Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes

Company:
→ A company is owned by shareholders who appoint Directors to give direction to the business. Company is a legal body in its own right with an existence that is separate in law from its owners. The company will thus be sued and can sue in its own name.

→ Shareholders put funds into the company by buying shares. The money contributed for purchase of shares is the capital of the company. Thus total share capital is divided into smaller portions which are called shares and persons purchase these shares and become the owners in the company. Limited liability is a form of business protection for company shareholders.

→ Meaning of shares: A unit of ownership that represents an equal proportion of a company’s capital. It entitles its holder (the shareholder) to an equal claim on the company’s profits and an equal obligation for the company’s debts and losses. Share as defined in Section 2(84) of the Companies Act, 2013 means a share in the share capital of a company and it also includes stock.

→ Types of Shares:
I. Equity Shares – Equity shares are those shares who do not enjoy any preference as regards payment of dividend and repayment of capital. The rate of dividend on equity shares is not fixed. It fluctuates, as it depends on the profits made by a company i.e. higher the profits, higher the dividend, lower the profits, lower die dividend. Moreover Equity shareholders are paid their capital after the preference shareholders are paid. They have normal voting rights. They receive dividend after it is paid to preference shares.

II. Preference Shares – These will usually have a preferential right to a fixed amount of dividend, expressed as a percentage of the nominal (par) value of the share It is, however, still a dividend and payable only out of profits. Preference shareholders are paid their capital first. They do not have normal voting rights. Preference shares are classified into many types like cumulative preference shares, non-cumulative preference shares, convertible preference shares, non-convertible preference shares etc.

→ Types of Share Capital
1. Authorized Share Capital: This is also known as registered capital. It is the maximum amount of capital that the limited company is authorized to issue to its shareholders. However, the maximum amount can be changed by some legal formalities.

2. Subscribed Capital: This is the amount of money that the investors agree to subscribe in return for their shares.

3. Issued Share Capital: This is the part of capital which has been allotted or issued to shareholders.

4. Called up Share Capital: This is the total amount of issued capital for which the holders of shares are required to pay.

5. Paid up Share Capital: This is the actual amount paid by the shareholders on called-up capital. The amount remaining unpaid on the called-up capital is known as “call in arrears”.

→ Issue of Shares:
The number of authorized shares that is sold to and held by the shareholders of a company, regardless of whether they are insiders, institutional investors or the general public are called issued shares. Shares can be issued only when the minimum subscription has been received.

→ Terms of issue of shares:
A limited company may issue the shares on following different terms.
(a) Issue of Shares for Consideration other than cash or for cash or on capitalization of reserves.
(b) Issue of Shares at par i.e. at face value or at nominal value.
(c) Issue of Shares at a Premium i.e. at more than face value.
(d) Issue of Shares at a Discount i.e. at less than the face value.

→ Issue of shares at par: Par value shares are those which have a face value assigned to them. Such shares may be issued at par that is nominal value or face value. When par value shares are issued exactly at par, cash is debited and common stock or preferred stock account is credited. Accounting Entries

→ When shares are issued at par and the amount is paid in lump sum
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 1
In case shares allotted are of different classes then separate account is to be opened for each share class. If minimum subscription is not received then all the money is to be returned back and thus the accounting entry will be
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 2

→ When shares are issued at par but the amount is payable in installment
When all the money due for shares is not payable in lump sum then money can be called in installments. In this case shares are allotted and the money is called as and when required by the company. Such demands are termed as calls. Calls differ from each other by their numbers like first call, second call and so on and last call is called Final call.

→ Accounting Entries
On Receipt of Application Money
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 3
On allotment of shares Share Application Money is transferred to share Capital Account
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 4

→ Issue of shares at Premium: When the shares are issued at a price higher than the nominal value of the shares then it is called as shares issued at a premium. The amount of premium is decided by the board of Directors as per the guide lines issued by SEBI. Such share premium collected by the company is credited to a separate A/c called as “Securities Premium A/c”. Although Securities Premium is a profit to the company, it is not a revenue profit, it is treated as capital profit.

→ Issue of Shares at Discount: The Companies Act, permits issue of shares at a discount subject to the following conditions.
(a) The issue must be of a class of shares already issued.
(b) Not less than 1 year has at the date of issue elapsed since the date on which the company became entitled to commence business.
(c) The issue at a discount is authorized by a resolution passed by the company in the general meeting & sanctioned by the company law board.

→ Until it is written off the amount should be shown on the asset side of Balance Sheet under the head Miscellaneous Expenditure.

→ Under-subscription of Shares: Situation where a new stock (share) issue has fewer buyers than there are shares (the entire number of shares is not initially sold). Sometimes before an IPO, buyers will indicate that they are willing to buy any of the leftover shares from an under subscription scenario. Thus total number of shares applied by people is less than the number of shares offered for subscription but is not less than minimum subscription is termed under- subscription.

→ Over – subscription of Shares: Situation where a new stock (share) issue has more buyers than there are shares to satisfy their orders. This excess of demand over supply occurrence pushes the share’s price higher and may motivate the issuer to bring out another issue. This situation is opposite to under subscription.

→ Calls in Arrears: Money called up for shares, but not paid at the correct time is calls in Arrears. After allotment of shares company calls for money left to be paid by the shareholder and if shareholder does not pay such amount called by company in due time then such money called up is termed Calls in Arrears. Moreover interest is charged on these calls as specified in the articles. In case it is not mentioned in the articles then rate of interest can not be more than 5 %. The Balance of calls-in-arrears account is deducted from the Called-up capital in the Balance Sheet.

→ Calls in advance: it means calls not due but paid by the shareholders in advance thus the amount of future calls is received in advance by the company. A company may if authorized by its articles accepts call-in advance amount form its shareholders. A separate calls-in-advance is opened for its accounting treatment. The amount received by the company as calls in advance is a debt of the company. Besides this Company is also required to pay interest on this money received in advance from shareholders. The rate of interest can be as specified in the articles of the company but can not be more than 6%.

→ Issue of shares for consideration other than cash: A company can issue shares for consideration other than cash. Common examples include issuing shares in return for property, assets the company needs or (e.g. in a takeover) shares in another company. These shares can be issued to

→ Issue of shares to vendors: A company may purchase assets from the vendors and instead of paying them cash company allots shares to those vendors. A Company may take over a running business i.e. assets & liabilities of another business. The Sellers of the business are known as Vendors

→ Issue of shares to Promoters: A promoter’s share is a share issued to a stockholder in exchange of the services and labor actually rendered in favor of a corporation

→ A company may allot fully paid shares to Promoters who provide some technical information, or provide services etc. instead of paying him in cash. As the amount paid to promoters will be used by company for long period of time it will be treated as capital expenditure and debited to Goodwill Account.

→ Forfeiture of Shares: if a shareholder fails to pay allotment money and/or calls money on his shares as called upon by the company his shares may be forfeited by giving due notice and following the procedure specified in the articles of association on this behalf. This is known as forfeiture of shares in simple words to forfeit a share means to cancel the allotment to defaulting share holders. When a share is forfeited, the shareholder no longer owes any remaining balance, surrenders any potential capital gain on the shares and the shares become the property of the issuing company.

