Corporate Accounting - Cash Flow Analysis

Corporate Accounting

Cash Flow Analysis

 

Part A: Discussion of basic theories including various methods and techniques of preparing the Cash Flow Statement and explanation of important definitions and points relevant to analysing the cash flows of a business enterprise effectively in order to preparing the Cash Flow Statement most appropriately.

Part B: 5 Illustrations with solutions.

Part A

Definitions

 

Cash flow means change in cash balance between two balance sheet dates. In other words, cash flow is the difference between the opening cash balance and the closing cash balance of an accounting year. If the closing cash balance of the accounting year is higher than the opening cash balance, it is termed as positive cash flow. On the other hand, if the closing cash balance is smaller than the opening cash balance, it is termed as negative cash flow.

 

Cash flow analysis means analysis of the cash flow in order to find out –

(a)  If there is a positive cash flow, then what are the reasons / factors which contributed to the increase in cash balance during the accounting year?

(b)  If there is a negative cash flow, then what are the reasons / factors which contributed to the decrease in cash balance during the accounting year?

 

Cash flow statement is a statement prepared for the purpose of cash flow analysis as per AS-3 (Accounting Standard – 3) issued by the Institute of Chartered Accountants of India (ICAI). As per the AS-3 a cash flow statement should consist of following three components:

 

1. Cash flows from operating activities

 

Cash flows from operating activities primarily arise from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions that are considered for determining net profit or net loss. Thus, examples of cash flows from operating activities are:

i.         Cash receipts from the sale of goods and the rendering of services;

ii.        Cash receipts from royalties, fees, commission and other revenue;

iii.      Cash payments to suppliers of goods and services;

iv.      Cash payments to and on behalf of the employees (e.g., salaries, wages, PF contribution, ESI   contribution, etc.).

 

2. Cash flows from investing activities

 

Cash flows arising out of acquisition and disposal of fixed assets and long term investments are classified under investing activities. Examples of these cash flows are as follows:

i.         Cash payments to acquire fixed assets (including intangible assets);

ii.        Cash receipts from disposal of fixed assets (including intangible assets);

iii.      Cash payments to acquire shares, debentures etc. of other companies;

iv.      Cash receipts from disposal of shares, debentures etc. of other companies;

v.       Receipt of dividend and interest in cash;

vi.      Cash payments for research and development;

vii.    Cash payments for construction of fixed assets.

 

3. Cash flows from financing activities

 

Cash flows arising out of raising and redemption of capital are classified under financing activities. Examples of these cash flows are as follows:

i.         Cash receipts from issue of shares;

ii.        Cash payments for buy back of equity shares;

iii.      Cash payments for redemption of preference shares;

iv.      Cash receipts from issue of debentures;

v.       Cash payments for redemption of debentures;

vi.      Raising of long term loans in cash;

vii.    Repayment of long term loans in cash;

viii.   Payment of dividend and interest in cash.

 

Methods of preparing the cash flow statement

There are two methods for preparing the cash flow statement: Direct Method and Indirect Method.

Some Important Points / Explanations:

 

1.   Meaning of cash and cash equivalents

 

Cash comprises (a) cash in hand and (b) cash at bank in the form of demand deposits. Cash equivalents are short term highly liquid investments having a short maturity period of, say, three months or less from the date of acquisition, which can be readily converted into known amount of cash and which are not subject to any significant risk of changes in value. Examples of cash equivalents are (a) marketable securities such as treasury bills, commercial papers etc., which can be converted into known amounts of cash readily and (b) short-term investments.

 

2.   Current Investments

 

Current investments are considered as part of working capital and accordingly, should be taken into account in calculating cash from operating activities. If, however, they are stated to be marketable securities or short-term investments, they are included in cash and cash equivalents.

 

3.   Treatment of bank overdraft and cash credit

 

Cash credits are to be treated as short-term borrowings (under current liabilities) as part of financing activities and not as cash and cash equivalents, but as per Ind AS-7 bank overdrafts which are repayable on demand are to be treated as part of cash and cash equivalents.

 

4.   Provision against current assets

 

Very often provision is made for doubtful debts and obsolescence or loss in the value of inventory. In such cases the concerned item of current asset should be shown net of provision in the “changes in working capital”.

 

5.   Treatment of bad debts

 

Bad debts written off during the year may be added back to the closing balances of provision for doubtful debts and trade receivables. Alternatively, the adjustment of writing off of bad debts may be ignored and the solution can be given on the basis of the closing balances of provision for doubtful debts and trade receivables as appearing in the balance sheet without adding back the bad debts written off during the year to the said closing balances.

 

6.   Purchasing a business by issue of fully paid shares

 

If assets and liabilities of another company are purchased by issuing fully paid shares, the entire amount of issue of shares against the business purchase should be ignored i.e. should not be considered as a cash inflow under financing activities. Similarly, acquisition of fixed assets in such cases should also be ignored i.e. should not be considered as a cash outflow under investing activities. But the current assets or current liabilities acquired in such cases should be added with the respective opening balances and should be considered accordingly under operating activities.

 

7.   Treatment of proposed dividend

 

First Approach (If Proposed Dividend is not shown in the Balance Sheet)

As per the Amendment in the year 2016 by a Notification of the Ministry of Corporate Affairs dated 6 April, 2016, proposed dividend should not be shown in the Balance Sheet as a liability. Proposed dividend should actually be disclosed in the Notes to Accounts under Contingent Liability.

In view of above,

(a)  Previous year's proposed dividend shall be added back to the Net Profit as per Balance Sheet to arrive at the Net Profit Before Tax under Operating Activities and shall be shown as a cash outflow under Financing Activities in preparing the Cash Flow Statement.

 

(b)    No effect is to be given to current year's proposed dividend in preparing the Cash Flow Statement.

Second Approach (If Proposed Dividend is shown in the Balance Sheet)

Current year's proposed dividend shall be added back to the Net Profit as per Balance Sheet to arrive at the Net Profit Before Tax under Operating Activities and previous year's proposed dividend shall be shown as a cash outflow under Financing Activities in preparing the Cash Flow Statement.

 

8.   Interest on debentures and loans

 

The International Accounting Standard Board (IASB) in their IAS-7: Cash Flow Statement has considered interest expenses as part of operating activities. In this case, interest expenses are not to be added back under “Cash flows from operating activities”. It would be simply ignored.

