ACCOUNTANCY
Study material on topic “Company Accounts”
Company accounts
Multiple choice questions.
1-The amount received over and above the nominal value of share is credited to
a- securities premium reserve account ,b-share capital account, c-share allotment account, d-none of
the above.
Ans-a
2-When share are allotted , the account to be credited will be
a- Share capital account, b-share allotment account, c-share application account, d-share first and final
call account.
Ans-a
3-The balance of the forfeited shares account after the reissue of the forfeited shares is transferred to
a- general reserve , b-capital redemption reserve, c-capital reserve ,d-reserve capital.
Ans-c
4-If A Co.ltd forfeited 10 shares of Rs 10 each Rs 7 called up, Rs 5 paid on application, the amount to be
forfeited is
a- Rs50,b-Rs 20,c-Rs 60,d-Rs 100.
Ans-a
5-After the re-issue of for feited shares
a-general reserve is debited with the credit balance left in the forfeited shares account ,b- general
reserve is credited with the credit balance left in the forfeited shares account, c-capital reserve is
debited with the credit balance left in the forfeited shares account, d- capital reserve is credited with
the credit balance left in the forfeited shares account.
Ans-d
6-Unpaid calls are shown in the notes to accounts of balance sheet of a company
a-Under the head in current assets, b-by deducting it from the subscribed but not fully paid up share
capital ,c-under the head current assets, d-under the head current liabilities.
Ans-b
7-Profit on re-issue of shares is transferred to
a-statement of profit and loss ,b-general reserve ,c-capital reserve, d-capital redemption reserve.
Ans-c
8-The capital with which a company is registered is called
a-issued capital,b-paid up capital,c- authorized capital,d-subscribed capital.
Ans-c
9-Calls in arrears account shows --------balance.
a-credit,b-debit ,c-debit or credit ,d-nil.
Ans-b
10-Bltd forfeited 300 shares of Rs 10 each,fully called up for non payment of final call money of Rs 4 per
share .these were subsequently reissued by the company for Rs 12per share as fully paid up.Amount of
forfeited shares account transferred to capital reserve.
a-Rs2400,b-Rs600,c-Rs1800,d-Rs3600.
Ans-c
11-Which of the following statement is true for a company ?
a-subscribed capital cannot exceed issued capital,b-subscribed capital can exceed paid up capital,cissued capital can be less than called up capital,d-paid up capital is always equal to authorized capital
ans-a
12-Prefernce shareholder does not have right to
a-preferential payment of dividend ,b-preferential payment of capital on redemption,c-vote,d-all of the
above.
Ans-c
13-When the full amount due on any call is received in advance ,the excess amount is credited to
a-calls suspense account,b-calls in arrears account,c-calls in advance account,d-none of the above.
Ans-c
14-On an equity share of Rs 20,the company has called up Rs 18,but the amount received is only Rs16
only ,the share capital account would be credited with the amount.
a-Rs 20,b-Rs16,c-Rs18,d-none of the above.
Ans-c
15-on an equity share of Rs 20,the company has called up Rs 18,but the amount received is only Rs16
only ,the difference of Rs 2 will be debited to
a-calls in arrear account, b-calls in advance account, c-shares forfeiture account, d-none of the above.
Ans-a
16-The maximum amount of capital that a company can raise is called
a-subscribed capital,b-issued capital ,c-called up capital,d-none of the above
ans-d
17-On an equity share of Rs 20 the company has called up Rs 18 but a shareholder paid only Rs 14and
his share were forfeited .on forfeiture of his shares ,forfeited shares account would be
a-credited by Rs 20,b-debited by Rs 18,c-credited by Rs 14,d-debited by Rs 10.
Ans-c
18-On a share of Rs 100issued at a premium Rs10 the whole amount has been called-up.but ,in case of a
shareholder only Rs 80has been received and his shares are forfeited .share capital account would be
debited by
a-Rs100,b -110,c-80,d-70
ans -a
19-On a share of Rs 100 issued at a premium of Rs 10,the whole amount has been called –up.but, in case
of a shareholder only Rs 80 has been received. Forfeited shares account would be credited by
a-Rs80,b-Rs 20,c-Rs 30,d-Rs70.
