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.
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Hint:

When shares are forfeited, the accounting entries reverse previous records of share capital and calls in arrears while transferring received amounts to the share forfeiture account. Always remember that securities premium is not reversed during forfeiture.

Answer 1

The Correct Option is A

Upon forfeiture of shares, the share capital account is debited by the total called-up value. The amount already received is credited to the share forfeiture account, and any outstanding balance is moved to the relevant unpaid calls account (e.g., calls in arrears). Reason (R) clarifies that all journal entries concerning forfeited shares, excluding those related to securities premium, should be reversed to adhere to correct accounting principles.