→ The issuing company can re-issue forfeited shares at par, a premium or a discount as determined by the board of directors. There is no specified procedure for the forfeiture of shares in the Companies Act but directors must follow some procedure, a notice is given to the shareholder whose shares are being forfeited and minimum of 14 days is given regarding the payment after which shares are forfeited in a board meeting.

→ Effect of the forfeiture of shares is that the name of the shareholder is removed from the register of members and amount already received on these shares is forfeited to the company. The forfeited amount should be transferred to newly opened share forfeiture account it means that he is no more shareholder of the company

→ Share Capital A/c Dr. (no of forfeited shares*amount called up per shares)

  • To Calls in Arrears A/c (amount of unpaid calls )
  • To Share Forfeiture A/c (amount received towards share received)

→ If the Forfeited shares are issued at a discount, the proportion amount of discount allowed on such shares should be cancelled.

→ If the Forfeited shares were issued at a premium and the premium money is already received on those Forfeited shares, security premium A/c will not be cancelled or debited.
Reissue of Forfeited Shares: Company can re-issue or dispose of such shares in such manner as it thinks fit. Any profit on reissue of Forfeited shares represents capital profit & hence it should be transferred to capital reserve. If all forfeited shares are not reissued only that proportion of share forfeiture account which belongs to the reissued shares should be transferred to capital reserve account and the remaining balance of the share forfeiture account relating to shares not reissued is carried forward.

→ The amount of discount allowed on reissue of shares at the most can be equal to the forfeited amount on such shares.

→ The maximum permissible discount on reissue of shares which were originally issued on discount will be equal to the amount forfeited plus the amount of discount initially allowed on these shares at the time of their original issue.

→ In case forfeited shares are issued on premium than amount in the Share Forfeited Account will be treated as net gain and transferred to Capital Reserve Account

→ In case forfeited shares are issued at par than amount in the Share Forfeited Account will be treated as net gain and transferred to Capital Reserve Account

→ Forfeiture and Shares allotted on Pro-Rata basis – Pro – Rata means shares are distributed to all applicants in such a way that every applicant will get shares less than what he applied for, the money remaining on the shares which are given to the potential shareholders may now be used to pay part of their future indebtedness on the shares already allotted to them. Pro-Rata allotment situation comes when shares of the company are oversubscribed.

→ Example
The issued share capital of Stag pic was Rs 100 million, being 100 million equity shares of Rs 1 each fully paid with no share premium account. On 2 January 20 xl the company offered 40 million shares to the public at Rs 1.25 each, payable 40p on application, 30p on allotment and 55p on call at 30 June 20×1. Applications closed on 31 January when applications had been received for 65 million shares. On 4 February, 15 million were rejected and moneys returned, and allotments were made pro rata to the remaining applicants.

→ Note that since 50 million share applications were not rejected, allotments were on the basis of four shares 50p paid (i.e. 50 million @ 40p ÷ 40 million) for every five shares applied for; a balance of only 30p -(50p -40p) = 20p per share will be payable on Allotment. The amounts due on allotment were received in full by 28 February. By 4 July, call money for 32 million shares had been received. The remaining shares (8 million) were forfeited. On 18 July 4 million forfeited shares were reissued at 75p each.

Application money = 65 million @ Rs0.40 = Rs26 million
Refunded = 15 million @ Rs 0.40 Rs 6 million
Allotment money = 40 million @ Rs 0.20 = Rs 8 million
Share premium per share = 1.25 – Rs 1 = Rs 0.25
Total share premium = 40 million @ Rs 0.25 = Rs 10 million
Nominal value of application and allotment = 40 million @ (Rs 0.40 + Rs 0.30 – Rs 0.25)
= Rs 18 million
Call
Nominal value of call = 40 million @ Rs 0.55 = Rs22 million.
Call money received = 32 million @ Rs 0.55 Rs 17.6 million.
Forfeiture
Called-up value of forfeited shares excluding the share premium = 8 million @ Rs 1 = Rs 8 million
Premium included in the amount called up relating to forfeited shares = 8 million @ Rs 0.25 = Rs 2 million
Amount in call account relating to arrears on forfeited shares  = 8 million @ Rs 0.55 = Rs 4.4 million.
Reissue
Reissue money received = 4 million @ Rs 0.75 = Rs 3 million
Nominal value of shares reissued called up = 4 miIlion @ Rs 1 = Rs 4 million
Amount in forfeited shares account relating to reissue = 4 million @ (Rs 0.40 + Rs 0.30) = Rs 2.8 million

Example: Karan Ltd. forfeited 500 shares of Rs 10 each fully called-up out of which the company received only Rs 5 and the balance amount remained unpaid. As a result, the company forfeited these shares for the non-payment of allotment money of Rs 3 and call money of Rs 2. These shares were reissued by the company at Rs 15 per share fully paid-up. Pass the necessary Journal entries.
Solution:
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 5

Debentures:
→ A debenture is a medium to long-term debt format that is used by large companies to borrow money. For short term fund requirement companies may take promissory notes, bank overdrafts etc. but Debentures are the most common form of long-term loans that can be taken by a company. Most debentures pay a fixed rate of interest. It is required that this interest is paid prior to dividends being paid to shareholders. Furthermore, most debentures are secured on the borrower’s assets, although some are not, these can be known as naked or unsecured debentures. The main advantage of debentures to companies is the fact that they have a lower interest rate than e.g. overdrafts. Also, they are usually repayable at a date far off in the future.

→ Issue of Debentures: Just like shares debentures can be issued for cash as well as for consideration other than cash and as collateral security.

→ Issue of debentures for Cash: The procedure and accounting entries for issue of debentures are very much similar to that of share. A prospectus is issued to the public for inviting applications. The money on debentures may be payable in full at a time along with application or by installments on application, allotment and various calls. When a debenture is issued at its face value, it is called issue of debenture at par. If a debenture of Rs 200 is issued at Rs 200, it is called the issue of debenture at par.