 

But, The Institute of Chartered Accountants of India (ICAI) in AS-3: Cash Flow Statement has considered interest expenses as part of financing activities. In this case, interest expenses have to be added back under “Cash flows from operating activities” and payment of interests has to be shown as outflow of cash under “Cash flows from financing activities”.

 

In the above format interest on debentures and loans has been considered as part of financing activities. If nothing specific is instructed in the problem in this regard, interest expenses should be considered as part of financing activities.

Part B

Corporate Accounting

Cash Flow Analysis

Selected Problems and Solutions

Corporate Accounting - Accounting for Issue, Forfeiture and Re-Issue of Shares

CORPORATE ACCOUNTING

Accounting for

ISSUE, FORFEITURE AND RE-ISSUE OF SHARES

 

Part A:

Discussion of basic theories including relevant provisions of the Companies Act, 2013, Journal Entries and various important Working Tables.

Part B:

5 Illustrations with Solutions

Part A

Share capital of a company

Share capital of a company is that part of the capital which is represented by the total nominal value (face value) of the shares which the company has issued. In the context of the company law, the term ‘share capital’ may be used in the following different senses:

1	Nominal or Authorised Capital It is the face value of the shares which a company is authorised to issue in accordance with its memorandum.
2	Issued Capital It is that part of the authorised capital which is issued to the public for subscription and allotment.
3	Subscribed Capital It is that part of the issued capital which has been subscribed by the public.
4	Called-up Capital It is that part of the subscribed capital which the directors have called up in order to carry on with the planned business expansion of the company.
5	Paid-up Capital It is that part of the called up capital which is actually received in cash by the company.
6	Uncalled Capital It is that part of the subscribed capital which has not yet been called up by the directors. The difference between the subscribed capital and called up capital is represented by the uncalled capital.
7	Reserve Capital It is that part of the uncalled capital which the company u/s 65 of The Companies Act, 2013, by special resolution, has decided not to call, except in the event and for the purposes of the company being wound up.

Share capital of a company may consist of both equity share capital and preference share capital. Face value of an equity share is usually Rs 10, if not otherwise mentioned. Similarly, face value of a preference share is usually Rs 100, if not otherwise mentioned.

 

Face Value (also called Nominal Value)

‘Face value’ of a share is the value of the share which is indicated / mentioned on the face of the share certificate itself. The face value of a share is actually printed on the face of the share certificate. A share may have a different market value which may be more or less than the face value of the share. This difference between the face value and the market value of a share may be due to a number of reasons some of which may be as follows:

1	Future prospect of the company as a whole as well as the prospect of the individual projects the company is going to execute and implement.
2	Expected profitability of the future projects as well as the profitability of the company as a whole.
3	Expectation by the market (prospective investors) of a reasonable / high percentage of dividends.
4	Expectation by the market of a bonus issue or a stock split by the company.
5	News of a tie-up or collaboration with a big industrial house.
6	News of development of a new product or process or service within the company having a very good potential in terms of increasing the revenue and future profitability.
7	General upward or downward trend in the stock market.

 

Whatever may be the market price, whenever a company declares dividend, the percentage of dividend is applied on the face value of the share.

 

Issue of shares

A company issues shares for public subscription whenever it requires fund to invest in new projects or to expand any existing project (s), assuming that raising capital by issue of shares is the best possible option available to the company compared to the other options like issue of debentures, taking term loans from banks or financial institutions, etc. Sometimes shares may also be issued to raise fund for paying off long term debts and loans.

 

Shares may be issued at par or at premium. Issue price of a share is the total of its face value and premium when shares are issued at premium. But issue price will be equal to the face value when shares are issued at par. It means,

a)	Issue price = Face value                              (when issued at par)
b)	Issue price = Face value + Premium              (when issued at premium)

 

As per Section 53 of The Companies Act, 2013 Companies would no longer be permitted to issue shares at a discount. The only shares that could be issued at a discount are sweat equity shares which are issued to the directors and employees of the Company u/s 54 of The Companies Act, 2013.

 

When a company issues shares for public subscription, the company may collect the entire issue price along with the application for shares. But usually, the company collects the issue price in different instalments. For example, a part of the issue price may be collected along with the application for shares, a part may be collected during allotment of the shares and the balance may be collected in one or more instalments. When the issue price is collected in instalments, usually there is a time gap between the calls of two successive instalments.

Minimum share application money

As per Section 39(2) of the Companies Act 2013, the amount payable on application on every share shall not be less than 5% of the nominal amount (i.e. face value) of the share or such other percentage or amount, as may be specified by the Securities and Exchange Board of India (SEBI) by making regulations in this behalf. However, as per SEBI Guidelines, the minimum application money to be paid by an applicant along with the application for shares shall not be less than 25% of the issue price of the share.

 

Minimum Subscription

A public limited company cannot make any allotment of shares unless the amount of minimum subscription stated in the prospectus has been subscribed and the sum payable as application money for such shares has been paid to and received by the company. The amount of minimum subscription has to be disclosed in the prospectus by the Board of Directors after taking into account the following:

1	Preliminary expenses of the company,
2	Commission payable on issue of shares,
3	Cost of fixed assets purchased or to be purchased,
4	Working capital requirements of the company, and
5	Any other expenditure for the day to day operation of the business.

 

Under section 39(1) of The Companies Act, 2013, no allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument.

 

Under section 39(3) of The Companies Act, 2013, if the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of 30 days from the date of issue of the prospectus, or such other period as may be specified by the Securities and Exchange Board of India (SEBI), the amount received u/s 39(1) as stated above shall be returned within such time and manner as may be prescribed.

 

As per SEBI Guidelines, a company must receive a minimum of 90% subscription against the entire issue (including devolvement on underwriters in case of underwritten issue) before making any allotment of shares or debentures to the public. If the Company does not receive the minimum subscription of 90% of the issue, the entire subscription shall be refunded to the applicants within 15 days after the date of closure of issue. In case of delayed refund, interest shall be due to be paid to the applicants at the rate of 15% per annum for the delayed period.