Ans -d
20-On a share of Rs 100issued at a premium Rs10 the whole amount has been called –up. but ,in case of
shareholder only Rs 80 has been received and the shares have been forfeited .what would be the
minimum price at which the forfeited shares can be re-issued.
a-Rs 20, b-Rs 30, c-Rs 70,d-Rs80.
Ans -b
21-Equity shareholders are entitled to
a-dividend at a fixed rate,b-interest at a fixed rate,c-dividend @15%,d-dividend only when proposed by
the board of directors and approved by the shareholders,
ans -d
22-Dividends are paid as a percentage of
a-authorised capital, b –net profit ,c-paid up capital, d-called up capital.
Ans -c
23-Declared dividend should be classified in the balance sheet as a
a-provision ,b-current liabilities ,c-reserve, d-current assets
ans -a
24-Which of the following signifies the difference between par value and an issue price below par?
a-securities premium ,b-discount on issue of shares, c-calls in arrears, d-calls in advance
ans-b
25-The document inviting offers from public to subscribe for the shares or debentures or deposits by a
body corporate is
a-share certificate, b-stock invest ,c-fixed deposit receipt, d-prospectus
ans-d
26-Excess price received over the face value of shares,is credited to
a-call in advance account, b-share capital account, c-reserve capital account, d-securities premium
reserve account.
Ans -d
Q 1.
A Company is
(a) A Natural Person
(b) A Citizen
(c) An Artificial Judicial Person
(d) None of the above
Ans- c
Q2.
Which of the following is not the salient feature of the company?
(a)Separate Legal Entity
(b) Perpetual Succession
(c) Limited Liability
(d) Discretionary Registration
Ans- d
Q3.
Registration of Company
(a) is compulsory
(b) is discretionary
(c) depends on nature of company
(d) None of the above
Ans-a
Q4.
Securities Premium Reserve is shown under which head of the Balance Sheet?
(a) Share Capital
(b) Reserves and Surplus
(c) Secured Loans
(d) Unsecured Loans
Ans -b
Q5.
When shares are forfeited, share capital account is debited by
(a) Paid-up amount
(b) Called-up amount
(c) Nominal Value of the share
(d) All of the above
Ans-b
Q6.
Balance of forfeited shares account is transferred to
(a) General Reserve
(b) Capital Reserve
(c) Either (a) or (b)
(d) None of the above
Ans-b
Q7.
Premium on issue of shares can be used for
(a) Purchasing of goods
(b) Issue of fully paid bonus shares
(c) Paying the amount to directors
(d) Transfer to Dividend Equalization
Fund
Ans-b
Q8.
The share capital account at the time of forfeiture of shares is
(a) Debited with called-up amount of the forfeited shares
(b) Debited with face value of the shares
(c) Credited with the called up the amount of the shares
(d) Credited with the face value of the shares
Ans- a
Q9.
Pro rata allotment of shares means allotment of shares
(a) Equally amongst the applicants
(b) To companies new partner
(c) To the applicants in proportion to the shares applied for
(d) To only a few selected applicants
Ans-c
Q10.
Which of the following statement is true for a company?
(a) Subscribed Capital cannot exceed issued capital
(b) Subscribed Capital can exceed paid-up capital
(c) issued capital can be less than called-up capital
(d) Paid-up capital is always equal to authorized capital
Ans- a
Q11.
Preference shareholder does have right to
(a) Preferential payment of Dividend
(b) Preferential payment of capital on redemption
(c) Vote
(d) All of the above
Ans-d
Q12.
When the full amount due on any call is received in advance, the excess amount is
credited to
(a) Calls Suspense Account
(b) Calls in-Arrears Account
(c) Calls in -Advance Account
(d) None of the above
Ans- c
Q13.
Which of the following statement is true ?
(a) Debentures bear fixed rate of interest
(b) Interest on debentures is not a charge but appropriation of profit
(c) Debenture holders have voting right like shareholders
(d) Debentures cannot be issued for consideration other than cash
Ans-a
Q14.