I Debentures Issued at par and redeemable at par
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 6
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 7

II. Issue of debentures at premium: A debenture is said to be issued at premium when the issue price exceeds the par value. If a debenture of RslOO is issued at Rs 110, then it is called issue of debenture at premium. The excess amount RslO (RsllO-Rs 100) is debenture premium. Where a company issues debentures at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those debentures shall be transferred to an account, to be called “the securities premium account”.
When premium amount due with application money
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 8

III. Issue of Debentures at Discount: When a debenture is issued at an amount less than its face value, it is said to be issued at discount. If a debenture of RslOO is issued at Rs 95, it is said to have been issued at a discount of Rs 5. Such loss is a capital loss and is shown in the asset side of balance sheet under the heading “Miscellaneous Expenditure”. In case debentures are issued at discount, debenture account is credited with nominal value of debenture and discount allowed is transferred to “Discount on issue of Debenture Account”
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 9

→ Issue of debentures for consideration other then cash – Sometimes a company may purchase an asset, like plant or machinery, and may issue debentures in payment of consideration for such assets. Sometimes a company may purchase some running business and may settle the purchase consideration by issue of debentures.
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 10

→ Issue of debenture as collateral security: Collateral security means security provided to the lender over and above the prime or principal security. Collateral security is to be realized only when the principal security fails to pay the amount of loan. Issue of debentures is a means to provide collateral security when the borrower is not in a position to give any other assets as collateral security. When the loan is paid back, the debentures issued as collateral security are returned to the company. Sometimes, when a company takes a loan, say of Rs 1000000 from a bank, it may have to issue (in addition to any other security that it may have offered) debentures for the same amount or even a higher amount. These debentures will not carry any right as long as the terms of the loan are not contravened. The holder of such debentures is entitled to interest only on the amount of loan, but not on the debentures. However, if there is any breach, say, failure to pay the interest, the creditor may choose to activise the debentures and then claim all the rights of the debenture holder.

→ In case the company (borrower) ’fails to pay the principal along with interest in time, the lender is at liberty to recover his dues from the sale of primary security in the first instance. If the realizable value of primary security is insufficient to clear the dues, the lender has the right to invoke the benefit of collateral security whereby, the debenture may either be presented for redemption or sold in the market.

→ No entry is required to be passed in books of account as debentures are issued only as collateral security and becomes active only when loan is not repaid. But a note is to be given in the balance sheet showing such debentures under the heading of loan account.

→ Redemption of Preference Shares: Subject to the provisions of the Companies Act 2013 a company limited by shares may, if so authorized by its articles, issue preference shares which are, liable, to be redeemed. As per new companies act i.e. CA 2013 No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable. A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue but a infrastructure company may issue preference shares for a period exceeding twenty years, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders.

→ Provisions related to redemption of preference shares
(a) No such shares shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption

(b) No such shares shall be redeemed unless they are fully paid.

(c) According to companies Act 2013 in case if shares are to be redeemed at premium then payment for such payment must be arranged either out of profits of the company or out of company’s securities premium account.

(d) The redemption of preference shares under this section by a company shall not be taken as reducing the amount of the company’s authorized share capital.

(e) when a company has redeemed or is about to redeem any preference shares, it shall have power to issue shares up to the nominal amount of the shares redeemed or to be redeemed as if those shares had never been issued, and accordingly the share capital of the company shall not for the purposes of any enactments relating to stamp duty be deemed to be increased by the issue of shares in pursuance of this subsection.

(f) The capital redemption reserve fund may, notwithstanding anything in this section, be applied by the company in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

(g) Where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall out of profits which would otherwise have been available for dividend be transferred to a reserve fund to be called “the capital redemption reserve fund”. A sum equal to the nominal amount of the shares redeemed shall, except as provided in this section, apply as if the capital redemption reserve fund were paid up share capital of the company.

(h) Capital Redemption Reserve (C.R.R.) Account can not be used for any other purpose except issuing frilly paid bonus shares to the equity shareholders.

(i) A company has redeemed or is about to redeem any preference shares, it shall have power to issue fresh shares up to the nominal amount of the shares redeemed or to be redeemed as if those shares had never been issued, and accordingly the share capital of the company shall not for the purposes of any enactments be increased by the issue of shares. Thus a new share capital account (could be equity or preference) will be equal to the redeemable preference shares.

(j) If new shares are issued at par then nominal value of the shares will be transferred to C.R.R. Account. Example if 12% preference shares are redeemed with the fresh issue of 1000 shares having the nominal value of Rs 10 then Rs 10000 will be transferred to C.R.R. Account.

(k) In case fresh shares are issued at premium then in such case only nominal value of the share will be transferred to C.R.R. Account and premium will be transferred to “Securities Premium Account “. While if preference shares are redeemed at premium then premium can be received both from securities premium account as well as from the profit of Company.
Example if 12% preference shares are redeemed with the fresh issue of 1000 shares having the nominal value of Rs 10 issued at Rs 12 then Rs 10000 will be transferred to C.R.R. Account and Rs 2000 will be transferred to “Securities Premium Account “.

(l) In case fresh shares are issued at loss then in such case only value of the share received will be transferred to C.R.R. Account and discount will be a capital loss.
Example if 12% preference shares are redeemed with the issue of fresh 1000 shares having the nominal value of Rs 10 being issued at Rs 8 then Rs 8000 will be transferred to C.R.R. Account and rest Rs 2000 as capital loss.

(m) If there are two types of redeemable preference share i.e. one is fully paid up and other is partly paid up then
– If it is given that both classes of preference shares are to be redeemed then firstly, convert the partly paid up by making final call.
– If it is given that preference shares are to be redeemed then only Fully paid up preference shares are to be redeemed.

(n) In case preference shares are redeemed partly out of profits and partly out of fresh issue then redeemable preference share account = CRR Account + new share capital account

→ Various accounting entries for redemption of preference shares
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 11

Introduction to Company Accounts MCQ Questions – CS Foundation Fundamentals of Accounting and Auditing

Question 1.
Characteristic feature NOT found in company is
a. Legal entry
b. Common seal
c. Affected by insolvency of an individual member
d. Association of individual members
Answer:
c. Affected by insolvency of an individual member

Question 2.
Which of the following items is not an appropriation of profit for a limited company?
a. Preference shares dividend payable
b. Ordinary dividend payable by the company
c. Income tax payable by the company
d. Debenture interest payable
Answer:
d. Debenture interest payable

Question 3.
Which of the following statement is correct for preference shares?
a. They have voting rights
b. Their rights and given in memo – condom of association
c. They can vote at the time of winding up of the company
d. All of the above
Answer:
c. They can vote at the time of winding up of the company

Question 4.
Of the following account types, which would be 8. increased by a debit?
a. ‘Liabilities and expenses.
b. Assets and equity
c. Assets and expenses
d. Equity and revenues
Answer:
c. Assets and expenses

Question 5.
If articles provide then preference shareholder can have
a. Voting right in the general meeting
b. To receive divided along with equity shareholders
c. Both a & b
d. None of the above
Answer:
d. None of the above

Question 6.
Minimum capital with which a company is registered is
a. Issued capital
b. Subscribed capital
c. Authorized capital
d. Paid up capital
Answer:
d. Paid up capital

Question 7.
When there is an increase in the minimum capital with which the company is registered is to be altered
a. Memorandum of association
b. Articles of association
c. Paid up capital
d. Subscribed capital
Answer:
a. Memorandum of association

Question 8.
In balance sheet the classes of shares that have been issued by the company are shown under the heading
a. Authorized capital
b. Issued capital
c. Subscribed capital
d. Paid up capital
Answer:
b. Issued capital

Question 9.
Partly paid up capital is
a. Authorized capital
b. Subscribed capital
c. Paid up capital
d. Issued capital
Answer:
b. Subscribed capital