 

Journal entries

(Assuming that the issue price is collected in instalments)

Dt.	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Bank A/c                                  Dr
	To Equity share application A/c
	(Application money received for number of shares applied for)
2	If application money does not include any premium
	Equity share application A/c        Dr
	To Equity share capital A/c
	(Application money transferred to share capital account for number of shares issued and allotted)
3	If shares are issued at premium and the premium is collected along with application
	Equity share application A/c        Dr
	To Equity share capital A/c
	To Securities premium A/c
	(Application money transferred to share capital account and securities premium account for number of shares issued and allotted)
4	Equity share application A/c       Dr
	To Bank A/c
	(Excess application money refunded) [See Working Note: 1]
5	Equity share application A/c       Dr
	To Equity share allotment A/c
	(Excess application money adjusted against allotment)
6	If allotment money does not include any premium
	Equity share allotment A/c         Dr
	To Equity share capital A/c
	(Allotment money becomes due)
7	If shares are issued at premium and the premium is included in allotment money
	Equity share allotment A/c         Dr
	To Equity share capital A/c
	To Securities premium A/c
	(Allotment money along with securities premium becomes due)
8	Bank A/c                                  Dr
	Calls-in-arrear A/c (if any)          Dr
	To Equity share allotment A/c
	(Allotment money received) [See Working Note: 2]
9	Equity share first call A/c            Dr
	To Equity share capital A/c
	(First call money becomes due)
10	Bank A/c                                  Dr
	Calls-in-arrear A/c (if any)          Dr
	To Equity share first call A/c
	(First call money received) Note: Same journal entries as for the first call will be made for the second and all subsequent calls.
11	If premium with respect to the forfeited shares has already been received
	Equity share capital A/c             Dr [Called up amount credited to share capital w.r.t. the forfeited shares up to the time of forfeiture of the shares]
	To Calls-in-arrear A/c
	To Forfeited shares A/c [Amount already received against the forfeited shares excluding premium]
	(Shares forfeited)
12	If premium with respect to the forfeited shares has not yet been received
	Equity share capital A/c             Dr [Called up amount credited to share capital w.r.t. the forfeited shares up to the time of forfeiture of the shares]
	Securities premium A/c             Dr [Securities premium w.r.t. the forfeited shares due but not received]
	To Calls-in-arrear A/c
	To Forfeited shares A/c [Amount already received against the forfeited shares]
	(Shares forfeited)
	Note: 1 If the premium has already been received by the company, it cannot be cancelled (i.e. it cannot be debited) even if the shares are forfeited in the future. Moreover, the premium which has already been received by the company cannot even be included in the forfeited shares account at the time of forfeiture of the shares.
	Note: 2 Excess application money (including premium, if any) shall be adjusted against face value as well as premium, if any (first against face value and then against premium), of the subsequent calls including allotment.
13	Bank A/c                                Dr [Amount received on re-issue of the shares]
	Forfeited shares A/c                 Dr [Discount on re-issue]
	To Equity share capital A/c [Paid up value of the re-issued shares]
	(Forfeited shares re-issued)
14	Forfeited shares A/c                 Dr
	To Capital reserve A/c
	(Profit on re-issue of forfeited shares transferred to capital reserve) [See Working Note: 3]

  Important Notes:

1	Forfeited shares can be re-issued at any price so long as: [Amount received from the defaulting shareholder + Re-issue price] ≥ Calls in Arrear.
2	Discount on re-issue should be ≤ Amount forfeited.
3	If the shares are re-issued at a price which is more than the face value of the shares, the excess amount will be credited to Securities Premium Account.

Calls-in-arrear

Calls-in-arrear refer to that portion of the capital which has been called up but not yet been paid by the shareholders. When a shareholder fails to pay the amount due on allotment and/or calls, such amount is debited to a special account called “Calls-in-arrear account” crediting the allotment and/or respective calls account.

If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest thereon from the day appointed for payment thereof to the time of actual payment @ 10% per annum or at such lower rate, if any, as the Board may determine.

 

Interest on calls-in-arrear may be collected by the directors from the shareholders, if the Articles of Association so provide. If the company has adopted ‘Table F’, then it can charge interest @ 10% p.a. from the due date to the date of actual receipt.

Journal entries

Date	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Shareholders A/c                           Dr
	To Interest on calls-in-arrear A/c
	(Interest on calls-in-arrear becomes due)
2	Bank A/c                                       Dr
	To Shareholders A/c
	(Interest on calls-in-arrear actually received)
3	Interest on calls-in-arrear A/c         Dr
	To Profit and loss A/c
	(Interest on calls-in-arrear transferred to P/L A/c)

 

Calls-in-advance

Calls-in-advance generally arise when there is an over subscription of shares. Here, the excess application money received is adjusted against the amount due on allotment or calls. The excess application money after adjustment against the amount due on allotment is credited to a special account called “Calls-in-advance account”. Sometimes, to avoid botheration of paying calls from time to time, some shareholders may prefer to pay the entire amount at the time of allotment. Such advance money in respect of future call(s) is also credited to “Calls-in-advance account”.

 

The Board—

(a)	May, if it thinks fit, receive from any member willing to advance the same, all or any part of the monies uncalled and unpaid upon any shares held by him; and
(b)	Upon all or any of the monies so advanced, may (until the same would, but for such advance, become presently payable) pay interest at such rate not exceeding, unless the company in general meeting shall otherwise direct, 12% per annum, as may be agreed upon between the Board and the member paying the sum in advance.

Interest on calls-in-advance may be paid by the directors to the shareholders, if the Articles of Association so provide. If the company has adopted ‘Table F’, then it has to pay interest @ 12% p.a. from the date of receipt to the due date.

 

Journal entries

Date	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Interest on calls-in-advance A/c       Dr
	To Shareholders A/c
	(Interest on calls-in-advance becomes due)
2	Shareholders A/c                            Dr
	To Bank A/c
	(Interest on calls-in-advance actually paid)
3	Profit and loss A/c                         Dr
	To Interest on calls-in-advance A/c
	(Interest on calls-in-advance transferred to P/L A/c)

 

Issue of shares other than for cash

 

Issue of shares to promoters

A company may allot shares to the promoters of the company for providing their services.

Journal entries

Date	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Goodwill A/c                            Dr
	To Share Capital A/c
	(Shares issued to promoters as per Board’s Resolution no………… dated……………..)

