Chapter 10 - Company Accounts Part I (Accounting For Shares)
Book Keeping Accountancy Solutions for Class 12 Commerce Accountancy
Objective Type Question :
Answer in one Sentence only :
What is authorised capital?
ANSWER:
The amount of capital stated in the memorandum of association at the time of incorporation is referred to as authorised capital. It is the maximum amount of capital that can be issued to the shareholders of a company. It is also known as the registered capital or the nominal capital of the company.
State the meaning of issued capital.
ANSWER:
The part of authorised capital of a company that is issued to the public in the form of shares is known as issued capital. If the number of shares subscribed by the public is equal to the number of shares issued, then the issued capital will be equal to the subscribed capital.
What do you mean by reserve capital?
ANSWER:
Reserve capital represents the portion of subscribed capital that remains uncalled except in case of winding up or at the time of liquidation. As per Section 99 of the Companies Act, 1956, a company can create reserve capital by passing a special resolution.
Define share.
ANSWER:
The total capital of a company is divided into equal units of small denomination termed as shares.
Write the meaning of equity share capital.
ANSWER:
A company can raise capital via debt capital and share capital. Debt capital is procured from lenders in the form of loans or debentures, whereas share capital is procured by issuing shares (i.e. equity shares or preference shares). Equity shareholders have ownership rights in the management of a company and the amount of equity share capital is repaid only on winding up the company.
What is meant by convertible preference share?
ANSWER:
Preference shares are those shares which are given priority over equity shareholders in respect of payment of dividend and repayment of capital on winding up. Preference shares that can be converted into equity shares at a given future date, according to agreed terms and conditions, are known as convertible preference shares.
Which preference shares are called cumulative preference shares?
ANSWER:
In case of cumulative preference shares, the unpaid dividend on preference shares is accumulated and treated as arrears. In other words, the dividend on such shares is carried forward to the next year. The unpaid dividend on these shares keeps on accumulating till it is paid.
What is allotment of shares?
ANSWER:
Allotment means accepting the applications of the applicants and distributing the shares to them. After the acceptance, the company allots the shares via share certificates. The share certificate contains the details about the number of shares allotted to the applicant. Shareholders pay the prescribed allotment money for getting the shares allotted.
What is meant by share premium?
ANSWER:
As per Section 78 of the Companies Act, 1956, when the shares are issued to the public at a price more than their par value, i.e. face value, the shares are said to be issued at a premium. The amount of premium received is credited to a separate account known as Securities Premium Account. It can be used for the following purposes:
a. For writing-off preliminary expenses of the company
b. For writing-off expenses of commission paid or discount allowed on issue of shares or debentures of the company
c. For issuing bonus shares
What is meant by discount on issue of shares?
ANSWER:
As per Section 79 of the Companies Act, 1956, issuance of shares at a discount implies that shares are issued at a price below their par value, i.e. the face value of the shares. The discount on issuance of shares is debited to Discount on Issue of Shares Account. For example, a share with a face value of Rs 10 is issued at a discount of 10%. So, a discount of Re 1 per share will be offered and the share will be issued at Rs 9.
Give the full form of SEBI.
ANSWER:
SEBI stands for Securities Exchange Board of India. It is the regulator of the securities market in India and was established in 1988.
What do you understand by Pro-rata allotment of shares?
ANSWER:
When shares subscribed by the public are greater than the shares offered by the company, it results in over-subscription. In such cases, the company makes allotment on a proportionate basis, which is known as pro-rata allotment of shares. For example, the company may allot 1500 shares to an applicant who applied for 2000 shares.
Define call-in-advance.
ANSWER:
Sometimes a shareholder might pay the amount due on future calls along with the allotment money. In other words, it represents the amount received from the shareholders in excess of the amount that is actually due from them. This amount is credited to a different account known as Calls in Advance Account. It is shown on the Liabilities side of the company’s Balance Sheet. A company can accept calls in advance only if there is a provision in its Articles of Association. According to Table A, the company is required to pay interest at the rate of 6% p.a. on the amount received as advance call money.
Define securities premium.
ANSWER:
Securities premium or share premium refers to the amount received in excess of the face value of the share. For example, if a share with face value Rs 10 is issued at Rs 12, the amount of premium per share is Rs 2. The amount of premium is the difference between the issue price and the face value of a share
Give one word / Term / phrase for each of the following statements :
Capital stated in the capital clause of Memorandum of Association.
ANSWER:
Authorised Capital
Explanation: The capital stated in the capital clause of the Memorandum of Association is regarded as authorised capital. It is the maximum amount of capital that a company can issue to its shareholders. It is also known as the registered capital or the nominal capital of a company.