Question 10.
A company issued shares at Rs. 100 Company received Rs. 60 per share Rs. 60 is
a. Subscribed capital
b. Paid up capital
c. Called up capital
d. None of the above
Answer:
c. Called up capital

Question 11.
Which of the following statements is true?
a. Ordinary shares have fixed dividends and stable market values
b. Ordinary shares have variable dividends and stable market values
c. Ordinary shares have fixed dividends and volatile market values
d. Ordinary shares have variable dividends and volatile market values
Answer:
d. Ordinary shares have variable dividends and volatile market values

Question 12.
Prospectus is
a. Invitation from company to subscribe for shares
b. Document submitted to ROC after allotment of shares
c. Document which shows the number of shares that have been allotted
d. Document which shows the paid up capital of the company
Answer:
a. Invitation from company to subscribe for shares

Question 13.
Share capital account can be credited only
a. Application money is received
b. When shares are allotted
c. When prospectus is issued
d. None of the above
Answer:
b. When shares are allotted

Question 14.
Calls are
a. Share value
b. Application money
c. Demand made to shareholder by directors
d. Allotment money
Answer:
c. Demand made to shareholder by directors

Question 15.
Allotment money is
a. First installment money called by company
b. Second installment money called by company
c. Third installment money called by company
d. Final installment money called by company
Answer:
b. Second installment money called by company

Question 16.
“Shareholder wealth” in a firm is represented by:
a. The number of people employed in the firm.
b. The book value of the firm’s assets less the book value of its liabilities.
c. The mount of salary paid to its employees
d. The market price per share of the firm’s common stock.
Answer:
d. The market price per share of the firm’s common stock.

Question 17.
Minimum subscription required by a company is
a. 90%
b. 80%
c. 75%
d. None of the above
Answer:
a. 90%

Question 18.
Premium received on shares is treated as
a. Capital reserve
b. Capital receipt
c. Capital revenue
d. All of the above
Answer:
b. Capital receipt

Question 19.
In case of under subscription ____________ is NOT found
a. Total no of application received is equal to total no of shares offered
b. Total no of application received is less than total no. of shares by offered.
c. Total no. of application is more than the total no of shares offered.
d. Both a & c
Answer:
d. Both a & c

Question 20.
Features of calls-in- advance
a. Considered as capital of the company
b. Shown on the liabilities side
c. No dividend pain on calls in advance
d. Both a & c
Answer:
d. Both a & c

Question 21.
Which of the following statement is true?
a. Loan capital is paid up capital of the company
b. Loan capital is subscribed capital of the company
c. Loan capital is money borrowed from outsiders
d. Loan capital is not normally repaid to the lender
Answer:
c. Loan capital is money borrowed from outsiders

Question 22.
Amount of interest to be paid by a person whom shares have been allotted but has not paid money asked, by the last date will be
a. 5%
b. 6%
c. 7%
d. 8%
Answer:
a. 5%

Question 23.
Shares can be forfeited by
a. Shareholders
b. Registrar of companies as per companies act
c. Directors
d. All of the above
Answer:
c. Directors

Question 24.
Amongst the following that is not a short term means of raising capital
a. Loans from financial institutions
b. Bills of exchange
c. Promissory note
d. None of the above
Answer:
a. Loans from financial institutions

Question 25.
All of them are long term borrowings except
a. Cash credits
b. Public deposits
c. Debentures
d. Both a & c
Answer:
d. Both a & c

Question 26.
In ______________ debenture account is to be mentioned
a. Name of the debenture
b. Rate of interest
c. Date of issue of debenture
d. All of the above
Answer:
b. Rate of interest

Question 27.
When debentures are issued at discount. Such discount
a. May be written off against revenue profits
b. May be written of against capital profit
c. Both a & b
d. Shown at debit side of balance sheet
Answer:
c. Both a & b

Question 28.
Feature of debentures issued as collateral securities. Select from the given options
a. Only interest on loan to be paid
b. Interest on loan as well debenture to be paid.
c. Debenture issued as a security towards the loan taken
d. Both a & b
Answer:
d. Both a & b

Question 29.
It is uncommon is case of debentures issued as collateral security that
a. Interest be given on debentures
b. Accounting entry is not made
c. Existence of debenture given as a note in balance sheet
d. None of the above
Answer:
d. None of the above

Question 30.
When preference shares are redeemed the redemption money is paid from
a. Capital account
b. Profits of the company
c. securities premium account
d. Both b & c
Answer:
d. Both b & c

Question 31.
Redemption of preference shares can be done except
a Fresh shares are issued for this purpose.
b. From the profits
c. When shares are partly paid
d. All of the above
Answer:
c. When shares are partly paid

Question 32.
Capital redemption reserve account is prepared when
a. Redemption is done out of issue of fresh shares
b. Redemption is done out of profits of the company
c. Redemption is done through company’s capital fund
d. All of the above
Answer:
b. Redemption is done out of profits of the company

Question 33.
Which of the following transactions would have no impact on stockholders’ equity?
a. Purchase of land from the proceeds of a bank loan.
b. Dividends to stockholders.
c. Net loss.
d. Investments of cash by stockholders.
Answer:
a. Purchase of land from the proceeds of a bank loan.

Question 34.
Which of the following would not be included on a balance sheet?
a. Accounts receivable
b. Accounts payable.
c. Sales
d. Cash.
Answer:
c. Sales

Question 35.
It is UNCOMMON in calls in advance that
a. Directors pay 8 % interest on the amount paid by shareholder
b. Directors pay 6% interest on the amount paid by shareholder
c. Directors pay 5% interest on the amount paid by shareholder
d. Directors pay 4% interest on the amount paid by shareholder
Answer:
a. Directors pay 8 % interest on the amount paid by shareholder

Question 36.
The following relate to the recording process. Which of these statements is correct?
a. The general ledger is a chronological record, of transactions.
b. The general ledger is posted from transactions recorded in the general journal.
c. The trial balance provides the primary source document for recording transactions into the general journal.
d. Transposition is the transfer of information from the general journal to the general ledger.
Answer:
b. The general ledger is posted from transactions recorded in the general journal.

Question 37.
Select the statement that is true?
a. Preference shares have variable dividends and volatile market values
b. Preference shares have fixed dividends and stable market values
c. Preference shares have variable dividends and no market values
d. Preference shares have variable dividends and stable market values
Answer:
b. Preference shares have fixed dividends and stable market values

Question 38.
Which is true?
a. Called up capital and paid up capital are equal
b. Called up capital and paid up capital are unequal
c. Called up capital and paid up capital may be equal
d. None of the above
Answer:
c. Called up capital and paid up capital may be equal

Question 39.
If a company has the word limited at the end of its name, this means that:
a. The shareholder’s liability for the debts of the business is restricted
b. The number of shareholders have fixed upper limit
c. The number of members can never be increased.
d. There is a limit to the number of shares that can be issued
Answer:
a. The shareholder’s liability for the debts of the business is restricted

Question 40.
A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following?
Redemption of Lapse of certificates : certificates
a. Decrease: Decrease
b. Decrease: no effect
c. No effect: decrease
d. No effect: no effect
Answer:
a. Decrease: Decrease

Question 41.
The correct concept of double entry book keeping states that
a. For every goods received on credit, the seller becomes your creditor
b. For every debit entry, there must be a corresponding credit entry
c. For every seller, there must be a buyer
d. One party receives and another party give value
Answer:
b. For every debit entry, there must be a corresponding credit entry

Question 42.
Subscription received in advance is classified in the Balance Sheet of a club as _____________
a. Tangible asset
b. Intangible asset
c. Fixed asset
d. Current liability
Answer:
d. Current liability

Question 43.
Leases have been capitalized by the client but refuse to capitalize them in the financial statements; Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?
a. Qualified opinion.
b. Unqualified opinion.
c. Favorable opinion.
d. Adverse opinion.
Answer:
d. Adverse opinion.

