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

Upon share forfeiture, the share capital account is debited by the amount that has been called up on the forfeited shares. The corresponding credit entries are made to:- The Calls in Arrears account, for any unpaid amounts.- The Share Forfeiture account, for amounts that have already been paid. Any securities premium previously recognized is not reversed during forfeiture. This is because the premium represents a valid receipt on the shares and is unaffected by the forfeiture process. Therefore, both the Assertion (A) and the Reason (R) are correct, and Reason (R) provides a valid explanation for Assertion (A).