Question

The Balance in the Share Forfeited Account relating to reissue of forfeited shares will be treated as:

• A. Capital Profit
• B. Revenue Profit
• C. Capital Loss
• D. Revenue Reserve

Answer 1

The Correct Option is A

The balance remaining in the Share Forfeited Account upon the reissue of forfeited shares is classified as Capital Profit.

This classification arises because the Share Forfeited Account holds amounts previously paid by shareholders for shares later forfeited due to unfulfilled call payments. Upon reissue, a portion or the entirety of this forfeited amount is transferred to Capital Reserve, signifying a non-recurring gain tied to the company's capital structure, not operational income.

The process is detailed as follows:

1. Share Forfeiture: Shares are forfeited when a shareholder fails to meet call payments. Amounts paid on these shares prior to forfeiture are recorded in the Share Forfeited Account.
2. Share Reissue: Subsequently, these forfeited shares may be reissued to new buyers. The reissue price can be lower than, equal to, or higher than the original issue price.
3. Balance Adjustment: If the reissue price is below the original paid-up value, the shortfall is offset against the Share Forfeited Account balance. Any residual balance in this account after such adjustments is deemed a capital gain.
4. Accounting Classification: As this balance originates from a capital transaction involving share issuance, it is treated as Capital Profit and transferred to the Capital Reserve Account. This segregation prevents its distribution as dividends and allows its use for offsetting capital losses.

Consequently, the appropriate classification is Capital Profit.