Question 44.
When a company’s stock record books are maintained by an outside transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:
a. Amount of dividends paid to related parties.
b. The complaints of the shareholders received.
c. Number of shares issued and outstanding.
d. Proper authorization of stock rights and warrants.
Answer:
c. Number of shares issued and outstanding.

Question 45.
When an auditor has substantial doubt about an entity’s ability to continue as a going concern because there is no continuity of operations of the company then the auditor most likely would express a qualified opinion if
a. The effects of the adverse financial conditions likely will cause a bankruptcy filing.
b. information about the entity’s ability to continue as a going concern is not disclosed.
c. Management has no plans to reduce or delay future expenditures.
d. Negative trends and recurring operating losses appear to be irreversible.
Answer:
b. information about the entity’s ability to continue as a going concern is not disclosed.

Question 46.
Which of the following items would not form part of the shareholders’ equity of a company on the statement of financial position?
a. Ordinary share capital
b. Trade payables
c. Share premium
d. Retained profits
Answer:
b. Trade payables

Question 47.
Which one of the following would not be included in a full set of company financial statements?
a. The cash budget
b. The statement of financial position r
c. The statement of changes in equity
d. The income statement
Answer:
a. The cash budget

Question 48.
ABC pic issues 30,000 shares of Rs.1 at Rs.1.30 for each share. Which of the following statements is true?
a. Ordinary share capital will increase by Rs. 30,000 and share premium will increase by Rs. 39,000.
b. Ordinary share capital will increase by Rs. 39,000 and share premium will increase by Rs. 9,000.
c. Ordinary share capital will increase by Rs. 39,000 and share premium will be unaffected.
d. Ordinary share capital will increase by Rs 30,000 and share premium will increase by Rs. 9,0000
Answer:
d. Ordinary share capital will increase by Rs 30,000 and share premium will increase by Rs. 9,0000

Question 49.
Polyster Ltd made a profit for the year ended 31 March 2012 of 130,000. During that year the company had paid preference dividends on 100,000 (5% preference shares). In addition, an ordinary dividend of 4 Rs. per share was paid on 200,000 ordinary shares. What was the retained profit for the year ended 31 March 2012?
a. Rs. 22,000
b. Rs. 17,000
c. Rs. 25,000
d. Rs. 30,000
Answer:
b. Rs. 17,000

Question 50.
Which of the following would not be an entry in the statement of changes in equity?
a. Revaluation gain
b. Dividends paid
c. Taxation
d. Profit for the year
Answer:
c. Taxation

Question 51.
Which of the following situations most likely represents the highest risk of a material misstatement arising from misappropriations of assets?
a. A large number of bearer bonds on hand
b. A large number of inventory items with low sales prices.
c. A large number of transactions processed in a short period of time.
d. A large number of fixed assets with easily identifiable serial numbers.
Answer:
a. A large number of bearer bonds on hand

Question 52.
Each of the following is a type of known misstatement, except:
a. An inaccuracy in processing data.
b. The misapplication of accounting principles.
c. Differences between management and the auditor’s judgment regarding estimates.
d. A difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.
Answer:
c. Differences between management and the auditor’s judgment regarding estimates.

Question 53.
An ordinary share dividend is:
a. Part of the company profits used to reward the shareholders for their investment.
b. Interest on money lent to the company by its shareholders.
c. An expense of running the company.
d. The directors’ remuneration
Answer:
a. Part of the company profits used to reward the shareholders for their investment.

Question 54.
XYZ Ltd issues 500000 new ordinary Rs 1 shares at an issue price of Rs 1.50 and makes a bonus Issue of new shares amounting to 50000 Rs1 ordinary shares. The company also increases its authorized ordinary share capital by 550000 Rs1 ordinary shares. By how much will the balance sheet ordinary share capital account increase?
a. Rs 800 000.
b. Rs 550 000.
c. Rs750 000
d. Rs. 350000.
Answer:
b. Rs 550 000.

Question 55.
Statements of Standard Accounting Practice and Financial Reporting Standards should be complied with when preparing the final accounts of a limited company because:
a. The Companies Act 1985 demands that they are used.
b. The auditors will insist they are followed.
c. The directors are under a legal obligation to ensure they are followed.
d. They ensure that the accounts present a true and fair view.
Answer:
d. They ensure that the accounts present a true and fair view.

Question 56.
If current accounts are not being managed for a partnership firm then partners are maintaining _________________ accounts
a. Fixed capital account
b. Partnership account
c. Fluctuating capital account
d. Saving account
Answer:
c. Fluctuating capital account

Question 57.
Which of the following statement correctly describes debentures?
a. Income bonds that require interest payments only when earnings permit.
b. Income bonds that require interest payments only when earnings permit.
c. Subordinated debt and rank behind convertible bonds.
d. A form of lease financing similar to equipment trust certificates.
Answer:
c. Subordinated debt and rank behind convertible bonds.

Question 58.
Which of the following statement is true?
a. Authorised Capital = Issued Capital
b. Authorised Capital > Issued Capital
c. Paid up Capital ≥ Issued Capital
d. None of the above.
Answer:
a. Authorised Capital = Issued Capital

Hint:
Authorised share capital: This is also known as registered capital. It is the maximum amount of capital that the limited company is authorised to issue to its shareholders. Issued capital means that portion of authorised capital which has been issued thus authorised capital is more than issued capital.

Question 59.
Which of the following will define, when appropriation of a certain number of shares is made to an applicant in response to his application?
a. Share allotment
b. Share forfeiture
c. Share trading
d. Share purchase.
Answer:
a. Share allotment

Hint:
With a share allotment, the shares are created and issued by the company to the people who become the company’s shareholders.

Question 60.
P Ltd. forfeited 150 shares of Rs.10 each, issued at a premium of Rs. 2, for non – payment of the final call of Rs. 3. Cut Of those, 100 shares were reissued @ Rs. 11 per share. How much amount would be transferred to capita! reserve?
a. Rs. 700
b. Rs. 500
c. Rs. 1,200
d. Rs. 300
Answer:
a. Rs. 700

Hint:
When forfeited shares were re-issued the following Journal Entry will be passed
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 12

Question 61.
If tl”9 number of shares offered to public for subscription is less than the number of applications received, it is termed as.
a. Minimum subscription
b. Over subscription
c. Under subscription
d. Maximum subscription
Answer:
b. Over subscription

Hint:
Over subscription of Shares: Situation where a new stock (share) issue has more buyers than there are shares to satisfy their orders. This excess of demand over supply occurrence pushes the share’s price higher and may motivate the issuer to bring out another issue.

