Step 1: Understanding the Concept:
Forfeiture of shares is a penalizing action taken by a company against a shareholder who fails to pay the allotment money or any subsequent call money within the stipulated time frame given in the notice.
When shares are forfeited, the following legal and accounting consequences occur:
First, the shareholder's name is removed from the Register of Members, and they lose their ownership rights in the company.
Second, the amount that the shareholder has already paid to the company (towards application, allotment, or previous calls) is not refunded.
Third, this retained amount is transferred to a special account called the "Share Forfeiture Account."
Fourth, the Share Capital of the company is reduced by the amount that was "Called-up" (asked for) until the point of forfeiture.
The "amount forfeited" specifically represents the gain to the company from the cancellation of these shares, which consists solely of the money already received from the defaulting shareholder.
It is important to note that if the shares were issued at a premium and the premium was already received, it is generally not included in the forfeiture account due to specific legal restrictions under Section 52 of the Companies Act, 2013.
Step 2: Key Formula or Approach:
The accounting entry for forfeiture at par is:
{Share Capital A/c Dr. (Called-up value)}
{To Share Forfeiture A/c (Amount already paid)}
{To Calls-in-Arrears A/c (Amount not paid)}
Therefore, the formula to find the amount forfeited is:
\[ \text{Amount Forfeited} = \text{Number of Shares Forfeited} \times \text{Amount Paid per Share} \]
Alternatively, since Total Value = Paid Amount + Unpaid Amount:
\[ \text{Paid Amount per share} = \text{Called-up value per share} - \text{Unpaid value per share} \]
Step 3: Detailed Explanation:
Let us apply the values from the problem to find the total gain for the company:
1. The company, XYZ Ltd., is forfeiting 500 shares.
2. The Face Value (and total potential called-up value) of each share is \( 10 \).
3. The shareholder failed to pay the "Final Call."
4. The value of the Final Call is stated as \( 2 \) per share.
5. Calculation of the amount already paid by the shareholder:
Total amount called by the company = \( 10 \).
Amount not paid by the shareholder (Unpaid) = \( 2 \).
Amount already paid = Total Called - Unpaid.
\[ \text{Amount Paid per share} = 10 - 2 = 8 \text{ per share.} \]
6. This \( 8 \) per share is what the company will retain in the Share Forfeiture Account.
7. Total Amount to be forfeited:
\[ \text{Total Forfeited Amount} = 500 \text{ (shares)} \times 8 \text{ (amount paid per share)} \]
\[ \text{Total Forfeited Amount} = 4,000. \]
8. In the journal entry, the Share Capital Account will be debited by \( 5,000 \) (\( 500 \times 10 \)), the Share Forfeiture Account will be credited by \( 4,000 \), and the Calls-in-Arrears (Final Call) will be credited by \( 1,000 \) (\( 500 \times 2 \)).
Step 4: Final Answer:
The total amount forfeited by XYZ Ltd. is 4,000. This represents the cumulative sum of the application, allotment, and previous calls that the shareholder successfully paid before defaulting on the final call.