Pass appropriate journal entry in the books of Newcomers Limited.
Understand the Problem
The question is requesting the appropriate journal entry for Newcomers Limited following the issuance, allotment, and forfeiture of shares. We need to account for the issuance of shares, defaults in payment, forfeiture of shares, and reissue of forfeited shares.
Answer
Issuance: $10,000, Allotment: $5,000, Forfeiture: $2,000, Reissue: Cash $1,600, Credits: $2,000 and $400.
Answer for screen readers
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Issuance of Shares:
- Debit Cash: $10,000
- Credit Share Capital: $10,000
-
Allotment Entry:
- Debit Share Allotment Receivable: $5,000
- Credit Share Capital: $5,000
-
Forfeiture Entry:
- Debit Share Capital: $2,000
- Credit Forfeited Shares Account: $2,000
-
Reissue of Forfeited Shares:
- Debit Cash: $1,600
- Credit Forfeited Shares Account: $2,000
- Credit Share Capital: $400
Steps to Solve
- Account for Issuance of Shares
When shares are issued, the company receives cash or other consideration, and share capital is increased.
Assuming 1,000 shares are issued at $10 each, the journal entry will be:
- Debit Cash $10,000 (1,000 shares x $10)
- Credit Share Capital $10,000
- Account for Allotment
If shares are allotted but not fully paid, record the amount due from shareholders. Assuming $5 is payable on allotment per share, the entry is as follows:
- Debit Share Allotment Receivable $5,000 (1,000 shares x $5)
- Credit Share Capital $5,000
- Account for Forfeiture of Shares
If a shareholder defaults, the company may forfeit their shares. Assuming one shareholder defaults on 200 shares, the forfeiture entry is:
- Debit Share Capital $2,000 (200 shares x $10)
- Credit Forfeited Shares Account $2,000
- Account for Reissue of Forfeited Shares
If forfeited shares are reissued at a lower price, for example at $8 each, the entries will be:
- Debit Cash $1,600 (200 shares x $8)
- Credit Forfeited Shares Account $2,000
- Credit Share Capital $400 (200 shares x ($10 - $8))
This shows the cash received and the respective adjustments to the forfeited shares and new share capital created from the reissue.
-
Issuance of Shares:
- Debit Cash: $10,000
- Credit Share Capital: $10,000
-
Allotment Entry:
- Debit Share Allotment Receivable: $5,000
- Credit Share Capital: $5,000
-
Forfeiture Entry:
- Debit Share Capital: $2,000
- Credit Forfeited Shares Account: $2,000
-
Reissue of Forfeited Shares:
- Debit Cash: $1,600
- Credit Forfeited Shares Account: $2,000
- Credit Share Capital: $400
More Information
This illustrates the process of issuing shares, including handling defaults and reissuing forfeited shares. These entries ensure accurate accounting for capital movements in the company.
Tips
- Not correctly reflecting the number of shares in the entries.
- Failing to account for all stages: issuance, allotment, forfeiture, and reissue.
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