LEARNING OBJECTIVES
Understand the meaning and features of company
I)
Classification of share capital
II)
Understand the accounting treatment of over
subscription, calls in arrears, premium and discount on issue of shares.
III)
Understand the meaning of forfeiture of shares
IV)
Pass journal entries regarding forfeiture and
reissue of shares
V)
Calculate capital reserve
VI)
Differentiate between capital reserve and reserve
capital
VII) Understand the disclosure of the share
capital in the balance sheet
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Salient Features
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*A company is an artificial
person having separate legal entity.
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*A company is created by law and
effected by law.
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*A private company can be formed
with minimum two members and maximum
fifty.
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*For a public company minimum
members required are 7 and there is no maximum limit.
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*The capital of the company is
divided into units of small denominations which are called shares.
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*Though the company is an
artificial person, it has to perform all statutory obligation like a person.
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association.
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*A public company can allot
shares in case of minimum subscription is received.
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*Shares can be issued at par,
premium, or even at discount.
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*Preferences shareholder enjoy
preference rights whereas equity share holder enjoy voting
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rights.
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*When a shareholder fails to pay
one or more installments due on the shares held by him,
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the company has the authority to
forfeit such shares.
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*A company can re-issue the
forfeited shares in accordance with the provisions contained in the
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articles of the company.
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(1 marks)
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Q.1
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Give
the definition of a company as contained in the Companies Act,1956.
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Ans.
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section 3(1)(i) of companies act defines a company
as "a company formed and registered under this
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act
or an existing company."
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According
to sec3(1)(ii),"An existing company means a company formed and
registered under
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any
of the former companies Acts."
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Q.2
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Can
forfeited shares be issued at a discount? If so to what extent?
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Ans.
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Re-issue
of forfeited shares: Forfeited shares can be reissued at a discount. However,
the
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discount
on the reissue of such shares can not
exceed the amount earlier forfeited on such shares.
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In
other words, amount received on
received on re-issue plus amount already received on forfeited
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shares
must not be less than the paid up value of shares.
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Q.3
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As a
director of a company you had invited applications for 20,000 equity shares
of Rs.10 each at a
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premium of Rs.2 each. The total applications
money received at Rs.3/-
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per
share was Rs.72,000. Name the kind of subscription. List the three
alternatives for allotting these
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share.
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Ans.
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It is
a case of over-subscription. Shares are said to be over-subscribed when the
numbers of
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shares
at more than the number of shares offered:
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(i)
Allotment for 1st 20,000 shares and the rest
can rejected
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(ii)
Allotment on prorata basis
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(iii)Allotment
of some application in full and some on prorata basis, and some refused.
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4 What is an Escrow Account?
Ans. In order to fulfill certain obligations
under the scheme of buy-back of securities an account is opened, which is known
as escrow account.
Q.5 What do you mean by Private placement of shares?
Ans. Private Placement of shares implies issue and allotment of
shares to a selected groups of persons privately and not to public in general
through public issue. In order to place the shares privately, a company must
pass a special resolution to this effect.
Q.6 What is Sweat Equity?
Ans. Sweat Equity shares means easily shares issued by the company
to its employees or whole time directors at a discount or for consideration
other then cash for providing know - how or making available right in the
nature of intellectual properly rights or valve addition by whatever name
called.
Q.7 What maximum amount of discount can be allowed on the
reissue of forfeited shares?
Ans. The maximum amount of discount on reissue of forfeited shares
is that the amount of discount allowed cannot exceed the amount that had been
received on forfeited shares on their original issue and that the discount
allowed on re issue of forfeited shares should be debited to the share
forfeited account.
Q.8 State in brief, the SEBI Guidelines regarding Debenture
Redemption Reserve.
Ans. At per SEBI Guidelines, an amount equal to 50% of the
debenture issue must be transferred to DRR before the redemption begins. In
other words, before redemption, at least an amount equal to 50% of the
debenture issue must stand to the credit of DRR
Q.9 Name the head under which discount on issue of debentures
appears in the Balance Sheet of "C" Company.
Ans. Discount
on issue of debentures will appear under the heading Miscellaneous Expenditure.
Q.10 Can a company issue share of discount? What conditions must a company comply with
before the issue of such shares?
Ans. Section 79 of the companies Act, 1956 permits a company to
issue shares at a discount only if the following conditions are fulfilled:
1) The shares
are of a class already issued.
2) At least one
year must have elapsed since the company become entitled to commence
business.
3) The issue of
shares at discount is authorises by a revolution passed by the company
in its general meeting and sanctioned by the central Government.
The resolution specifies the
maximum rate of discount at which the shares are
to be issued. The rate must not exceed 10% unless sanctioned by the central
Government.
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Q.11
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Write the difference between an equity share and
preference share.
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Ans.
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*Basis
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Preference shares
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Equity shares
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*Dividend rate
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Preference share holders are paid
dividend at a fixed rate.
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The rate of dividend on equity
shares vary from year to year depending upon profits
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*Redemption
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They can be redeemed
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They can't be redeemed.
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*Payment of
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These shares have a
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Payment of dividend is made
after paying to
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dividend
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Preferential right to receive
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preference share holders.