Question 62.
Shares may be issued
a. For cash
b. For consideration other than cash.
c. For both (a) and (b)
d. None of the above
Answer:
c. For both (a) and (b)

Hint:
A limited company may issue the shares for Consideration other than cash or for cash or on capitalization of reserves.

Question 63.
Which of the following will be the journal entry for recording the issue of shares at par against purchase of Machinery?
a. Debit Machinery A/c, Credit Share Capital A/c
b. Debit Share Capital A/c, Credit Machinery A/c
c. Debit Bank A/c, Credit Share Capital Nc
d. Debit Machinery A/c, Credit Cash A/c
Answer:
a. Debit Machinery A/c, Credit Share Capital A/c

Hint:
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 13

Question 64.
Debentures of a company can be issued
a. For cash
b. For consideration other than cash
c. As a collateral security
d. Any of the above.
Answer:
d. Any of the above.

Hint:
Just like shares debentures can be issued for cash as well as for consideration other than cash and as collateral security

Question 65.
On issue of debentures as a collateral security, which account is credited?
a. Debentures Account
b. Bank Loan Account
c. Debenture holdings Account
d. Debenture Suspense Account
Answer:
a. Debentures Account

Hint:
Collateral security means security provided to the lender over and above the prime or principal security. Collateral security is to be realized only when the principal security fails to pay the amount of loan.
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 14

Question 66.
XY Limited issued 2,50,000 equity shares of Rs.10 each at a premium of Rs.1 each payable as Rs.2.5 on application, Rs.4 on allotment and balance on the first and final call. Applications were received for 5,00,000 equity shares but the company allotted to them only 2,50,000 shares. Excess money was refunded after adjustment for further calls. Last call on 500 shares were not received and shares were forfeited after due notice. This is a case of:
a. Over subscription
b. Pro-rata allotment
c. Forfeiture of shares
d. All of the above.
Answer:
d. All of the above.

Hint:
Over – subscription of Shares: Situation where a new stock (share) issue has more buyers than there are shares to satisfy their orders. This excess of demand over supply occurrence pushes the share’s price higher and may motivate the issuer to bring out another issue.
Company invited applications for 2,50,000 shares but applications are received for 5,00,000 shares. This is a case of over – subscription.

Pro – Rata means shares are distributed to all applicants in such a way that every applicant will get shares less than what he applied for, the money remaining on the shares which are given to the potential shareholders may now be used to pay part of their future indebtedness on the shares already allotted to them. Pro-Rata allotment situation comes when shares of the company are oversubscribed.
Company allotted 2,50,000 shares to the applicants of 5,00,000 shares. This is a case of Pro-rata allotment.

Forfeiture of Shares: if a shareholder fails to pay allotment money and/or calls money on his shares as called upon by the company his shares may be forfeited by giving due notice and following the procedure. Company could not receive last call on 500 shares and these were subsequently forfeited. This is a case of forfeiture of shares.

Question 67.
Z Limited forfeited 200 fully called up shares of Rs.10 each on which Rs.1 ,300 had been received; later on these shares were reissued as fully paid up @ Rs.9 per share. The amount to be transferred from share forfeited account to capital reserve account will be:
a. Rs.1,800
b. Rs.2,000
c. Rs.1, 100
d. Nil.
Answer:
c. Rs.1, 100

Hint:
Important points to remember
→ Company can re-issue or dispose of such shares in such manner as it thinks fit. Any profit on reissue of Forfeited shares represents capital profit & hence it should be transferred to capital reserve.

→ The forfeited amount should be transferred to newly opened share forfeiture account.

→ If the Forfeited shares are issued at a discount, the proportion amount of discount allowed on such shares should be cancelled.

On forefeiture of shares accounting entries are
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 15

Question 68.
Omega Limited, a listed company acquires assets worth Rs.7,50,000 from Alpha Limited and issue shares of Rs. 10 each at a premium of 25%. The number of shares to be issued by Omega Ltd., to settle the purchase consideration will be:
a. 60,000
b. 75,000
c. 1,00,000
d. 1,25,000.
Answer:
a. 60,000

Hint:
Number of shares to be issued = 7,50,000/12.5 = 60,000 shares

Question 69.
E Ltd. had allotted 10,000 shares to the applicants of 14,000 shares on pro-rata basis. The amount payable on application was Rs.2. F applied for 420 shares, Th2 number of shares allotted and the amount carried forward for adjustment against allotment money due from F will be:
a. 60 shares; Rs.120
b. 340 shares; Rs.160
c. 320 shares; Rs.200
d. 300 shares; Rs.240
Answer:
d. 300 shares; Rs.240

Hint:
Application received = 14,000
No. of shares alloted = 10,000
No. of shares allotted to F = 420 × \(\frac { 10 }{ 14 }\) = 300 shares.
Application money received from F
F sent application money for 420 shares × 2 = Rs. 840
Application money adjusted against 300 shares
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 16
Rs 240 is to be adjusted against allotment.

Question 70.
A company cannot issue redeemable preference shares for a period exceeding:
a. 6 Years
b. 7 Years
c. 8 Years
d. 20 Years.
Answer:
d. 20 Years.

Hint:
According to Sec 55 of Companies Act, 2013 a company cannot issue any preference share, which is irredeemable or is redeemable after the expiry of a period of twenty years from the date of its issue.

Question 71.
A company forfeited 1,000 shares on 10 each (which were issued at par) held by Saurabh for non-payment of allotment money of Rs.4 per share. The called-up value per share was 18. On forfeiture, the amount debited to share capital account will be
a. Rs.10,000
b. Rs.8,000
c. Rs.2,000
d. Rs.18,000.
Answer:
b. Rs.8,000

Hint:
The forfeited amount should be transferred to newly opened share forfeiture account.
So, Share Capital A/c will be debited by (1,000 × 8) = Rs. 8,000
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 17

Question 72.
The maximum amount beyond which a company is not allowed to raise funds by issue of its shares, is called
a. Subscribed capital
b. Called-up capital
c. Paid-up capital
d. Authorised capital.
Answer:
d. Authorised capital.

Hint:
According to Companies Act, 2013 a joint stock company is not allowed to raise funds by issue of shares beyond the limit of Authorised Capital.