Discount on issue of debentures is a
(a)Capital Loss
(b) Revenue Loss
(c) Financial Loss
(d) Speculative Loss
Ans-a
Q15.
Premium on redemption of debentures is shown in balance sheet as
(a) Other Current Assets
(b) Other Non Current Assets
(c) Both (a) and (b)
(d) None of the Above
Ans-c
Q16.
Premium on redemption of debentures Account is opened up at the time of
(a) Issue of Debentures
(b) Redemption of Debentures
(c) Every Year
(d) None of the above
Ans-a
Q17.
Debentures can be redeemed out of
(a) Profits and Surplus of the company
(b) By issue of fresh shares and debentures
(c) Capital
(d) All of the above
Ans-d
Q18.
A company issued 5000, 11% Debentures of Rs. 100 each at par redeemable at 10%
premium, 11% stands for
(a) Rate of Dividend
(b) Rate of Tax on interest
(c) Rate of Interest
(d) Rate of Discount
Ans-c
Q19.
X Ltd. purchased machinery for Rs. 40000 payable Rs. 13000 in cash and balance by
issue of 11% Debentures of Rs. 100 each at a discount of 10%. How many
debentures would be issued to the vendor ?
(a) 330 Debentures of Rs. 100 each
(b) 300 Debentures of Rs. 100 each
(c) 400 Debentures of Rs. 100 each
(d) 500 Debentures of Rs. 100 each
Ans-b
Q20.
X Ltd. purchased machinery for Rs. 40000 payable Rs. 12940 in cash and balance by
issue of 11% Debentures of Rs. 100 each at a premium of 10%. How many
debentures would be required to issue to the vendor ?
(a) 300 Debentures of Rs. 100 each
(b) 246 Debentures of Rs. 100 each
(c) 420 Debentures of Rs. 100 each
(d) 510 Debentures of Rs. 100 each
Ans-b
Q21.
Which of the following is incorrect with respect of debentures?
(a) They can be issued for cash
(b) They can be issued for consideration other than cash
(c) They cannot be issued as collateral security
(d) They can be issued in lieu of dividends
Ans-d
Q22.
Which of the following is correct?
(a) A company can issue irredeemable debentures
(b) A company can issue debentures with voting rights
(c) A company cannot buy its own debentures
(d) A company can buy its own debentures
Ans-d
Q23.
Debentures which are not secured by any charge upon any asset of the company are
called
(a) Secured Debentures
(b) Registered Debentures
(c) Bearer Debentures
(d) Unsecured Debentures
Ans-d
Q24.
XYZ Ltd. issued 100000, 10% Debentures of Rs. 100 each at a discount of 10% to be
redeemed at par at the end of 10th year from the date of issue. The loss on issue of
debentures will be written off
(a) Rs. 1,00,000 every month
(b) Rs. 1,00,000 every year
(c) Rs. 10000000 at the end of 10th year
(d) Rs. 1000000 at the end of 1st
year of issue
Ans- b
Q25.
ABC Ltd. issued 100000, 12.5% Debentures of Rs. 100 each. The total amount of
interest in a year, payable o the debentures will be
(a) Rs. 12,50,000
(b) Rs. 6,25,000
(c) Rs. 10,00,000
(d) Rs. 1,25,000
Ans-a
Q26.
___________ Debentures are those which can be transferred by mere delivery
(a) Unsecured
(b) Registered
(c) Bearer
(d) Convertible
Ans-c
Q27.
Issue of Debentures as collateral security means issue of such debentures as
(a) Additional Security
(b) Principal Security
(c) In lieu of Principal Security
(d) None of the above
Ans-a
Q28.
Profit on cancellation of own debentures is transferred to
(a) Capital Reserve
(b) Dividend Equalization Fund
(c) Statement of Profit and Loss
(d) None of the Above
Ans-a
Q29.
When debentures are issued at par and are redeemable at premium, the credit goes
to premium on redemption of debentures account is in the nature of
(a) Liability Account
(b) Expenses Account
(c) Income Account
(d) None of the above
Ans-a
Q30.
Which of these is not a method of redemption of debentures?
(a) Purchase in open market
(b) Auction of debentures
(c) Drawing of lots
(d) Payment in lump sum
Ans-b
Q31.