The portion of subscribed capital which has not yet been called up.
ANSWER:
Uncalled Capital
Explanation: It represents the part of issued and subscribed share capital which is not yet called up by a company. In other words, the part of the face value of a share that is not called up by the company is referred to as uncalled capital.
The capital which is not disclosed in the balance sheet.
ANSWER:
Reserve Capital
Explanation: It represents the portion of subscribed capital that remains uncalled except in case of winding up or at the time of liquidation. It does not form a part of a company’s Balance Sheet.
As per Section 99 of the Companies Act, 1956, a company can create reserve capital by passing a special resolution.
Preference share on which arrears of dividend accumulate.
ANSWER:
Cumulative Preference Share
Explanation: In case of cumulative preference shares, the unpaid dividend on preference shares is accumulated and treated as arrears. In other words, the dividends on such shares is carried forward to the next year. The unpaid dividend on these shares keeps on accumulating till it is paid.
A preference share having right of conversion into equity.
ANSWER:
Convertible
Explanation: Preference shares with the provision of being converted into equity shares after a defined span of time are known as convertible preference shares.
Issue of share above face value.
ANSWER:
Share issued at Premium
Explanation: Shares are said to be issued at a premium when the issue price of a share is more than its face value. The amount of premium is credited to a separate account known as Securities Premium Account.
The account to which excess amount on share forfeited a/c is transferred.
ANSWER:
Capital Reserve
Explanation: It is a reserve created out of capital profits of an organisation. It is maintained out of profits earned from specific transactions of a capital nature. It is capital reserve to which the excess amount on Share Forfeited Account is transferred. Such excess amount represents the profit on reissue of forfeited shares.
The maximum amount beyond which a company is not allowed to raise funds.
ANSWER:
Authorised / Nominal Capital
Explanation: The maximum amount of capital beyond which a company is not allowed to raise funds is known as its authorised share capital. This capital is stated in the capital clause of the Memorandum of Association of the company at the time of its incorporation.
Deduction made from share capital to find out paid up capital.
ANSWER:
Calls-in-arrears
Explanation: Sometimes, a shareholder might not pay the call money on all the shares or on some of the shares held by him. In such cases, the unpaid amount is treated as call in arrears. According to Table A, the company is authorised to charge interest on call in arrears @ 5% p.a. till the amount remains unpaid. The amount of calls in arrears is deducted from the called-up capital in the Balance Sheet to show the net paid-up capital by the shareholders.
Amount called on shares by the company but not received.
ANSWER:
Calls-in-arrears
Explanation: Sometimes, a shareholder might fail to pay allotment or call money on all the shares or some of the shares held by him/her. The amount that is called up by a company but not paid (received) by (from) a shareholder represents the amount due, i.e. the outstanding amount. Therefore, it is termed as calls-in-arrears. Calls-in-arrears are shown in a company’s Balance Sheet by way of deduction from the called-up capital.
The capital on which dividend is paid.
ANSWER:
Paid up Capital
Explanation: A company declares dividend on the amount of money paid up by the shareholders. That is, dividend is declared on paid-up share capital. It represents the money received from the shareholders on the shares held by them. It is not necessary that every shareholder will pay the whole amount of called-up share capital; therefore, a company pays a dividend on the amount of paid-up capital.
Shares having voting rights.
ANSWER:
Equity Shares
Explanation: Shares issued with voting rights are termed as equity or ordinary shares. Equity shareholders have residual claims in the earnings of a company. In other words, in the event of liquidation (winding up), equity shareholders are paid after payment to preference shareholders has been made.
Shares having first right on surplus assets at the time of liquidation.
ANSWER:
Preference Shares
Explanation: Preference shares are given priority over equity shares regarding the distribution of dividend and repayment of capital at the time of liquidation or winding up of a company. In other words, preference shareholders have the first right (preferential) in the surplus assets or the earnings of a company over equity shareholders.
Select the most appropriate answer from the alternatives given below and rewrite the sentence :
Nominal value of shares allotted to the public is called _____________ capital.
a) authorised
b) reserve
c) paid up
d) subscribed
ANSWER:
Nominal value of shares allotted to the public is called subscribed capital.
Explanation: Shares applied by the public and allotted to the public by a company are referred to as shares subscribed. Therefore, the nominal value of shares allotted to the public is termed as subscribed capital.
Paid up, value of all shares allotted is called ______________ capital.
a) uncalled
b) issued
c) subscribed
d) nominal
ANSWER:
Paid up value of all shares allotted is called subscribed capital.
Explanation: The part of the issued capital that is subscribed to and paid by the public is called subscribed capital.