 

Issue of shares to underwriters

A company may allot shares to the underwriters to pay their underwriting commission.

Journal entries

Date	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Underwriting Commission A/c           Dr
	To Underwriters’ A/c
	(Underwriting commission becomes due)
2	Underwriters’ A/c                           Dr
	To Share Capital A/c
	(Shares allotted to the underwriters)
3	Securities Premium A/c                   Dr [If Securities Premium exists in the balance sheet]
	Statement of Profit and Loss A/c       Dr
	To Underwriting Commission A/c
	(Underwriting commission written off)

 

Issue of shares to vendors

Shares can be issued even to vendors against purchase of assets like land, building, plant, equipment, etc or even against purchase of an entire business.

Journal entries

Date	Particulars	LF	Dr. (Rs)	Cr. (Rs)
	For assets and liabilities taken over
	A) When purchase consideration is equal to the net asset taken over
1	Sundry assets A/c                          Dr
	To Sundry liabilities A/c
	To Vendors A/c [Purchase consideration]
	(Net asset taken over)
	B) When purchase consideration is more than the net asset taken over
2	Sundry assets A/c                          Dr
	Goodwill A/c                                  Dr (Purchase Consideration – Net Asset)
	To Sundry liabilities A/c
	To Vendors A/c [Purchase consideration]
	(Net asset taken over)
	C) When purchase consideration is less than the net asset taken over
3	Sundry assets A/c                         Dr
	To Sundry liabilities A/c
	To Capital Reserve A/c (Net Asset – Purchase Consideration)
	To Vendors A/c [Purchase consideration]
	(Net asset taken over)
	For issue of shares (at par) to the vendor to satisfy the purchase consideration
4	Vendors A/c                                Dr [Purchase consideration]
	To Share Capital A/c
	(Shares allotted to the vendor at par)
	For issue of shares (at premium) to the vendor to satisfy the purchase consideration
5	Vendors A/c                              Dr [Purchase consideration]
	To Share Capital A/c
	To Securities premium A/c
	(Shares allotted to the vendor at premium)

 

Oversubscription and pro-rata allotment of shares

Oversubscription is receipt of application for more number of shares than the number of shares issued for subscription. Application money for excess number of shares over the number of shares issued for subscription is either refunded or adjusted as follows:

1	Refunded to the applicants fully and shares issued are allotted to the remaining applicants; or
2	Refunded to the applicants partially and shares issued are allotted to the remaining applicants on pro-rata basis, adjusting the excess application money received from these remaining applicants against the amounts due from them as allotment moneys and call moneys; or
3	Not refunded at all and shares issued are allotted to all the applicants on pro-rata basis, adjusting the excess application money received from them against the amounts due from them as allotment moneys and call moneys.

 

When shares are allotted on pro-rata basis, excess application money on shares allotted is adjusted either only against allotment money or against allotment money and one or more subsequent call moneys. But in any case, if any amount is to be refunded as excess application money, it has to be refunded before the shares are allotted to the applicants.

 

What is Pro-rata Allotment?

Pro-rata allotment means allotting shares in proportion of shares applied for. For example, if a company allots 1,00,000 shares (which were actually issued for public subscription) to the applicants for 1,50,000 shares on pro-rata basis, any applicant who has applied for 15 shares will be allotted 10 shares, and any applicant who has applied for 60 shares will be allotted 40 shares, and so on.

Allotment of shares on pro-rata basis

– an example

A Company issued 1, 00,000 equity shares for public subscription. Applications were received for 1, 50,000 shares. The Company refused to allot any shares to the applicants applying for 30,000 shares and allotted shares to the remaining applicants on pro-rata basis. Abhishek applied for 6000 shares and Amitabh was allotted 20,000 shares. Calculate –

         a)        How many shares were allotted to Abhishek, and

         b)        How many shares did Amitabh apply for?

 

Solution:

1,00,000 equity shares were allotted on pro-rata basis to the applicants applying for (1,50,000 – 30,000), i.e. 1,20,000 shares. So, ratio of pro-rata allotment is 1,00,000: 1,20,000, i.e. 5: 6.

 

Therefore,

         a)        Number of shares allotted to Abhishek

= 6,000 × ⁵/₆ = 5,000.

         b)        Number of shares Amitabh applied for

= 20,000 × ⁶/₅ = 24,000.

 

In case of pro-rata allotment there may be two situations as follows:

Situation 1:

Under this situation, no shareholder fails to pay the allotment money and the subsequent call moneys (against which the excess application money had been adjusted) due from him. No special computation or workings are required to be made under this situation. Journal entries are also made as usual as shown above.

 

Situation 2:

Under this situation, one or more shareholders fail to pay the allotment money and / or the subsequent call moneys (against which the excess application money had been adjusted) due from him. In this case, Calls-in-Arrear from the defaulting shareholder and Total Allotment Money Received have to be calculated as per Working Note: 2 given below.

 

Working Note: 1

Statement showing Allotment of Shares and

Adjustment and Refund of Excess Application Money

SL No	Particulars	Category: I	Category: II	Category: III	Category: IV	Category: V	Total
1	No. of shares applied
2	No. of shares allotted
3	Application money received
4	Excess application money received
5	Allotment money due
6	Allotment money received
7	Excess application money received
8	1st call money due
9	1st call money received
10	Excess application money received
11	Final call money due
12	Final call money received
13	Application money refunded

 

Working Note: 2

Calculation of Calls-in-Arrear and Total Allotment Money Received

In case of pro-rata allotment of shares under Situation 2

	Particulars	Rs	Rs
	Total amount due on allotment		×××
LESS	Excess application money adjusted against allotment		(×××)
			×××
LESS	Allotment money due from the defaulting shareholder [Number of shares allotted × Allotment money per share]	×××
	LESS: Excess application money received from the defaulting Shareholder [(Number of shares applied for – Number of shares allotted) × Application money per share]	(×××)	(×××) (A)
	Total Allotment Money Received		×××

    A  = Call-in-Arrear

 

Working Note: 3

Computation of amount of profit on re-issue of forfeited shares to be transferred to Capital Reserve:

 

This amount can be computed by using any one of the two alternative formulas as given below:

 

