Sunday, August 10, 2014

AHSEC - 12: Company Accounts - Accounting for Share Capital Important Questions for Feb' 2017 Exam

Unit – 5: Accounting for Share Capital
Q.1. Define the term Company. Mention its features.   2001, 2009
Ans: Company: A Company is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.
According to Section 2 (20) of the Companies Act 2013 “Company means a company formed and registered under this Act."
According to Professor Haney “A Company is an artificial person, created by law having a separate entity with a perpetual succession and a common seal."
Characteristics of a Company:
a)      Artificial Person: A company is an artificial person, which exists only in the eyes of law.
b)      Separate Legal entity: A company has a separate legal entity and is not affected by changes in its membership.
c)       Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members.
d)      Limited Liability: The liability of every member is limited to the amount he has agreed to pay to the company on the shares held by him.
e)      Transferability of Shares: The shares of a company are freely transferable by its members except in case of a private company.

Q.2. What do you mean by shares? What are its various types? Explain them.                   1999, 2000, 2016
Ans: A share is the interest of a shareholder in a definite portion of the capital. It expresses a proprietary relationship between the company and the shareholder. A shareholder is the proportionate owner of the company.
Section 2(84) of the Companies Act’ 2013 defines a share as, “A share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied”.  
In the words of Farwell J. “A share is the interest of a shareholder in the company, measured by a sum of money, for the purpose of liability in the first place, and of interest the second, but also consisting of a series of mutual covenants entered into by all the shareholder inter se in accordance with the companies act”.
Types of shares:
According to section 43 of the Companies Act 2013, a company can issue only two types of shares:
(a) Preference shares; and
(b) Equity shares.
Equity Share: According to Sec. 43 (a) of the Companies Act 2013 "an equity share is share which is not preference share". An equity share does not carry any preferential right. Equity shares are entitled to dividend and repayment of capital after the claims of preference shares are satisfied. Equity shareholders control the affairs of the company and have right to all the profits after the preference dividend has been paid.
Preference Share: According to Sec. 43 (a) of the Companies Act 2013, a share that carries the following two preferential rights is called ‘Preference Share’:
(i) Preference shares have a right to receive dividend at a fixed rate before any dividend given to equity Shares.      
(ii) Preference shares have a right to get their capital returned, before the capital of equity shareholders is returned in case the company is going to wind up.
Q.3. Distinguish between the following:
(a) Partnership Firm and Joint Stock Company
(b) Equity Shares and Preference Shares 1999, 2005, 2009, 2012
(c) Shares and Debentures 2002, 2004, 2006, 2008, 2010, 2012, 2014, 2016
(d) Shares and Stock
Ans: (a) Difference between Partnership Firm and Joint Stock Company
Basis of Difference
Joint Stock Company
a)   Regulation
Partnership Firm is formed under Indian Partnership Act, 1932.
A Joint Stock Company is formed under Indian Companies Act, 2013.
b)   Number of persons

Minimum number of partners is 2 and maximum 10 in case of banking business and 20 in other kind of business.
Minimum numbers of members are 7 in case of a public company and there is no limit for maximum.  In a private limited company minimum number of members is 2 and 200 are maximum.
c)    Liability
Liability of a Partnership firm is unlimited.
Liability of members is limited to extent of shares held by him.
d)   Auditing
Auditing of books is not compulsory.
Auditing of books is compulsory.
(b)  Difference between Equity Shares and Preference Shares 
Basis of Difference
Preference Share
Equity Share
a)      Right of Dividend
Preference shares are paid dividend before the Equity shares.
Equity shares are paid dividend out of the balance of profit available after the dividend paid to preference shareholders.
b)      Rate of Dividend
Rate of dividend is fixed.
Rate of dividend is decided by the Board of Directors, year to year depending on profits.
c)       Convertibility
Preference Shares may be converted into Equity shares, if the terms of issue provide so.
Equity shares are not convertible.
d)      Voting Right
Preference shareholders do not carry the voting right. They can vote only in special circumstances.
Equity shareholders have voting rights in all circumstances.
e)      Redemption of Share Capital
Preference shares may be redeemed.
A company may buy-back its equity shares.
(c)  Difference between Shares and Debentures
Basis of Difference
a)            Ownership
Shareholders are the owners of the Company.
Debenture holders are the Creditors of the Company.
b)            Repayment