As per section 69 (3) of the Companies Act, 1956, the minimum amount payable on share application should be______________ percent.
a) 10
b) 5
c) 20
d) 15
ANSWER:
As per section 69 (3) of the Companies Act, 1956, the minimum amount payable on share application should be 5 per cent.
Explanation: Minimum amount payable on share application should be 5% of the nominal value of the share.
As per SEBI guidelines, the minimum amount payable on share application should be ____________ of nominal value of share.
a) 10
b) 20
c) 25
d) 5
ANSWER:
As per SEBI guidelines, the minimum amount payable on share application should be 25% of nominal value of shares.
Explanation: As per SEBI, at least 25% of the nominal value of shares should be called on application.
As per Table A, the amount on call on a share must not exceed ____________ percent.
a) 5
b) 10
c) 20
d) 25
ANSWER:
As per Table A, the amount on call on a share must not exceed 25 per cent.
Explanation: A company cannot call more than 25% of the nominal value of shares in one call.
If articles are silent regarding interest on calls-in-arrears, the minimum rate of interest to be charged is _____________.
a) 5% p.a.
b) 6% p.a.
c) 8% p.a.
d) none of these
ANSWER:
If articles are silent regarding interest on calls-in-arrears, the minimum rate of interest to be charged is none of these.
Explanation: No interest is charged when articles are silent about the interest on calls-in-arrears. However, if directors want and there is a provision in the Articles of Association, the company can charge interest @ 5% p.a. from the shareholders for the period for which such amount remains outstanding.
If the articles are silent regarding interest on Calls-in-advance, the minimum rate of interest to be charged is _____________ p.a.
a) 5%
b) 6%
c) 8%
d) none of these
ANSWER:
If the articles are silent regarding interest on calls-in-advance, the minimum rate of interest to be charged is 6% p.a.
Explanation: If the articles are silent, then the provisions of Table A are applicable. As per Table A, interest @ 6% p.a. is paid on calls-in-advance.
The document inviting offers from public to subscribe its share is called _____________.
a) prospectus
b) share certificate
c) both ‘a’ and ‘b’
d) none of these
ANSWER:
The document inviting offers from public to subscribe its share is called prospectus.
Explanation: A prospectus is used to invite applications from the general public to purchase the shares of a company. It contains information about the company such as names and addresses of the registered office and directors of the company, consent from SEBI, authorised and issued capital etc. On the basis of information contained in a prospectus, the public applies for the shares.
If shares are issued at its face value, it is called as issue at __________________.
a) premium
b) discount
c) par
d) none of these
ANSWER:
If shares are issued at its face value, it is called as issue at par.
Explanation: Shares are said to have been issued at par when the face value of a share equals its issue price. On the other hand, if the shares are issued at a price below their face value, it is known as issue at discount, whereas if shares are issued at a price that is more than the face value, it is known as issue at premium. For example, if a share is issued at a face value of Rs 10, it is issued at par. If it is issued at Rs 9, then it is issued at a discount of Re 1 and if it is issued at Rs 12, then it is issued at a premium of Rs 2.
_____________ is deducted from the share capital to know paid up value of shares.
a) Calls-in-advance
b) Calls-in-arrears
c) Forfeited shares
d) Discount on issue
ANSWER:
Calls-in-arrears is deducted from the share capital to know paid up value of shares.
Explanation: Calls-in-arrears represent the amount of capital called by a company but not paid by the shareholders. Calls-in-arrears are shown on the Liabilities side of the company’s Balance Sheet by way of deduction from the called-up capital to arrive at the net paid-up capital.
Interest on Calls-in-arrears is ______________for the company.
a) income
b) expenditure
c) gain
d) loss
ANSWER:
Interest on Calls-in-arrears is income for the company.
Explanation: When the shareholders do not pay the called-up amount on the shares, it is known as calls-in-arrears. The shareholders are required to pay the interest on such calls-in-arrears till it remains unpaid. It is in the nature of income for a company and hence, it is credited. The rate of interest charged by a company on calls-in-arrears is 5 % p.a.
When shares are forfeited, share capital account is ______________.
a) debited
b) credited
c) adjusted
d) none of these
ANSWER:
When shares are forfeited, share capital account is debited.
Explanation: When the shares are forfeited, share capital account is debited, since the money received on the shares being forfeited is to be cancelled. When money is received on the shares, share capital account is credited. Therefore, on forfeiture, share capital account is debited.
The excess price received over the par value of shares, should be ___________ to securities premium a/c.
a) debited
b) credited
c) adjusted
d) none of these
ANSWER:
The excess price received over the par value of shares should be credited to securities premium a/c.