   Let, for a single defaulter

(a)	Transfer to capital reserve = TCR
(b)	Number of shares forfeited = F
(c)	Total amount forfeited by forfeiting the shares = TAF
(d)	Number of shares re-issued from the forfeited shares = R
(e)	Total amount of discount on re-issue of the forfeited shares = TDR

Formula: 1

Amount to be transferred to Capital Reserve

=  Proportionate forfeited amount on re-issued shares − Total discount on re-issued shares

=  [Amount forfeited per share × Number of shares re-issued] − Total amount of discount on re-issue of the forfeited shares

 

Symbolically,

TCR       = [(TAF ÷ F) × R] – TDR

 

Formula: 2

Amount to be transferred to Capital Reserve

=  Proportionate forfeited amount on re-issued shares − Total discount on re-issued shares

=  [Amount forfeited per share – Amount of discount on re-issue per share] × Number of shares re-issued

 

Symbolically,

TCR       = [(TAF ÷ F) – (TDR ÷ R)] × R

 

Important note:

Where there are two or more defaulters, the workings as shown in Working Note: 3 shall have to be made separately for each of the defaulters to arrive at the total amount to be transferred to Capital Reserve.

Working Note:  4

Computation of amount of balance remained in the Forfeited Shares Account after re-issue of some or all the forfeited shares:

Balance in the Forfeited Shares Account after re-issue of the forfeited shares

= Total amount forfeited − Proportionate forfeited amount on re-issued shares

= Amount forfeited per share × Number of forfeited shares that were not re-issued

Important note:

Where there are two or more defaulters, the workings as shown in Working Note: 4 shall have to be made separately for each of the defaulters to arrive at the total amount of balance remained in the Forfeited Shares Account after re-issue of forfeited shares.

Where ‘Capital Reserve’ and ‘Forfeited Shares Account’ are shown in the Balance Sheet

 

Capital Reserve is shown on the liabilities side of a company's balance sheet, specifically under the "Equity and Liabilities" section within the "Reserves and Surplus" subsection, as part of the shareholders' funds.

 

The balance in a Forfeited Shares Account is shown on the liabilities side of the company’s balance sheet, specifically under the “Equity and Liabilities” section within the “Share Capital” subsection, as part of the shareholders’ funds. It is typically added to the Subscribed and Paid-up Capital. This treatment shows the total amount of capital received by the company on the forfeited shares, even though the shares are no longer outstanding.

Part B

CORPORATE ACCOUNTING

Accounting for

ISSUE, FORFEITURE AND RE-ISSUE OF SHARES

Selected Problems and Solutions

Illustration: 1

A Company invited the public to subscribe for 100, 00,000 Equity Shares of Rs 100 each at a premium of Rs 10 per share payable on allotment. Payments were to be made as follows: On application Rs 20; on allotment Rs 40; on first call Rs 30 and on final call Rs 20.

 

Applications were received for 130, 00,000 shares; applications for 20, 00,000 shares were rejected and allotment was made proportionately to the remaining applicants. Both the calls were made and all the moneys were received except the final call moneys on 3, 00,000 shares which are forfeited after due notice. Later 2, 00,000 of the forfeited shares were re-issued as fully paid up at Rs 85 per share. Pass Journal entries.

 

Solution: 1

Journal Entries                         [Rs in ’000]

Dt.	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Bank A/c [Rs 20 × 130,00,000]        Dr		2,60,000
	To Equity share application A/c			2,60,000
	(Application money @ Rs 20 per share received for 130 lakh shares applied for)
2	Equity share application A/c        Dr		2,00,000
	To Eq. Sh. Cap. A/c       [Rs 20 × 100,00,000]			2,00,000
	(Application money transferred to share capital account for 100 lakh shares issued and allotted)
3	Equity share application A/c       Dr		40,000
	To Bank A/c [Rs 20 × 20,00,000]			40,000
	(Excess application money refunded)
4	Equity share application A/c       Dr		20,000
	To Eq. Sh. Allot. A/c       [Rs 20 × 10,00,000]			20,000
	(Excess application money adjusted against allotment)
5	Eq. Sh. Allot. A/c                      Dr [Rs 40 × 100,00,000]		4,00,000
	To Eq. Sh. Cap. A/c       [Rs 30 × 100,00,000]			3,00,000
	To Sec. Prem. A/c       [Rs 10 × 100,00,000]			1,00,000
	(Allotment money along with securities premium becomes due)
6	Bank A/c                          Dr [40,00,00,000 – 2,00,00,000]		3,80,000
	To Equity share allotment A/c			3,80,000
	(Allotment money received)
7	Eq. Sh. First call A/c          Dr [Rs 30 × 100,00,000]		3,00,000
	To Equity share capital A/c			3,00,000
	(First call money becomes due)
8	Bank A/c                              Dr		3,00,000
	To Equity share first call A/c			3,00,000
	(First call money received)
9	Eq. Sh. Final call A/c              Dr [Rs 20 × 100,00,000]		2,00,000
	To Equity share capital A/c			2,00,000
	(Final call money becomes due)
10	Bank A/c [Rs 20 × 97,00,000]    Dr		1,94,000
	Calls-in-arrear A/c                     Dr [Rs 20 × 3,00,000]		6,000
	To Equity share final call A/c			2,00,000
	(Final call money received except calls-in-arrear on 3,00,000 shares]
11	Eq. Sh. Capital A/c                    Dr [Rs 100 × 3,00,000]		30,000
	To Calls-in-arrear A/c			6,000
	To Forfeited shares A/c       [Rs 80 × 3,00,000]			24,000
	(3,00,000 shares forfeited for non payment of final call money)
12	Bank A/c [Rs 85 × 2,00,000]      Dr		17,000
	Forfeited shares A/c                    Dr [Rs 15 × 2,00,000]		3,000
	To Eq. Sh. Capital A/c       [Rs 100 × 2,00,000]			20,000
	(2,00,000 forfeited shares re-issued @ Rs 85 each)
13	Forfeited shares A/c                 Dr		13,000
	To Capital reserve A/c			13,000
	(Profit on re-issue of forfeited shares transferred to capital reserve) [W.N.]