Debentures which are convertible into shares at the option of debenture holders
according to the terms of the issue are known as
(a) Secured Debentures
(b) Convertible Debentures
(c) Redeemable Debentures
(d) Bearer Debentures
Ans-b
Q32.
Ans-c
Company should create DRR atleast equivalent to _____% of the amount of
debentures issued before redemption of debentures can commence
(a) 75
(b) 40
(c) 50
(d) 25
Rembering ,understanding,application –based and hots
Sa-1
1-share capital, issued capital and subscribed capital as types of share capital.
2-b ltd is registered with a capital of Rs15,00,000 divided into 1,50,000 shares of Rs 10each.it issued
1,00,000 shares for subscription to public at par. applications were received for the issued shares. All call
were made and received except final call of Rs2 on 20,000 shares. These shares were forfeited .
Prepare the notes to accounts on share capital from the above information.
Ans-subscribed and fully paid up Rs 9,60,000
3-c ltd is registered with a capital of Rs 50,00,000 divided into 500,000shares of Rs10 each.it issued
2,00,000 shares for subscription to public at a premium of Rs2.applications were received for the issued
shares.all calls were made and received except the final call of Rs 2 on 10,000 shares. Prepare the notes
to accounts from the above information.
Ans-subscribed and fully paid up-Rs 19,00,000;subscribed but not fully paid up –Rs 80,000,reserve and
surplus-Rs 4,00,000
4- r ltd is registered with a capital of Rs 25,00,000 divided into 250,000shares of Rs10 each. it issued
1,50,000 shares for subscription to public at a premium of Rs3.applications were received for the issued
forfeited and reissued at Rs 10 per shares. Prepare the notes to accounts from the above information.
Ans-subscribed and fully paid up-Rs 15,00,000, reserve and surplus Rs 5,90,000.
5-R infrastructure ltd, a company engaged in road construction, has outstanding 10000;11%debentures
of Rs 100 each issued in 2003 due for redemption on 30th june 2013. How much amount of DRR should
be created before the redemption of debentures begins.? pass JE for redemption of debentures.
Ans- I)deb account debit and debholder account credit by 10,00,000 and ii)debholder account debit and
bank account credit by 10,00,000
6-E ltd issued 20000, 9%debentures of Rs 100 each on 1st april 2009 redeemable at 10% premium in four
equal annual instalments starting from 1st april 2014.pass JE for redemption of debentures assuming
that there is adequate debenture redemption reserve.
7-p ltd issued 1,50,000 shares of Rs 10 each at par to public payable Rs 4 on application, Rs 3 on
allotment and Rs 3 on first and final call. applications were received for 2,25,000 shares. the directors
decided to allot 150000 shares on pro rata basis and surplus of application money to be utilized for
allotment money due. Pass JE assuming that the amounts due were received.
8-sltd took term loan of Rs 5,00,000 from state bank of india repayable in 5 years. since it could not
provide a collateral security in the form of tangible asset, it issued 10000, 15%debentures of Rs 100 each
as collateral security. the company did not pass any entry for the debentures issued. you are required to
prepare note to account for the same from the above information.
Ans –term loan from sbi under the heading long term borrowings Rs 5,00,000
9-g ltd forfeited 300 shares of a shareholder of Rs 10 each, Rs 8 called up for non-payment of first call
money of Rs 3 per share. these shares were reissued at Rs 10.pass the journal entries.
Ans-transferred to capital reserve –Rs 1500.
10-p ltd took term loan of Rs 15,00,000from sbi repayable in 5 years .since it could not provide a
collateral security in the form of tangible asset, it issued 20,000 ,15% debentures of Rs 100 each as
collateral security. the company opted to pass an entry for the debentures issued. you are required to
prepare note to accounts for the same from the above information.
Ans-term loan from sbi under the heading long term borrowings -Rs15,00,000.
