies that the Share Capital account will be credited with the full \( 10 \) per share.
4. The actual price charged to the new buyers (Reissue Price) is \( 9 \) per share.
5. Calculation of Discount per share:
\[ \text{Discount} = 10 \text{ (Nominal Value)} - 9 \text{ (Actual Price)} = 1 \text{ per share.} \]
6. Calculation of Total Discount for the entire block of reissued shares:
\[ \text{Total Discount} = 400 \text{ shares} \times 1 \text{ (discount per share)} \]
\[ \text{Total Discount} = 400. \]
7. Accounting Entry Visualization:
Bank A/c Dr. 3,600 (Cash received: \( 400 \times 9 \))
Share Forfeiture A/c Dr. 400 (Discount adjusted: \( 400 \times 1 \))
To Share Capital A/c 4,000 (Value credited: \( 400 \times 10 \))
8. This \( 400 \) discount will be subtracted from the existing balance in the Share Forfeiture Account. Any remaining balance in that account for these 400 shares would then be transferred to the Capital Reserve.
Step 4: Final Answer:
The total amount of discount allowed on the reissue of these 400 forfeited shares is 400.