 

Working note:

Amount to be transferred to Capital Reserve

=  [Amount forfeited per share – Amount of discount on re-issue per share] × Number of shares re-issued

=  [Rs 80 – Rs 15] × 2, 00,000

=  Rs 1, 30, 00,000

 

Illustration: 2

X Ltd. issued 10,000 Equity shares of Rs 10 each at a premium of Rs 2 per share, payable: Rs 3 on application (including premium of Rs 1); Rs 4 on allotment (including the balance of premium) and the balance in a call.

Public subscribed for 12,000 shares. Excess application money was refunded. One shareholder Mr. Andy holding 50 shares paid the call money along with allotment. Another Mr. Brandy failed to pay allotment & call on 30 shares. These shares were forfeited after the call and 25 of these shares were re-issued as fully paid up at Rs 9 each. Pass Journals Entries.

 

Solution: 2

Journal Entries

Dt.	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Bank A/c [Rs 3 × 12,000]        Dr		36,000
	To Equity share application A/c			36,000
	(Application money @ Rs 3 per share received for 12,000 shares applied for)
2	Equity share application A/c        Dr		30,000
	To Eq. Sh. Capital A/c [Rs 2 × 10,000]			20,000
	To Sec. Prem. A/c [Rs 1 × 10,000]			10,000
	(Application money @ Rs 2 per share transferred to share capital account and premium @ Rs 1 per share transferred to securities premium account for 10,000 shares issued and allotted)
3	Equity share application A/c       Dr		6,000
	To Bank A/c [Rs 3 × 2,000]			6,000
	(Excess application money refunded)
4	Eq. Sh. Allot. A/c [Rs 4 × 10,000] Dr		40,000
	To Eq. Sh. Capital A/c [Rs 3 × 10,000]			30,000
	To Sec. Prem. A/c [Rs 1 × 10,000]			10,000
	(Allotment money along with securities premium becomes due)
5	Bank A/c                                         Dr		40,130
	Calls-in-arrear A/c [Rs 4 × 30]          Dr		120
	To Equity share allotment A/c			40,000
	To Calls-in-advance A/c [Rs 5 × 50]			250
	(Allotment money received except calls-in-arrear on 30 share and along with calls-in-advance on 50 shares w.r.t. the call money)
6	Equity share call A/c [Rs 5 × 10.000]  Dr		50,000
	To Equity share capital A/c			50,000
	(Call money becomes due)
7	Bank A/c                                          Dr		49,600
	Calls-in-arrear A/c [Rs 5 × 30]          Dr		150
	Calls-in-advance A/c [Rs 5 × 50]       Dr		250
	To Equity share call A/c			50,000
	(Call money received except calls-in-arrear on 30 shares)
8	Equity share capital A/c [Rs 10 × 30]   Dr		300
	Securities Premium A/c [Rs 1 × 30]     Dr		30
	To Calls-in-arrear A/c       [Rs 120 + Rs 150]			270
	To Forfeited shares A/c [Rs 2 × 30]			60
	(30 shares forfeited for non payment of allotment and call money)
9	Bank A/c [Rs 9 × 25]                       Dr		225
	Forfeited shares A/c [Rs 1 × 25]      Dr		25
	To Eq. Sh. Capital A/c [Rs 10 × 25]			250
	(25 forfeited shares re-issued @ Rs 9 each)
10	Forfeited shares A/c                 Dr		25
	To Capital reserve A/c			25
	(Profit on re-issue of forfeited shares transferred to capital reserve) [W.N.]

 

Working note:

Amount to be transferred to Capital Reserve

=  [Amount forfeited per share – Amount of discount on re-issue per share] × Number of shares re-issued

=  [Rs 2 – Rs 1] × 25

=  Rs 25

 

Illustration: 3

JB Ltd. issued 60000 equity shares of Rs 10 each at a premium of Rs 2.50 per share. The amount payable on application is Rs 4.50 (including premium). The amount payable on allotment was fixed at Rs 4 per share and an equivalent sum was due on a call to be made. Total applications received were for 110000 shares and after consulting the stock exchange, the following scheme for allotment was decided upon:

 

Category	A	B	C
Grouping of shares	1 to 100	101 to 500	Over 500
Number of applications received	1,200	175	5
Number of shares applied for	70,000	35,000	5,000
Number of shares allotted	42,000	14,000	4,000

 

It was decided that the excess amount received on applications would be utilised in payment of allotment money and surplus if any would be refunded to the applicant. Sanjay who was one of the applicants belonging to category A and had applied for 100 shares defaulted in payment of allotment money. Vivek, who belonged to category c, and who had been allotted 800 shares failed to pay the call money. Their shares were forfeited, after the respective calls were made and re-issued as fully paid up for Rs 8 and Rs 6 per share respectively. Show the necessary journal entries in the books of the company to record the above transactions.

 

Solution: 3

Journal Entries

Dt.	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Bank A/c [Rs 4.50 × 1,10,000]        Dr		4,95,000
	To Equity share application A/c			4,95,000
	(Application money @ Rs 4.50 per share received for 1,10,000 shares applied for)
2	Equity share application A/c        Dr		4,95,000
	To Bank A/c [Refund]    [W. N. 1]			38,500
	To Eq. Sh. Allot. A/c      [W. N. 1]			1,86,500
	To Eq. Sh. Cap. A/c [2 × 60,000]			1,20,000
	To Sec. Prem. A/c [2.50 × 60,000]			1,50,000
	(Application money @ Rs 2 per share transferred to share capital account and premium @ Rs 2.50 per share transferred to securities premium account for 60,000 shares issued and allotted)
3	Eq. Sh. Allot. A/c [4 × 60,000]     Dr		2,40,000
	To Equity share capital A/c			2,40,000
	(Allotment money becomes due)
4	Bank A/c              [W. N. 2]         Dr		53,440
	Calls-in-arrear A/c [W. N. 2]         Dr		60
	To Equity share allotment A/c			53,500
	(Allotment money received except calls-in-arrear on 60 share)
5	Eq. Sh. Call A/c [Rs 4 × 60,000]    Dr		2,40,000
	To Equity share capital A/c			2,40,000
	(Call money becomes due)
6	Bank A/c    [Rs 4 × 59,140]           Dr		2,36,560
	Calls-in-arrear A/c [Rs 4 × 860]     Dr		3,440
	To Equity share call A/c			2,40,000
	(Call money received except calls-in-arrear on 860 shares)
7	Eq. Sh. Cap. A/c [10 × 860]         Dr		8,600
	To Calls-in-arrear A/c [60 + 3,440]			3,500
	To Forfeited shares A/c       [(Rs 4.50 × 100 – Rs 2.50 × 60) +        (Rs 6 × 800)]			5,100
	(860 shares forfeited)
8	Bank A/c [(8 × 60) + (6 × 800)]     Dr		5,280
	Forfeited Sh. A/c                            Dr [(2 × 60) + (4 × 800)]		3,320
	To Eq. Sh. Cap. A/c [10 × 860]			8,600
	(60 forfeited shares re-issued @ Rs 8 each and 800 forfeited shares re-issued @ Rs 6 each)
9	Forfeited shares A/c                 Dr		1,780
	To Capital reserve A/c			1,780
	(Profit on re-issue of forfeited shares transferred to capital reserve) [ Rs 5,100 - Rs 3,320 ]

