2013 (May) – Semester Exam
1. (a) state true or false
(i) Out of face value of shares, at least 10% is payable with application. False
(ii) A debenture holder is an owner of the company. False
(iii) Under net payment method purchase consideration is calculated by adding the various payments made by the purchasing company. True
(iv) Insolvency is a necessary condition for liquidation of a company.
(b) State the correct answer:
(1) Preference shareholder are
(a) Creditors of a company
(b) owner of the company
(c) customers of the company
(2) Debentures are show in the Balance sheet at
(a) Face value
(3) Accumulated losses to the vendor company should be transferred to the
(a) Profit and Loss Account
(b) Profit and Loss Appropriation Account
(c) Equity shareholder Account
(4) A contributory is a
(a) Debenture holder
(b) Share holder
2. Answer the following:
a) Explain how would you deal with Shares forfeited but not reissued and Shares forfeited and reissued;
Ans: Forfeiture of shares: 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. At the time of forfeiture, share capital account is debited with the called up and amount paid on forfeited shares is transferred to “Forfeited Shares a/c” and amount unpaid on shares is transferred to “Calls in arrear a/c.
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 forfeited shares a/c. If the discount allowed on reissue is less than the forfeited amount there will be the surplus left in the forfeited shares a/c. This surplus will be of the nature of capital profits so it will be transferred to the Capital Reserve A/c.
b) Distinguish between ‘pre-acquisition profit’ and ‘post-acquisition profit’ of a company.
Ans: General Reserve & Profit & Loss Account (credit balance) appearing in the books of the subsidiary company on the date of acquisition are treated as pre – acquisition profits. Since, they were not earned by the holding company in the ordinary course of business they are capitalized & set off against the purchase price of the shares.
A pre – acquisition loss appearing in the books of the subsidiary company is treated as a capital loss & debited to goodwill account. Post acquisition profits or losses are those that are made or suffered by a subsidiary company after its shares have been purchased by the holding company. Revenue profits are added to the profits of the holding company if it acquires all the shares of the subsidiary company or to extent of its share holding in the subsidiary company. A post acquisition loss is treated as a revenue loss & deducted from the profits of the holding company.
If the date of acquisition is during the course of the year it becomes necessary to make an estimate of pre acquisition & post acquisition periods on time basis so as to apportion profits.
c) Explain briefly the modes of winding up of a company. (Out of Syllabus)
d) State the order in which ordinarily made by a liquidator to satisfy the various claims in case of voluntary liquidation of a company. (Out of Syllabus)
3. (a) A limited company issued 6% 10000 debentures of Rs. 100 each at discount of 5 per cent, repayable after 5 years at a premium of 10 per cent. Show journal Entries in the books of the company recording the above transactions.
(b) Explain how the loss on debenture be dealt with and show how this account will appear in the books of the company over the five consecutive years.
Ans: When debentures are issued at a price lower than its face value, then such debentures are said to be issued as “Debentures issued at a Discount”. Discount on issue of debentures is a Capital loss and is show in the Balance sheet on the Assets side under the head “Miscellaneous Expenditure” till it is written off.
When debentures are redeemable at a premium, the extra amount payable over and above the nominal value on redemption is called “Loss on Issue of Debenture”. Again when debentures are issued at a discount, the discount on issue of debenture is also a loss on issue of debentures. Thus when debentures are issued at a discount and redeemable at a premium both the losses are amalgamated under the head “Loss on Issue of Debenture Account”. It is a Capital loss and is show in the Balance sheet on the Assets side under the head “Miscellaneous Expenditure” till it is written off.
The amount of debenture discount/Loss on issue of debenture can be written off in two ways:
1. All debentures are to be redeemed after a fixed period: When the debentures are to be redeemed after a fixed period, the amount of discount will be distributed equally within the number of years spreaded between the issue of debentures and their redemption. The amount of discount on issue of debentures to be written off each year is calculated as: Amount of discount to be written off annually = Amount of Discount / No of Years
2. Debentures are redeemed in instalments: Debentures may also be redeemed in instalments but over a fixed period. In that case the amount of debenture discount will be written off each year in proportion to the amount of debentures redeemed.