Debentures (issued as collateral security) 20,00,000
20,000,15%debentures of Rs 100 each
20,00000
Evaluation and Multi –disciplinary questions
1-complete the following journal entries:
In the books of ashish and co.ltd
Journal
date
Particulars
PLANT A/c
Dr
LAND AND BUILDING A/c Dr
STOCK A/c
Dr
GOODWILL A/c
Dr
To CREDITORS A/c
To BILL PAYABLE A/c
To ABC LTD
(being the purchase consideration for acquiring
the business)
ABC LTD
Dr
To---------To----------------To-------------------(being the purchase consideration settled by
issue of 40000fully paid equity share of Rs10
each at a premium of 20% and payment of
balance amount by cheque)
LF
DR
3,00,000
5,00,000
2,00,000
80,000
CR
3,00,000
1,00,000
----------
----------------------------
2-complete the following JE
DATE
PARTICULARS
PLANT AND MACHINERY
A/c
BUILDING A/c
SUNDRY DEBTORS A/C
STOCK A/C
BANK A/C
TO SUNDRY CREDITORS A/c
TO E LTD
TO CAPITAL RESERVE A/c
(Being the assets and liabilities taken over)
---------Dr
To--------To--------(being the payment made to E LTD by issue of
10000,10%preference shares of Rs100 each at
a premium of 30%)
L.F
DR
4,00,000
4,00,000
3,00,000
5,00,000
2,00,000
CR
2,00,000
13,00,000
-------------------------------------
3- complete the following journal entries
DATE
1
2
PARTICULARS
SHARE CAPITAL A/c(100XRs9)
TO FORFEITED SHARES A/c(100XRs2)
TO CALLS IN ARREARS A/c(100XRs7)
(Being the forfeiture of 100 shares,Rs 9 called
up, on which allotment money of Rs 3 and first
call money of Rs 4 have not been received )
------ Dr
-------Dr
To ---------(Being the reissue of 100 shares fully paid up
at Rs 8)
SHARE CAPITAL A/c(100XRs9)
TO FORFEITED SHARES A/c(100XRs2)
TO CALLS IN ARREARS A/c(100XRs7)
(Being the forfeiture of 100 shares,Rs 9 called
up, on which allotment money of Rs 3 and first
call money of Rs 4 have not been received )
----------Dr
To---------(Being the reissue of 100 forfeited shares, fully
paid –up at par)
-------- Dr
To -------(---------------------------------------------------)
L.F.
DR
900
CR
200
700
800
200
1000
900
200
700
---------------
-------------------
4- touch ltd decided to set up new production unit of manufacturing facial tissue in a backward area
with a view to have low capital outlay and bring economic prosperity in the area by directly employing
local persons after imparting training to them. The management also decided to set up school in the
area since it did not have any school in that area .the company issued 50000 equity shares of Rs 50each
at a premium of 20% payable Rs 25 on application and balance on allotment(including premium).
Applications were received for 1,00,000 equity shares and the company made pro-rata allotment to all
the applicants.the company also issued 2500,10%debentures of Rs100 each at par.applications were
received for 5000debentures and the company made pro-rata allotmentto all applicants.you are to –
a)identify the values communicated by the company,b)prepare the extract of the balance sheet showing
the above transactions.
Short answers-II
Q1.
T Ltd. forfeited 20 shares of Rs. 10 each (Rs.7 called-up)issued at a discount of 10% to
Meena on which she had paid Rs. 2 per share. Out of these, 18 shares were reissued to Neeta as Rs 8
called-up for Rs. 6 per share. Give the Journal entries to record forfeiture and reissue of shares.
Ans-capital reserve-Rs18
Q2.
T Ltd. forfeited 20 shares of Rs. 10 each, Rs.7 called-up on which the shareholder had paid
application and allotment money of Rs. 5 per share. Out of these, 15 shares were reissued to
Naresh as Rs.7 per share paid up for Rs. 8 per share. Record the journal entries for the forfeiture
and reissue of shares.
Ans-capital reserve-75
Q3.
ZLtd. forfeited 300 shares of Rs.10 each issued at a discount of Rs.1 per share for non-payment
of first and final call of Rs.3 per share. Out of these 200 shares were reissued at Rs.3 per share
fully paid-up . Record the journal entries for the forfeiture and reissue of shares.
Ans-capital reserve-nil
Q4.