Normally, the amount of share is not returned during the life of the company.
Debentures are issued for a definite period.
c)             Convertibility
Shares cannot be converted into debentures.
Debentures can be converted into shares.
d)            Restrictions
There are legal restrictions to be fulfilled to issue shares at a discount.
There are no restrictions on the issue of debentures at a discount.
e)             Forfeiture
Shares can be forfeited for non-payment of allotment and call monies.
Debentures cannot be forfeited for non-payment of call monies.
(d)  Difference between Shares and Stocks
Basis of Difference
a)           Paid-up value
Shares may be fully paid up or partly paid up.
Stocks are fully paid up.
b)           Numbering
Shares are serially numbered.
Stocks are not numbered.
c)            Registration
Shares are always registered.
Stock may be registered or unregistered.
Q.4. What is Share Capital? Mention its various categories.        2014
Ans: Share Capital: The capital of a joint stock company is divided into shares which are collectively called ‘Share Capital’. Share capital refers to the amount that a company can raise or has raised by the issue of shares. The share capital may be classified as below (Sec. 2 of the Companies Act, 2013):
a)      Nominal/Authorized/Registered Capital: This is the amount of the capital which is stated in Memorandum of Association and with which the company is registered. Nominal capital is the maximum amount which the company is authorised to raise from the public.
b)      Issued Capital: Issued capital is that part of the nominal capital, which is offered to the public for subscription. The balance of the nominal capital, which is not offered to the public for subscription, is called unissued capital.
c)       Subscribed Capital: Subscribed capital is that part of the issued capital, which is applied for by the public. The balance of the issued capital, which is not subscribed for by the public is called, unsubscribe capital.
d)      Called up Capital: This is the amount of the capital that the shareholders have been called to pay on the shares subscribed for by them. The amount of the subscribed capital, which is not called, is known as uncalled capital.
e)      Paid up Capital: This represents that part of the called up capital, which is actually received by the company. The amount of the called-up capital, which not paid by the shareholders, is called as unpaid capital or calls in arrears.
f)       Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital.
Q.5. What are the various purposes for which Securities Premium can be utilised? 2003, 08, 12, 13
Ans: If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act, 2013 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Account.
Under Section 52 of the Company Act 2013, the amount of security premium may be used only for the following purposes:
a)      To write off the preliminary expenses of the company.
b)      To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
c)       To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
d)      To issue fully paid bonus shares to the shareholders of the company.
e)      In purchasing its own shares (buy back).
Q.6. Can a company issue shares at discount? If yes, under what conditions?                     2003, 2014
Ans: As per sec. 53 of the Companies Act, 2013, issue of shares at a discount is prohibited. This prohibition applies to all companies, public or private. Any issue of share at a discount shall be void. But a company can issue sweat equity shares to its directors or employees as a reward to them for their contributions. Sweat equity shares are those which are issued by a company at a discount or for consideration other than cash.
According to Section 54 of company act 2013, a company is permitted to issue sweat equity shares provided the following conditions are satisfied:
a)      The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.
b)      The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.
c)       At least one year must have elapsed since the company was entitled to commence the business.
d)      The shares are of a class, which has already been issued.
e)      The shares are issued within two months from the date of sanction received from the Government.
Q.7. What Statutory and Statistical Books? Give examples of such books.                            2004, 2008, 2014
Ans: Statutory book: Such books are those which a limited company is under statutory obligation to maintain at its registered office with a view to safeguard the interests of shareholders and creditors. Main statutory books are:
1. Register of investments held and their names, 2. Register of charges, 3. Register of members, 4. Register of debenture holders, 5. Annual returns, 6. Minute books, 7. Register of contracts, 8. Register of directors.
Statistical Books: In order to keep a complete record of numerous details of certain transactions and activities of the company the following statistical books are usually maintained by joint stock companies in addition to statutory books. The keeping of such books are optional. The main books are:
1. Share application and allotment book, 2. Share calls book, 3. Share certificate book, 4. Debenture application and allotment book, 5. Debenture calls book, 6. Dividend book, 7. Debenture interest book, 8. Agenda book
Q. 8. What is Reserve Capital and Capital Reserve? Distinguish between them.               
Ans: Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital.
Capital Reserve: It is that part of reserves which is create out of capital profits and normally not available for distribution as dividend.
Difference between Reserve Capital and Capital Reserve:

Basis of Difference
Reserve Capital
Capital Reserve
a)      Meaning
Reserve Capital is the part of uncalled capital, which shall not be called except in the event of winding up of the company.
It is that part of the reserves which is not free for distribution as dividend.
b)      Creation
It is created out of uncalled capital.
It is created out of capital profits.
c)       Optional/ Mandatory
It is not mandatory to create Reserve Capital.
Capital Reserve is mandatory to be created in case of profit on reissue of forfeited shares.
d)      Disclosure
It is not to be disclosed in the Balance Sheet of the company.
Capital Reserve is to be shown in liability side of the balance sheet of the company under the heading of ’Reserve and Surplus.’