Question 73.
Pious Limited purchases a machine worth Rs. 1,15,000 from Indigo Traders. Payment was made as Rs. 10,000 by cheque and the remaining by issue of equity shares of the face value of Rs.10 each fully paid-up at an issue price of Rs. 10.50 each. Amount of share premium would be .
a. Rs.6,000
b. Rs.5,000
c. Rs.7,000
d. Rs.4,000
Answer:
b. Rs.5,000

Hint:
Share premium = 10,000 × 0.50 = 5000

Question 74.
G Ltd. purchased land and building from H Ltd. at a book value of Rs. 2,00,000. The consideration was paid by issue of 12% debentures of Rs. 100 each at a discount of 20%. For this transaction, the debentures account would be credited with –
a. Rs.2,60,000
b. Rs.2,50,000
c. Rs.2,40,000
d. Rs. 1.60,000.
Answer:
b. Rs.2,50,000

Hint:
In case debentures are issued at discount, debenture account is credited with nominal value of debenture and discount allowed is transferred to “Discount on issue of Debenture Account”

Book Value of Building:
Face Valued Debenture – Discount on issue of debenture
= \(\frac{2,00,000}{100-(100 \times 20 \%)}\) = \(\frac{2,00,000}{80}\)
= 2,500 debentures
Debentures A/c will be credited by = No. of debentures × Face value of debentures
= 2,500 × 100
= 2,50,000

Question 75.
Solid ltd. issued 2,000, 10% preference shares of f 100 each at par, which are redeemable at a premium of 10%. For the purpose of redemption, the company issued 1,500 equity shares of Rs.100 each at a premium of 20% per share. At the time of redemption of preference shares, the amount to be transferred by the company to the Capital Redemption Reserve Account will be –
a. Rs.50,000
b. Rs 40,000
c. Rs.2,00,000
d. Rs 2,20,000.
Answer:
a. Rs.50,000

Hint:
In case fresh shares are issued at premium then in such case only nominal value of the share will be transferred to C.R.R. Account and premium will be transferred to “Securities Premium Account “.

Amount to be transferred to Capital Redemption Reserve:
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 18

Question 76.
A company invited share application of 5,000 shares, it received application of 6,000 shares and were allotted shares on prorata basis, 200 shares were forfeited. To which of the following does this case belong: ‘
a. Prorata
b. Oversubscription.
c. Forfeiture.
d. All of the above.
Answer:
d. All of the above.

Hint:
Over-subscription of Shares: Situation where a new stock (share) issue has more buyers than there are shares to satisfy their orders. This excess of demand over supply occurrence pushes the share’s price higher and may motivate the issuer to bring out another issue.
The company invited share application of 5,000 shares, it received application of 6,000 shares This is-a case of over-subscription.

Pro-Rata means shares are distributed to all applicants in such a way that every applicant will get shares less than what he applied for, the money remaining on the shares which are given to the potential shareholders may now be used to pay part of their future indebtedness on the shares already allotted to them. Pro-Rata allotment situation comes when shares of the company are oversubscribed.

Forfeiture of Shares: if a shareholder fails to pay allotment money and/or calls money on his shares as called upon by the company his shares may be forfeited by giving due notice and following the procedure. 200 shares were forfeited by company.

Question 77.
X failed to pay final call on 24,000 shares Rs.20 per share on 15.12.2013 ‘and paid the same on 15.03.2014. What is the interest of calls in arrears.
a. 12,000
b. 6,000
c. 6150
d. 6,250
Answer:
a. 12,000

Hint:
Final call paid was delayed by 3 months
Interest on calls in arrears will be
\(\frac{24000 \times 20 \times 10 \times 3}{100 \times 12}\) = 12,000

Question 78.
Company cannot issue shares more than –
a. Authorised Capital
b. Subscribed Capital
c. Issued Capital
d. Paid up Capital
Answer:
a. Authorised Capital

Hint:
Authorised share capital: This is also known as registered capital. It is the maximum amount of capital that the limited company is authorised to issue to its shareholders.

Question 79.
Premium received on re-issue of forfeited share should be
a. Debit to share forfeited A/c
b. Credit to share forfeited A/c
c. Credit securities premium A/c
d. None
Answer:
c. Credit securities premium A/c

Hint:
As per the provisions of Companies Act 2013, the amount of premium on fresh issue after redemption, should be credited to securities premium A/c and face value to share capital account.

Question 80.
X Ltd. forfeited 700 shares of Rs.10 each (9 called up) on which he paid up 7 per share. Out of these 200 shares were re-issued at Rs.9. Calculate the amount credited to Share Capital A/c at time of re-issued?
a. 6,300
b. 4,300
c. 1,800
d. 2,000.
Answer:
d. 2,000.

Hint:
If the Forfeited shares are issued at a discount, the proportion amount of discount allowed on such shares should be cancelled.

Entry for reissue of forfeited shares will be :
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 19

Question 81.
Y Ltd. forfeited 300 shares of Rs.10/- each for non-payment of allotment money of Rs.4/-, first call and second call of Rs.2/- each. All the shares were re-issued @ Rs.10 paid UP. Calculate the amount transferred to capital reserve.
a. 800
b. 900
c. 1,800
d. 600
Answer:
d. 600

Hint:
In case forfeited shares are issued at par than amount in the Share Forfeited Account will be treated as net gain and transferred to Capital Reserve Account
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 20

Question 82.
A limited company issued a prospectus inviting application for 2,000 shares of Rs. 10 each at premium of Rs. 2 per share payable as follows: On application – Rs. 2
On allotment – Rs. 5 (including premium)
On 1st call- Rs. 3
On llnd final call – Rs. 2
Application were received for 3,000 shares and allotment was made on pro-rata basis to applicant of 2,400 shares. Money received in excess on application was adjusted towards allotment.
Ramesh whom 40 shares were allotted, failed to pay allotment money & first call his shares were forfeited. Find the number of shares Ramesh has applied ‘for?
a. 52
b. 50
c. 42
d. 48.
Answer:
d. 48.

Hint:
Pro rata allotment of shares will be = no. of shares applied × 2400/2000
Ramesh applied for × shares and he is allotted 40 shares.
40 = 2400 × X/2000 .
x = \(\frac{2400 \times 40}{2,000}\)
= 48 shares

Question 83.
Gas Ltd. issued 1,00,000 equity shares of Rs.10 each payable as follows: Rs.3 on application, Rs.3 on allotment, Rs.2 on first call and Rs.2 on second and final call. The Company received application for 1,50,000 shares.
The allotment was made as under:
Applicants for 50,000 shares were allotted in full. Applicants for 80,000 shares were allotted 50,000 shares on pro-rata basis and applicants for 20,000 shares were rejected. The amount of excess application money available for adjustment against allotment is:
a. Rs.50,000
b. Rs.90,000
c. Rs.60,000
d. Rs.40,000
Answer:
b. Rs.90,000

Hint:
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting and Auditing Notes 21
The amount of excess application money available for adjustment against allotment is Rs. 90,000.