Gopal Ltd. purchased 5000 of its own 8% Debentures of Rs.1000 each at Rs. 987 per
debenture. It also purchased another lot of 600 debentures of the same series at Rs.986 per
debenture. The debentures were purchased for the purpose of cancellation. Record necessary
journal entries in the books of the company.
Ans-gain on cancellation of debentures-Rs73400.
Q5.
On 1st January, 2007 a Public Limited Company issued 25000, 10% Debentures of Rs. 100 each
at par which were repayable at the premium of 10% on 31st December, 2011. On the date of
maturity, the company decided to redeem the above mentioned 10% Debentures as the terms
of issue, out of profits. Surplus i.e. Balance in Statement of Profit and Loss shows a credit
balance of Rs. 30,00,000 on this date. The offer was accepted by all the debenture holders and
all the debentures were redeemed. Pass necessary journal entries in the books of the company
only for the redemption of debentures, if the Company follows Sec.117 C of the Companies Act.
AnsQ6.
Ratan Ltd. forfeited 500 Equity shares of Rs.100 each issued at a discount of 10% for the nonpayment of first call of Rs. 20 per share. The final call of Rs.25 per share was not yet made. Of
the forfeited shares 300 shares were reissued at Rs. 125 per share fully paid-up. The remaining
shares were reissued at Rs. 100 per share fully paid-up. Pass necessary journal entries in the
books of the company.
Ans-capital resrve-Rs22500
Q7.
Vishesh Ltd. forfeited 1000 Equity shares of Rs.10 each issued at a premium of Rs.2 per share for
non-payment of allotment money of Rs.5 per share including premium. The final call of Rs.2 per
share was not yet called on these shares. Of the forfeited shares 800 shares were reissued at Rs.
12 per share fully paid-up. The remaining shares were reissued at Rs.11 per share fully paid-up.
Pass necessary journal entries in the books of the company.
Ans-capital reserve-Rs5000
Q8.
Beeta Ltd. issued 5000, 9% Debentures of Rs.500 each. Pass necessary journal entries for the
issue of debentures in the books of the company in following cases:
(a) When Debentures are issued at 10% premium and redeemable at par
(b) When Debentures are issued at par and redeemable at 10% premium
(c) When Debentures are issued at 5% premium and redeemable at 10% premium
(d) When Debentures are issued at a premium of 25% to the vendors for the machinery
purchased for Rs. 625000
AnsLong answer -I
Q9.
B Company Limited made an issue of 1,00,000 Equity shares of Rs.10 each at a
20% payable as follows:
On Application
-------
premium of
Rs. 2.50 per share
On Allotment
-------
Rs. 4.50 per share
On First and Final Call
-------
Balance
Applications were received for 2,00,000 Equity shares and the Directors made pro rata
allotment. Ramu who had applied for 800 shares did not pay the allotment and final call money,
as a result his shares were forfeited. Later on 80% of the forfeited shares were reissued at Rs.8
per share fully paid-up. Pass necessary journal entries in the books of the company.
Ans- capital reserve-Rs960
Q10.
S Ltd. invited applications for the allotment of 80000 Equity shares of Rs.10 rach at a
discount of 10%. The amount was payable as follows:
On Application
-------
Rs. 2 per share
On Allotment
-------
Rs. 3 per share
On First and Final Call
-------
Balance
Applications for 1,10,000 shares were received. Applications for 10000 shares were rejected.
Shares were allotted on pro rata basis to the remaining applicants. Excess application money
received on application was adjusted towards sums due on allotment. All calls were made and
were duly received. suresh who had applied for 2000 shares failed to pay the allotment and first
and final call. His shares were forfeited. The forfeited shares were reissued for Rs.24000 fully
paid-up. Pass necessary journal entries in the books of the company.
Ans-capital reserve-4000
Q11. D Limited made an issue of 1,00,000 Equity shares of Rs.10 each at a
payable as follows:
premium of 30%
On Application
-------
Rs. 3.50 per share
On Allotment
-------
Rs. 6.50 per share
On First and Final Call
-------
Balance
Applications were received for 2,00,000 Equity shares and the Directors made pro rata
allotment. Harsh who had applied for 1600 shares did not pay the allotment and final call
money, as a result his shares were forfeited. Later on 60% of the forfeited shares were reissued
at Rs.8 per share fully paid-up. Pass necessary journal entries in the books of the company.