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dividend before any dividend is
paid on equity shares.
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Q.12
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Differentiate between Reserve
capital and capital reserve.
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Ans.
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*Basis
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Reserve capital
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Capital reserve
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*Meaning and
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Reserve capital refers to a
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Capital reserve is created out
of capital
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creation
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portion of uncalled capital
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profits.
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*Special
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Is required
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no Special resolution required
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resolution
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*Time when it
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It can be used only in the
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It can be used to write off
capital losses
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can be used
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event of company's winding up
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or to issue bonus shares.
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*Disclosure
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It is not shown in company's
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It is mentioned under the
heading reserves
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in balance sheet
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balance sheet
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and surplus on the liabilities
side of balance sheet
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Q.13
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Employees
stock option plan-"A right to buy and not an obligation". Comment
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Ans.
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Employees
stock option plan is the right granted to the employees of the company to
purchases thew shares lower than the market prices. It is worth mentioning
the the options provide a right and not the obligation to bur shares. It
means that the employees under this
plan are not necessarily required to purchase the shares. It is their wish to
buy or not necessarily required to purchase the shares. It is their wish to
buy or not.
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Q.14
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Write a short
note on minimum subscription?
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Ans
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Minimum
subscription is the amount received from share holders which is sufficeint
from the
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point of view
of directors for following purposes:
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(a) For purchasing necessary assets of the
company.
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(b) For paying preliminary expenses and
commission on sales of shares.
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© For paying loan if arranged for above two
purposes.
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(d) For working capital and for any other
purposes which the directors agree upon.
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Q.15
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Rohit Ltd.
Purchased assets from Rohan & co. for Rs. 3,50,000. A sum of Rs. 75,000
was paid
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by the emans of
a bank draft and for the balance due Rohit Ltd. Issued Equity shares of Rs.
10
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each at a
premium of 10% .Journalise the above transaction in the books of the company.
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Ans.
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Books of Rohit
Ltds.
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JOURNAL
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Date
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Particulars
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L.f
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debit
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credit
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amt.rs
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amt.rs
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Sund. assets
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dr
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3,50,000
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ToRohan&Co.
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3,50,000
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(Being assets
purchased from Rohan& CO.)
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Rohan&Co.
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dr.
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75,000
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To Bank A/c
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75,000
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(Being amount
paid to Rohan & Co.)
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Rohan
&Co.A/c
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dr.
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2,75,000
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To Equity share
capital a/c
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2,50,000
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To securities
Premium A/c
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25,000
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Q.16
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50 shares of
Rs. 10 each, issued at as premium of Rs. 5 per share, were forfeited by sohan
Ltd. for the nonpayment of allotment money of Rs.9 per share (including
premium). The first and final call on these shares at Rs. # per share was not
made. Forfeited shares were re-issued @ Rs. 12 per share, fully paid up.
Journalise
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Ans
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Date
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Particulars
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l.f
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debit
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credit
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amt
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amt
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|||||
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Share capital
a/c
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dr.
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350
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securities
premium a/c
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dr.
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250
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To share
forfeited a/c
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150
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To share
allotment a/c
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450
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(Being 50
shares forfeited for non
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payment of
allotment money as per
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board's
resolution dated…)
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Bank A/c
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dr.
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600
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To share
capital a/c
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500
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To securities
Premium a/c
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100
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(Being 50
shares reissued @Rs.12
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per share, fully paid)
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Shares
Forfeited A/c
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Dr.
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150
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To capital
reserve a/c
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150
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(being the
balance of forfeited shares
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transferred to
capital reserve.)
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Q17
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AB Ltd. Invited
applications for issuing 1,00,000 equity shares of Rs. 10 each. The amount
was payable as follows: On Application Rs.3 per share; On allotment Rs.2 per
share; and on 1st and final call Rs.5 per share. Applications for 1,50,000
shares were received and prorata allotment was made to all applicants as follows: Application for 80,000 shares were
allotted 60,000 shares on pro-rata basis ; Application for 70,000 shares were
allotted 40,000 shares on pro-rata basis; Sudha to whom 600 shares were
allotted out of the group 80,000 shares failed to pay allotment money. Her
shares were forfeited immediately after allotment. Asha who had applied for
1,400 share out of the group 70,000 shares failed to pay the first and final
call.Her shares were also forfeited. Out of forfeited shares 1,000 shares
were reissued @ Rs.8 per share fully paid up The reissued shares included all
the forfeited shares of Sudha. Pass necessary journal entries to record the
above transaction
|
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ans.
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Journal Entries
in the books of AbLtd.
|
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Date/Sr.
|
Particulars
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|
l.f
|
Debit
|
Credit
|
||||
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|
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Amt.Rs
|
Amt.Rs.
|
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1
|
Bank A/c
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Dr.