 

Working Note: 1

Statement showing Allotment of Shares and

Adjustment and Refund of Excess Application Money

SL No	Particulars	Category: A	Category: B	Category: C	Total
1	No. of shares applied	70,000	35,000	5,000	1,10,000
2	No. of shares allotted	42,000	14,000	4,000	60,000
3	Application money received	3,15,000	1,57,500	22,500	4,95,000
4	Excess application money received	1,26,000	94,500	4,500	2,25,000
5	Allotment money due	1,68,000	56,000	16,000	2,40,000
6	Allotment money received	42,000 – [4×60 – 4.5×40]= 41,940	-	11,500	53,440
7	Excess application money adjusted against allotment	1,26,000	56,000	4,500	1,86,500
8	Excess application money to be refunded	-	38,500	-	38,500
9	Call money due	1,68,000	56,000	16,000	2,40,000
10	Call money received	1,68,000 − [4×60]= 1,67,760	56,000	16,000− [4×800] =12,800	2,36,560

 

Working Note: 2

Calculation of Calls-in-Arrear and Total Allotment Money Received

	Particulars	Rs	Rs
	Total amount due on allotment		2,40,000
LESS	Excess application money adjusted against allotment		(1,86,500)
			53,500
LESS	Allotment money due from Sanjay [{(42,000 ÷ 70,000) × 100} × Rs 4]	240
	LESS: Excess application money received from Sanjay       [(100 – 60) × Rs 4.50]	(180)	(60)
	Total Allotment Money Received		53,440

    Call-in-Arrear = Rs 60

Illustration: 4

SOS Limited issued a prospectus inviting applications for 6,000 shares of Rs 10 each at a premium of Rs 2 per share, payable as follows:

On application Rs 2 per share, on allotment Rs 5 per share (including premium), on 1^st call Rs 3 per share, and on 2^nd-and-final call Rs 2 per share.

 

Applications were receive for 9,000 shares and allotment was made pro-rata to the applicants of 7,500 shares, the remaining applicants were refused allotment. Money overpaid on applications was applied towards sums due on allotment.

 

D, to whom 100 shares were allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited. Z, the holder of 200 shares, failed to pay both the calls, and his shares were forfeited after the second and final call. Of the shares forfeited 200 shares were sold to C credited as fully paid up for Rs 8.50 per share, the whole of D’s shares being included.

 

Required: Give journal entries to record the above transactions.

 

Solution: 4

Books of SOS Limited

Journal entries

Dt.	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Bank A/c [Rs 2 × 9,000]            Dr		18,000
	To Equity share application A/c			18,000
	(Application money @ Rs 2 per share received for 9,000 shares applied for)
2	Equity share application A/c        Dr		18,000
	To Bank A/c [Rs 2 × 1,500]			3,000
	To Eq. Sh. Allot. A/c [Rs 2 × 1,500]			3,000
	To Eq. Sh. Cap. A/c [Rs 2 × 6,000]			12,000
	(Application money @ Rs 2 per share for 6,000 share transferred to share capital account, for 1,500 shares refunded, and for 1,500 shares adjusted against allotment)
3	Eq. Sh. Allot. A/c [Rs 5 × 6,000]     Dr		30,000
	To Eq. Sh. Cap. A/c [Rs 3 × 6,000]			18,000
	To Sec. Prem. A/c [Rs 2 × 6,000]			12,000
	(Allotment money becomes due)
4	Bank A/c                    [W. N. 1]         Dr		26,550
	Calls-in-arrear A/c       [W. N. 1]         Dr		450
	To Equity share allotment A/c			27,000
	(Allotment money received except calls-in-arrear on 100 share)
5	Eq. Sh. First call A/c                       Dr [Rs 3 × 6,000]		18,000
	To Equity share capital A/c			18,000
	(Call money becomes due)
6	Bank A/c    [Rs 3 × 5,700]                 Dr		17,100
	Calls-in-arrear A/c [Rs 3 × 300]         Dr		900
	To Equity share first call A/c			18,000
	(First call money received except calls-in-arrear on 300 shares)
7	Eq. Sh. Capital A/c [Rs 8 × 100]         Dr		800
	Securities Prem. A/c [Rs 2 × 100]       Dr		200
	To Calls-in-arrear A/c       [Rs 450 + Rs 300]			750
	To Forfeited shares A/c           [Rs 2 × 100 × (7,500 ÷ 6,000)]			250
	(100 shares of D forfeited)
8	Eq. Sh. Final call A/c [2 × 5,900]    Dr		11,800
	To Equity share capital A/c			11,800
	(Final call money becomes due)
9	Bank A/c [Rs 2 × 5,700]                   Dr		11,400
	Calls-in-arrear A/c [Rs 2 × 200]        Dr		400
	To Equity share final call A/c			11,800
	(Final call money received except calls-in-arrear on 200 shares)
10	Eq. Sh. Capital A/c [10 × 200]        Dr		2,000
	To Calls-in-arrear A/c       [Rs 600 + Rs 400]			1,000
	To Forfeited shares A/c [Rs 5 × 200]			1,000
	(200 shares of Z forfeited for non-payment of first call and final call money)
11	Bank A/c [8.50 × 200]                  Dr		1,700
	Forfeited shares A/c [1.50 × 200]   Dr		300
	To Eq. Sh. Capital A/c [10 × 200]			2,000
	(200 forfeited shares re-issued at a discount of Rs 1.50 Per share)
12	Forfeited shares A/c   [W. N. 2]       Dr		450
	To Capital reserve A/c			450
	(Profit on re-issue of forfeited shares transferred to capital reserve)