Question 84.
Dabur Ltd. forfeited 400 shares of Rs. 1 G each fully called up on which the holder has paid only application money at Rs. 4 per share. Out of these 250 shams were reissued at 2 per share fully paid up. Capital reserve will be credited by:
a. Rs.3 000
b. Rs. 1,600
c. Rs.4,0300
d. Rs. 1,000
Answer:
d. Rs. 1,000

Hint:
In case forfeited shares are issued on premium than amount in the Share Forfeited Account will be treated as net gain and transferred to Capital Reserve Account.
250 shares were forfeited
Amount received on 250 shares = Rs 1000(250 × 4)

Question 85.
A new company wants to issue share at premium. The maximum rate of premium will be?
a. No limit
b. 10%
c. 30%
d. 15%
Answer:
a. No limit

Hint:
In case fresh shares are issued at premium then in such case only nominal value of the share will be transferred to C.R.R. Account and premium will be transferred to “Securities Premium Account “. Companies Act does not prescribe any maximum rate of premium.
So, the maximum rate of premium will be having no limit.

Question 86.
Forfeited shares account (not yet re-issued) shown under the heading ……………….
a. Current liabilities
b. Reserves and surplus
c. Share capital
d. Long term borrowings
Answer:
c. Share capital

Question 87.
Picus – Limited purchases a machine worth ‘Rs. 1,15,000 from Indigo Traders. Payment was made as Rs. 10,000 by cheque and the remaining by issue of equity shares of the face value of Rs.10 each fully paid-up at an issue price of Rs. 10.50 each. Amount of share premium would be;
a. Rs.5,000
b. Rs.6,000
c. Rs.7,000
d. Rs.4,000
Answer:
a. Rs.5,000

Hint:
Amount of premium = 50 × 10000 = 5000
10,000 equity shares @ Rs. 10 face value and Rs. 0.50 as a premium.

Question 88.
T ltd. has issued 14% Debentures of Rs. Rs.20,00,000 at a discount of 10% in April 2013 and the company pays interest half-yearly on June 30 and December 31 every year. On March 31, 2014, the amount shown as ‘interest accrued but not due’ in the balance sheet will be:
a. Rs.70,000
b. Rs.2,80,000
c. Rs. 1,40,000
d. Rs. 2,10,000
Answer:
a. Rs.70,000

Hint:
when interest that is either payable or receivable has been recognized, but not yet paid or received because it is not due is interest accrued.
Interest “accrued but not due” in the Balance sheet will be:
20,00,000 × 14/160 × 3/12 = 70,000

Question 89.
Which of the following accounts can not be transferred to capital redemption reserve account?
a. Dividend equalisation account
b. General reserves
c. Profit and loss appropriation account.
d. Securities premium reserves
Answer:
a. Dividend equalisation account

Hint:
Where any shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall out of profits which would otherwise have been available for dividend be transferred to a reserve fund to be called “the capital redemption reserve fund”.

Following accounts are transferred to CRR

  • General Reserves
  • Profit & Loss Appropriation A/c
  • Securities Premium Reserves
  • Other free Reserves

Question 90.
As per Section 52 of the Companies Act, 2013, the securities premium reserve can be utilised for the purpose of:
a. Redemption of preference shares
b. Transfer of amount to capital redemption reserve
c. Payment of dividend on preference shares
d. Payment of premium on redemption of preference shares.
Answer:
d. Payment of premium on redemption of preference shares.

Hint:
As per Companies Act Securities premium can be utilised only for:
(a) issuing fully paid shares to members
(b) writing off the balance of preliminary expenses of the company
(c) writing off commission paid/discount allowed/expenses incurred on issue of shares or debentures of the company
(d) for providing for the premium payable on redemption of preference shares
(e) for purchase of its own shares

Question 91.
Which of the following statement is not correct?
a. Equity shares are convertible
b. Equity shares have voting rights
c. Equity shares are also known as ordinary shares
d. Equity shareholders get dividend.
Answer:
a. Equity shares are convertible

Hint:
Equity shares are not convertible shares where as preference shares are convertible, they can be converted into equity shares but equity cannot be converted into preference shares.

Question 92.
XYZ limited issued 20,000 shares of Rs.10 each. It received applications for 24,000 shares. Shares were allotted to all shareholders proportionately. The application money was Rs.6 and allotment and call money was Rs.4 per share. Ram who was allotted 300 shares could not pay the allotment money. The money due to Ram would be:
a. Rs. 1,800
b. Rs. 1,200
c. Rs. 1,440
d. Rs.840.
Answer:
d. Rs.840.

Hint:
Application received – 24000
Allotment made -20000
No. of shares applied = 24000 × 300/20000 = 360
Money paid by Ram on application = 360 × 6 = 2160
Money for 300 shares = 1800
Extra money paid by Ram = 360
Allotment money due = 1200 – 360 = 840 (300 shares @rs 4)

Question 93.
Star Ltd. issued 80,000 equity shares of Rs,10 each. The money was payable as Rs.3 on application, Rs.4 on allotment, Rs.2 on first call and Rs.1 on final call. The applications were received for 1,20,000 shares. Applicants of 20,000 shares were allotted in full. Applicants of 80,000 shares were allotted 60,000 shares on prorata basis and applications for 20,000 shares were rejected. Amount to be refunded by the company is:
a. NIL
b. Rs. 1,80,000
c. Rs.60,000
d. Rs. 1,20,000.
Answer:
c. Rs.60,000

Hint:
20,000 shares were rejected, Rs. 3 on application
20,000 × 3 = Rs. 60,000

Question 94.
Large Ltd. issued 25,000 equity shares of Rs. 100 each at a premium of Rs.15 each payable as Rs.25 on application, Rs.40 on allotment and balance in the first call. The applications were received for 75,000 equity’ shares. The above is the case of:
a. Forfeiture of shares
b. Pro-rata allotment
c. Over-subscription
d. Under-subscription.
Answer:
c. Over-subscription

Hint:
Over-subscription of Shares: Situation where a new stock (share) issue has more buyers than there are shares to satisfy their orders. Thus the number of application received is more than number of shares issued.

Question 95.
Which of the following statement is not true:
a. When the shares are forfeited securities premium is debited along with share capital where premium has not been received
b. Where all the forfeited shares are not re-issued the share forfeited account will show a credit balance equal to gain on forfeiture of shares not yet re-issued .
c. Loss on re-issue of shares cannot be more than the gain on forfeiture of those shares
d. Where forfeited shares are re-issued at premium, the amount of such premium is credited to capital reserve account.
Answer:
d. Where forfeited shares are re-issued at premium, the amount of such premium is credited to capital reserve account.

Hint:
In case forfeited shares are issued on premium than amount in the Share Forfeited Account will be treated as net gain and transferred to Capital Reserve Account

Question 96.
T Ltd. has issued 14% debentures of Rs.20,00,000 at a discount of 10% in April, 2013 and the company pays interest half yearly on June 30, and December 31, every year. On March 31, 2014 the amount shown as interest accrued but not due in the balance sheet will be:
a. Rs. 1,40,000
b. Rs.2,10,000
c. Rs.2,80,000
d. Rs.70,000.
Answer:
d. Rs.70,000.

Hint:
when interest that is either payable or receivable has been recognized, but not yet paid or received because it is not due is interest accrued.
Interest accrued but not due as on 31st March, 2014
= \(\frac{20000 \times 14 \% \times 6 / 12}{2}\)
= 70,000

CS Foundation Fundamentals of Accounting and Auditing Notes