Reference no: EM132855044

Question - Scarborough Ltd issues a prospectus inviting the public to subscribe for 3 million ordinary shares at a price of $5.50 each. The terms of the issue are that $3.00 is to be paid on application and the remaining $2.50 within one month of allotment.

Applications are received for 5 million shares during July 2020. The directors allot 3 million shares on 5 August 2020. All applicants receive shares on a pro rata basis. The amounts payable on allotment are due by 5 September 2020.

By 5 September 2020 the holders of 50,000 shares have failed to pay the amounts due on allotment. The directors forfeit the shares on 10 September 2020. The shares are resold on 15 September 2020 as fully paid up for a price of $4.75 and incurred costs of $1,500.

Required -

1. Provide the general journal entries necessary to account for the above transactions and events.

2. What is meant by a forfeited shares reserve? What does it mean if a company has created a forfeited share reserve?