Question

At the time of forfeiture of shares originally issued at premium, Securities Premium Account is:

• A. Credited
• B. Debited only if premium is unpaid
• C. Always debited
• D. Not affected

Hint:

In share forfeiture: \[ \text{Premium unpaid} \Rightarrow \text{Debit Securities Premium A/c} \]

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
When a shareholder fails to pay called-up allotment or call monies, the company can forfeit their shares, which cancels their ownership record. When dealing with shares originally issued at a premium, the treatment of the Securities Premium Account is strictly governed by a specific accounting rule regarding whether that premium cash was actually collected before the default occurred. This distinction depends on the legal principle that once a premium is received, it cannot be reversed or canceled during forfeiture.
Step 2: Detailed Explanation:
Let's analyze the two scenario pathways for share forfeiture journal entries: - Case 1: The Securities Premium has been fully received. If the shareholder paid the allotment stage (where the premium is normally attached) but failed to pay a subsequent call, the premium money is already sitting safely in the company's accounts. By law, this premium cannot be touched or canceled. In this scenario, the Securities Premium Account is completely unaffected during forfeiture. - Case 2: The Securities Premium has NOT been received. If the default happened at the allotment stage itself, the company recorded the premium as due via a credit entry, but never actually received the cash. Since the share is now being canceled, this unrealized premium claim must be wiped off the books. To cancel the original credit balance, the Securities Premium Account must be debited for the unpaid amount. Thus, the Securities Premium Account is debited only if that premium amount remains unpaid by the defaulting shareholder. This matches option (B).
Step 3: Final Answer:
At the time of forfeiture, the Securities Premium Account is debited only if premium is unpaid.