Ans- capital reserve-2400
A collage of value-based questions
Q1.
Birla business ltd. has made a public issue of 10,00,000 Equity shares of Rs.10 each. The
issue is over subscribed by 100%. The company decides to reject applications for
5,00,000 Equity shares, allot 2,50,000 Equity shares to applicants of 7,50,000 shares and
make full allotment to the remaining applicants. Has the company, in your opinion, not
ignored any value?
Ans- the company may be legally correct in making allotment in this manner but it has ignored
the value of equal distribution of wealth. It would have been more appropriate had the
company made pro-rata allotment to all applicants
Q2.
Education ltd. has incurred preliminary expenses of Rs. 150000. As per AS-26 on
intangible assets, preliminary expenses are to be written off in the year they are
incurred. The company has following two options:
(i) Write it off against Securities Premium Reserve as per Section 78, or
(ii) From statement of Profit and Loss
The management of the company adopts the option of writing off preliminary expenses
against Securities Premium Reserve. Do you think that the company has adopted the
correct approach and not ignored any value?
Ans- the company is legally correct ,yet it would have been better had it written it off by
debiting it to the statement of profit and loss.in adopting this approach ,correct profit or loss
for the year would have been shown for better understanding of users of financial
statements,who are not well versed with the analysis.
Q3.
Bright Education ltd. has incurred preliminary expenses of Rs. 2,50,000. As per AS-26 on
intangible assets, preliminary expenses are to be written off in the year they are
incurred. The company debits it to the statement of profit and loss and not to Securities
Premium Reserve as allowed under section 78 of the Companies Act. The company
decides to issue fully paid bonus shares to its shareholders utilizing the balance in
Securities Premium Reserve. Do you think that the company has adopted the correct
and just approach and has not ignored any value?
Ans-the company has valued the principle of full disclosure for the users of financial statements
and yet kept the interest of the shareholders intact by issuing them bonus shares.
Q4.
A company issued equity shares which were oversubscribed. The Directors decide to
appropriate excess amount received against allotment and other calls. The Articles of
Association of the company do not permit payment of interest on calls in advance. In
your opinion, what value have been ignored by the company?
Ans-the company has ignored the value of being of being just and fair.it has used the excess
application money without payment of interest to the subscribers.
Q5.
HCL Ltd. made a public issue of 100000 equity shares of Rs. 10 each at a premium of
Rs.5. Current market price of the share is Rs.50. It received the amount on all shares
whenever called except final call of Rs.2 on 3000 shares held by two persons. It had
issued notices to the subscribers as was required but they did not respond. Before
forfeiting the shares, the Board deputed a person directing him to personally visit these
two shareholders and serve the forfeiture notice. What value has been fulfilled by the
company in this action?
Ans- they have fulfilled the value of being just. Inspite of the fact that they were well within
their rights to forfeit shares, yet by serving the notice by hand, they ensured that the
shareholders get an opportunity to pay the call money and do not incur a loss.
Q6.
The rate of return is 10% whereas borrowing cost is 12%. The company raises funds
through issue of fresh shares capital. In your opinion, what value has been fulfilled by
the company in raising funds?
Ans-they have fulfilled the value of democratic management as the shareholders will have
voting rights and better return on their investment.
Q7.
The return on investment is 10% and the borrowing cost is 14%. The company still
prefers to raise funds by borrowings and not by raising share capital. In your opinion,
what value has been ignored by the company in raising funds?
Ans-the management has borrowed funds rather than raising capital so that they do not dilute
their control on the company since the shareholders have the voting rights. They have ignored
the value of democratic management as the debentureholders do not have the voting rights
Q8.
A company had issued debentures at par redeemable after 10 years. In the sixth year,
the company offers the debenture holders to convert their holding into equity shares
issued at par. By doing so what value has been encouraged by the company?
Ans-by doing so the company has promoted risk capital as risk capital is capable of better
returns.