Q.9. What do you mean by forfeiture of shares and re-issue of shares? How shares are forfeited and re-issued? 2012, 2015, 2016

Ans: Forfeiture of shares: Cancellation of shares due to non-payment of allotment and call money is called forfeiture of shares. A company has no inherent power to forfeit shares. The power to forfeit shares must be contained in the articles. Where a share holder fail to pay the amount due on any call, the directors may, if so authorized by the articles, forfeit his shares. Shares can only be forfeited for non-payment of allotment and calls. An attempt to forfeit shares for other reasons is illegal. Thus where the shares are declared forfeited for the purpose of reliving a friend from liability, the forfeiture may be set aside.
Before the shares are forfeited the shareholder:
i) Must be served with a notice requiring him to pay the money due on the call together with interest;
ii) The notice shall specify a date, not being earlier than the expiry of 14 days from the date of service of notice, on or before which the payment is to be made and must also state that in the event of non-payment within that date will make the shares liable for forfeiture;
iii) There must be a proper resolution of the board;
iv) The power of forfeiture must be exercised bonafide and for the benefit of the company.
A person, whose shares have been forfeited, ceases to be a member of the company. But he shall remain liable to pay to the company all moneys which at the date of forfeiture were payable by him to the company in respect of the shares. The liability of such a person shall cease as and when the company receives payment in full in respect of the shares.
Reissue of the forfeited shares:
            The directors of the company have the power to re-issue the forfeited shares on such terms as it think fit. Thus the forfeited shares can be reissued at par, or at premium or at discount. However, if the forfeited shares are reissued at discount, the amount of discount should not exceed the amount credited to the share forfeiture A/c. If the discount allowed on reissue is less than the forfeited amount there will be the surplus left in the share forfeited A/c. This surplus will be of the nature of capital profits so it will be transferred to the Capital Reserve A/c.
Procedure for reissue of forfeited shares
a)      The forfeited shares may then be disposed by sale or in any other manner as directed by the Board.  
b)      Short particulars of reissued shares will be advised to the stock exchange concerned.  
c)       To give effect to the sale of forfeited shares, the Board will authorise some person, preferably the director or Secretary, to transfer the shares sold to the purchaser thereof and to make a declaration in connection therewith.  
d)      The defaulting members will be asked to return the share certificates. If they fail to do so fresh certificates will be issued.  
e)      Public and stock exchange will be advised not to deal with the old certificates.  
f)       Any surplus arising out of sale after adjusting the amount due to the company in respect of the shares will be refunded to the member concerned.
Q.10. Briefly explain various types of company.
Ans: Kinds of Companies
A. Classification on the basis of liability
1. Companies with limited liability
(a)   Companies limited by guarantee: where the liability of the members of a company is limited to a fixed amount which the members undertake to contribute.
(b)    Companies limited by shares: where the liability of the members of a company is limited to the amount unpaid on the shares.
2. Unlimited companies: A company without limited liability is known as an unlimited company.
B. Classification on the basis of number of members
1. Private company: A private company means a company which has a minimum paid-up capital of Rs. 1, 00,000 or such higher paid-up capital as may be prescribed by CG, and by its Articles Restricts the right to transfer its shares, if any. Except in case of one person company, limits the number of its members to 200 not including its employee-members.
2. Public company: A public company means a company which is not a private company
C. Classification on the basis of control
1. Holding company-Section: A company is known as the holding company of another company if is has control over that other company.
2. Subsidiary company-Section: A company is known as a subsidiary of another company when control is exercised by the latter over the former called a subsidiary company.
D. Classification on the basis of ownership
1. Foreign company: It means any company incorporated outside India which has an established place of business in India.
2. Government company: A Government company means any company in which not less than 51 % of the paid-up share capital is held by the Central government any State government or governments.
3. Non-government company: It means a company other than Government company.
E. Classification on the basis of listing of shares on the stock exchange
1. Listed Company: It means a company which has any of its securities listed on any recognized stock exchange.
2. Unlisted Company: It means a company other than listed company.
Q. 11. Write short notes on:                                                                       2016
Right Issue: Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue.
Calls-in-Arrears: The amount which is not paid by shareholders when money is demanded by the company, such amount is known as ‘Calls-in-Arrears’. The maximum rate of interest to be provided on calls in arrear must not exceed 10 per cent.
Calls-in-Advance: Sometimes, it so happens that a shareholder may pay the entire amount on his shares even though the whole amount has not been called up. The amount received in advance of calls from such a shareholder should be credited to "calls in advance". The maximum rate of interest allowed on calls in advance is 12% per annum.
Minimum Subscription: It means the minimum amount that, in the opinion of directors, must be raised to meet the needs of business operations of the company. AS per SEBI guidelines, the minimum subscription of capital cannot be less than 90% of the issued amount.
Preliminary Expenses: Expenses incurred to the formation of a company are called ‘Preliminary Expenses’. Preliminary expenses include the following - Expenses incurred in order to get the company registered, Expenses incurred for the preparation, printing and issue of prospectus, Cost of preliminary books and Common Seal, Duty payable on Authorized Capital, Underwriting Commission etc.
Preliminary Expenses are to be written off out Securities Premium Account or it may be written off out of the Profit & Loss A/c gradually over some period. The balance left of preliminary expenses is to be shown in the asset side of the balance sheet of the company under the heading of ‘Miscellaneous Expenditure’.
Bonus shares: Where company have large amount of undistributed profit and these profits are capitalised by converting them into shares and issued free of charge to the existing shareholders, such shares are known as bonus shares.
Buy-back of shares: Buy-back means the repurchase of its own shares by the company. When a company has substantial cash resources, it may like to buy its own shares from the market, particularly when the prevailing rate of its shares in the market is much lower that the book value.


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