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|
4,50,000
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|
|||||
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To Equity share
Application a/c
|
|
4,50,000
|
|||||||
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(For
application money received on
|
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|
|||||||
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1,50,000 shares
@ Rs.3 per share)
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|
|||||||
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2
|
Equity share
application a/c
|
Dr.
|
|
4,50,000
|
|
|||||
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To Equity share
capital a/c
|
|
3,00,000
|
|||||||
|
|
To equity share
allotment a/c
|
|
1,50,000
|
|||||||
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|
(For an
application money capitalised
|
|
|
|||||||
|
|
and transferred
to allotment a/c.)
|
|
|
|||||||
|
3
|
Equity share
allotment a/c
|
Dr.
|
|
2,00,000
|
|
|||||
|
|
To equity share
capital
|
|
2,00,000
|
|||||||
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|
(For allotment
money due on 1,00,000
|
|
|
|||||||
|
|
shares @ Rs.2
per share.)
|
|
|
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4
|
Bank A/c
|
Dr.
|
|
49,400
|
|
|||||
|
|
To equity share
allotment
|
|
49,400
|
|||||||
|
|
(For amount
received on allotment)
|
|
|
|||||||
|
5
|
Equity share
capital a/c
|
Dr.
|
|
3,000
|
|
|||||
|
|
To Equity Share
allotment a/c
|
|
600
|
|||||||
|
|
To share
forfeiture a/c
|
|
2,400
|
|||||||
|
|
(For 600 shares
of sudha forfeited)
|
|
|
|||||||
|
6
|
Equity share
first& final calla/c. Dr.
|
|
4,97,000
|
|
||||||
|
|
To Equity share
capital
|
|
4,97,000
|
|||||||
|
|
(For first and
final call money due on
|
|
|
|||||||
|
|
99,400 shares @
Rs.5 per shares.)
|
|
|
|||||||
|
7
|
Bank a/c
|
Dr
|
|
4,93,000
|
|
|||||
|
|
To equity share
first &final call
|
|
4,93,000
|
|||||||
|
|
(For money
received on first & final
|
|
|
|||||||
|
|
call.)
|
|
|
|||||||
|
8
|
Equity share
capital
|
Dr
|
|
8,000
|
|
|||||
|
|
To Equity share
first & final/c
|
|
4,000
|
|||||||
|
|
To share
forfeiture a/c
|
|
4,000
|
|||||||
|
|
(for 800 share
of Asha forfeited.)
|
|
|
|||||||
|
9
|
Bank a/c Dr.
|
|
8,000
|
|
||||||
|
|
Share forfeiture
a/c Dr.
|
|
2,000
|
|
||||||
|
|
To Equity share
capital
|
|
10,000
|
|||||||
|
|
(For 1,000
share received and loss on
|
|
|
|||||||
|
|
re-issue
charged from share forfeiture
|
|
|
|||||||
|
|
a/c.)
|
|
|
|
||||||
|
|
|
|
|
|
|
|
||||
|
10
|
Share
Forfeiture
|
Dr.
|
|
2,400
|
|
|||||
|
|
To capital
ReserveA/c
|
|
2,400
|
|||||||
|
|
(For
proportionate balance of share
|
|
|
|||||||
|
|
forfeiture a/c
transferred to capital
|
|
|
|||||||
|
|
reserve a/c.)
|
|
|
|||||||
Working notes:
Amount Received on application
Amount due 2,00,000
Less: Excess Received on application 1,50,000
50,000
Less: Calls in arrears 600
49,400
Due from Sudha on Allotment on 600 shares @2 each 1,200
Less: Excess on application on 200 shares
@Rs.3 each 600
600
If 60,000 shares allotted than applied 80,000
If 600 shares applied than 80000/60000*600=800 shares
Shares allotted to Asha
If 70000 shares applied ,allotted 40,000
If 1,400 shares than
40000/70000*1,400
Amount transferred to capital reserve
Balance of share forfeited a/c on Sudha’s share 2400
Balance of share forfeited a/c on Asha’s share 2000
4400
Less: Loss on capital Re-issue 2000
2400
Q.18 New India Ltd. forfeited 100 shares of
Rs. 10 each, issued at a discount of 10%.
The company had called up only Rs. 8 per share. Final call of Rs. 2 each has not been made on
these shares. These shares were allotted
to Ram, who did not pay the first call of Rs. 3. 60 shares were reissued at Rs. 7 per share,
as Rs. 8 paid up. Give Journal entries
in the books of the company, showing the working clearly.
JOURNAL
Date Particulars L.F. Dr. (Rs.) Cr.(Rs)
Share Capital A/c (100 x Rs. 8) ...Dr. 800
To Forfeited Shares A/c (100 xRs.
4) 400
To
Discount on Issue of Shares (1 00 x Re. 1 ) 100
To
Share First Calf A/c (100 x Rs. 3) 300
(Being 100 scares forfeited for
non-payment of first call ...)
Bank A/c (60 x Rs. 7) ...Dr. 420
Discount on issue of Shares A/c (60 x Re.
1) ...Dr. 60
Forfeited Shares A/c ...Dr. 60
To
Share Capital A/c 540
(Being 60 shares were reissued at Rs. 7
per share,
as Rs. 8 paid up)
Forfeited Shares A/c ...Dr. 180
To Capital Reserve A/c 180
(Being
the transfer of profit on reissue o'
shoes': 