 

Working Note: 1

Calculation of Calls-in-Arrear and Total Allotment Money Received

	Particulars	Rs	Rs
	Total amount due on allotment		30,000
LESS	Excess application money adjusted against allotment		(3,000)
			27,000
LESS	Allotment money due from D [100 × Rs 5]	500
	LESS: Excess application money received from D [{100 × (7,500/6,000)} – 100] × Rs 2	(50)	(450)
	Total Allotment Money Received		26,550

    Call-in-Arrear = Rs 450

 

Working Note: 2

Amount to be transferred to Capital Reserve

	Particulars	D	Z
1	Amount forfeited per share (Rs)	2.50	5
2	Amount of discount on re-issue per share (Rs)	1.50	1.50
3	Profit on re-issue per share (Rs)        [1 – 2]	1	3.50
4	Number of shares re-issued	100	100
5	Amount to be transferred to Capital Reserve [3 × 4]	100	350

 Total amount to be transferred to Capital Reserve = 100 + 350 = Rs 450

 

Illustration: 5

Alpha Ltd issued a prospectus inviting applications for 2,000 shares of Rs 10 each at a premium of Rs 2 per share, payable as follows:

On application Rs 2 per share, on allotment Rs 5 per share (including premium), on 1^st call Rs 3 per share, and on 2^nd-and-final call Rs 2 per share.

 

Applications were received for 3,000 shares and pro rata allotment was made on the applications for 2,400 shares. It was decided to utilise excess application money towards the amount due on allotment.

 

Mohit, to whom 40 shares allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited. Jagat, the holder of 60 shares failed to pay the two calls and on such failure, his shares were forfeited. Of the shares forfeited, 80 shares were sold to Rishav credited as fully paid for Rs 9 per share, the whole of Mohit’s shares being included.

 

Required: Give Journal Entries to record the above transactions (including cash transactions).

 

Solution: 5

Books of Alpha Limited

Journal entries

Dt.	Particulars	LF	Dr. (Rs)	Cr. (Rs)
1	Bank A/c [Rs 2 × 3,000]            Dr		6,000
	To Equity share application A/c			6,000
	(Application money @ Rs 2 per share received for 3,000 shares applied for)
2	Equity share application A/c        Dr		6,000
	To Bank A/c [Rs 2 × 600]			1,200
	To Eq. Sh. Allot. A/c [Rs 2 × 400]			800
	To Eq. Sh. Cap. A/c [Rs 2 × 2,000]			4,000
	(Application money @ Rs 2 per share for 2,000 share transferred to share capital account, for 600 shares refunded, and for 400 shares adjusted against allotment)
3	Eq. Sh. Allot. A/c [Rs 5 × 2,000]       Dr		10,000
	To Eq. Sh. Cap. A/c [Rs 3 × 2,000]			6,000
	To Sec. Prem. A/c[Rs 2 × 2,000]			4,000
	(Allotment money becomes due)
4	Bank A/c                 [W. N. 1]         Dr		9,016
	Calls-in-arrear A/c    [W. N. 1]         Dr		184
	To Equity share allotment A/c			9,200
	(Allotment money received except calls-in-arrear on 40 share)
5	Eq. Sh. First call A/c                      Dr [Rs 3 × 2,000]		6,000
	To Equity share capital A/c			6,000
	(First call money becomes due)
6	Bank A/c    [Rs 3 × 1,900]             Dr		5,700
	Calls-in-arrear A/c [Rs 3 × 100]     Dr		300
	To Equity share first call A/c			6,000
	(First call money received except calls-in-arrear on 100 shares)
7	Eq. Sh. Cap A/c [Rs 8 × 40]          Dr		320
	Sec. Prem. A/c [Rs 2 × 40]           Dr		80
	To Calls-in-arrear A/c       [Rs 184 + Rs 120]			304
	To Forfeited shares A/c       [Rs 2 × 40 × (2,400 ÷ 2,000)]			96
	(40 shares of Mohit forfeited)
8	Eq. Sh. Final call A/c [2 × 1,960]     Dr		3,920
	To Equity share capital A/c			3,920
	(Final call money becomes due)
9	Bank A/c [Rs 2 × 1,900]                 Dr		3,800
	Calls-in-arrear A/c [Rs 2 × 60]        Dr		120
	To Equity share final call A/c			3,920
	(Final call money received except calls-in-arrear on 60 shares)
10	Eq. Sh. Cap A/c [Rs 10 × 60]          Dr		600
	To Calls-in-arrear A/c   [180 + 120]			300
	To Forfeited shares A/c [Rs 5 × 60]			300
	(60 shares of Jagat forfeited for non-payment of first call and final call money)
11	Bank A/c [Rs 9 × 80]                  Dr		720
	Forfeited shares A/c [Rs 1 × 80]   Dr		80
	To Eq. Sh. Cap. A/c [Rs 10 × 80]			800
	(80 forfeited shares re-issued at a discount of Rs 1 Per share)
12	Forfeited shares A/c   [W. N. 2]      Dr		216
	To Capital reserve A/c			216
	(Profit on re-issue of forfeited shares transferred to capital reserve)

 

Working Note: 1

Calculation of Calls-in-Arrear and Total Allotment Money Received

	Particulars	Rs	Rs
	Total amount due on allotment		10,000
LESS	Excess application money adjusted against allotment		(800)
			9,200
LESS	Allotment money due from Mohit [40 × Rs 5]	200
	LESS: Excess application money received from Mohit [(40*2,400/2,000 – 40) × Rs 2	(16)	(184)
	Total Allotment Money Received		9,016

    Call-in-Arrear = Rs 184

 

Working Note: 2

Amount to be transferred to Capital Reserve

	Particulars	Mohit	Jagat
1	Amount forfeited per share (Rs)	2.40	5
2	Amount of discount on re-issue per share (Rs)	1	1
3	Profit on re-issue per share (Rs)        [1 – 2]	1.40	4
4	Number of shares re-issued	40	40
5	Amount to be transferred to Capital Reserve [3 × 4]	56	160

 Total amount to be transferred to Capital Reserve = 56 + 160 = Rs 216