Explanation: When shares are issued at a price above their par value, it is known as issuing of shares at premium. The excess amount received as premium is credited to a separate account known as Securities Premium Account. It is credited, as it is a gain for the company and is in the nature of nominal account.
State, whether the following statements are True or False.
The liability of a shareholder of public limited company is limited.
ANSWER:
True
Explanation: The liability of a shareholder of a public limited company is limited by shares. That is, the liability is limited to the extent of amount unpaid on their shares. In other words, the private property of shareholders cannot be used to pay off liabilities in the event of winding-up or at the time of liquidation of a company.
Equity shareholder enjoys preferential rights.
ANSWER:
False
Explanation: Equity shareholders have voting rights. However, it is the preference shareholders who enjoy preferential rights regarding dividend distribution and repayment of capital at the time of liquidation or in the event of winding up of a company.
Equity share is a guarantee of fixed rate of dividend.
ANSWER:
False
Explanation: Preference shares are the shares with a fixed rate of dividend. They receive dividends at the pre-defined rate, whereas equity shares do not guarantee a fixed rate of dividend. Moreover, it is uncertain whether the dividend will be distributed to them or profits will be retained.
In private placement shares are issued to the public through prospectus.
ANSWER:
False
Explanation: In private placement of shares, no applications are invited from the general public for subscribing to the shares of the company. According to section 81(1A) of the Companies Act, 1956, when the promoters of a public company are confident of raising capital through private sources, the company does not invite the public to subscribe for shares. Instead the company promotes the private placement of shares to promoters, friends and other private sources. The promoters are required to prepare a draft prospectus known as ‘statement in lieu of prospectus’ and file it with the Registrar of Companies at least 3 days before the first allotment.
Private placement method saves time and cost.
ANSWER:
True
Explanation: When the promoters of a public company are confident of raising capital through private sources, the company does not invite the general public to subscribe for shares instead the company promotes the private placement of shares to promoters, friends and other private sources. The company is not required to issue a prospectus. Also, no applications are invited for issue of shares. This saves time, cost and money.
In public issue whole amount of the share capital is called at once.
ANSWER:
False
Explanation: It is not necessary that the whole amount of share capital, i.e. authorized capital, is called up at once. The part of authorized capital that is issued to the shareholders is called issued capital, whereas the part that remains unissued is called unissued capital. The unissued capital of the company can be issued anytime during the lifetime of the company.
Shares are always issued at par.
ANSWER:
False
Explanation: Shares can be issued at par, at a discount or at a premium. It is not necessary that shares should be issued at par. They can be issued at below the face value, i.e. at a discount, or above the face value, i.e. at premium.
A public company can issue shares at only rate of discount.
ANSWER:
False
Explanation: Shares can be issued at a discount by public or private companies, subject to a few conditions (as per Section 79 of Companies Act, 1956) that are mentioned below:
1. Shares to be issued at a discount must be of an existing class already issued, i.e. a new class of shares cannot be issued at a discount.
2. Shares issued at a discount must be authorised by a resolution passed in the general meeting of a company and approved by SEBI.
3. The resolution should specify the maximum rate of discount (not exceeding 10%).
4. At least one year should have elapsed since the company commenced business.
5. After the permission of SEBI, the shares to be issued at a discount should be issued within two months.
A public company forfeits share on non-payment of final call only.
ANSWER:
False
Explanation: A company can forfeit the shares of a shareholder if he fails to pay any instalment due from him to the company. A company is required to issue a clear 14 days’ notice to the defaulting shareholder asking him to pay the due amount on his shares, failing which, his shares are forfeited.
Forfeited shares are reissued at par only.
ANSWER:
False
Explanation: Forfeited shares can be issued at par, at a discount or at a premium, as decided by the board of directors. The forfeited amount is transferred to Share Forfeiture Account. However, when the forfeited shares are reissued, the balance amount is transferred to the Capital Reserve Account.
Share forfeited balance is transferred to Capital Reserve Account.
ANSWER:
True
Explanation: On forfeiture, the amount received on such shares is transferred to the Share Forfeiture Account. Later, when the forfeited shares are reissued at a discount, the amount of the discount is set off against the Share Forfeiture Account and the balance is transferred to the Capital Reserve Account. Only when the forfeited shares are reissued, the amount in the Share Forfeiture Account is transferred to the Capital Reserve Account.
Shares are issued for cash only.
ANSWER:
False
Explanation: Shares can be issued for cash or for consideration other than cash. Sometimes shares are issued to vendors against purchase of assets. Also, shares are issued to the promoters of a company for setting up the company.