Journal Entry for Writing of Discount on issue of Debentures/Loss on issue of Debentures is:
Profit and Loss Account Dr.
To Discount on issue of Debentures Account
To Loss on Issue of Debentures Account
What do you mean by buyback of shares? State the legal provisions relating to buyback of shares.
Ans: 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 or what the company perceives to be its true value. This is known as buy back of shares. Buy back procedure thus enables a company to go back to the holders of its shares and offers to purchase from them the shares they hold. The shares thus bought back have to be cancelled.
Conditions of Buy Back: The buy-back is authorised by the Articles of association of the Company;
a) A special resolution has been passed in the general meeting of the company authorising the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. Also, the shares for buy back should be free from lock in period/non transferability. The buy back can be made by a Board resolution If the quantity of buyback is or less than ten percent of the paid up capital and free reserves;
b) The buy-back is of less than twenty-five per cent of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year;
c) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back;
d) There has been no default in any of the following
a. in repayment of deposit or interest payable thereon,
b. redemption of debentures, or preference shares or
c. payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or
d. repayment of any term loan or interest payable thereon to any financial institution or bank;
e) There has been no default in complying with the provisions of filing of Annual Return, Payment of Dividend, and form and contents of Annual Accounts;
f) All the shares or other specified securities for buy-back are fully paid-up;
g) The buy-back of the shares or other specified securities listed on any recognised stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and
h) The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed.
4. (a) (i) How should be premium on shares be deals with?
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. Securities premium account is shown under the head “Reserves and Surplus”.
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).
(b) A limited company has an accumulated reserve of Rs.500000. It was decided to declare bonus of Rs. 300000 out of its reserve. The bonus is too utilized as:
(1)100000 to make the existing 25000 shares of Rs. 10 each fully paid of which Rs. 6 per share called and paid.
(2)200000 by issuing 5000 bonus shares at Rs. 25 each at a premium of Rs. 15 per shares to the existing shareholders. Pass the Journal Entries in the book of the company recording the above transactions.
(b) Enumerate the SEBI’s guidelines regarding issue of shares and forfeiture of shares.
5. (a) Distinguish between Amalgamation and Absorption.
Ans: Meaning of Amalgamation: Amalgamation means the merging of two or more than two companies for eliminating competition among them or for growing in size to achieve the economies of scale. Amalgamation is a broad term which includes mergers (uniting of two existing companies) and acquisition (one company buying out another company).
Meaning of Absorption: Absorption is the process in which the one dominant company takes control over the weaker company.
Difference between Amalgamation and Absorption:
1) Two or more companies are liquidated in the process of amalgamation. One or more companies are liquidated in absorption.
2) Amalgamation involves formation of a new company. However, Absorption of companies does not involve formation of a new company
3) There is no such matter of size of amalgamating companies. Generally, size of purchasing company is greater than that of vendor company in absorption.
(b) What do you mean by internal reconstruction of a company? Explain its scope.
Ans: Internal Reconstruction: Internal reconstruction means a recourse undertaken to make necessary changes in the capital structure of a company without liquidating the existing company. In internal reconstruction neither the existing company is liquidated, nor is a new company incorporated. It is a scheme in which efforts are made to bail out the company from losses and put it in profitable position. Internal reconstruction of a company is done through the reorganization of its share capital. It is a scheme of reorganization in which all interested parties in the capital structure volunteer to sacrifice. They are the company’s shareholders, debenture holders, creditors etc. Under internal reconstruction, the accumulated trading losses and fictitious assets are written off against the sacrifice made by these interest holders in the form of reduction of paid up value of their interest.
Forms of Internal reconstruction of a company (Scope of Internal reconstruction)
Internal reconstruction of a company can be carried out in the following different ways. These are as under:
(A) Alteration of Share Capital; and
(B) Reduction in Share Capital
Alteration of Share Capital: Memorandum of Association contains capital clause of a company. Under Section 61 of the Companies Act 2013, a company, limited by shares, can alter this capital clause, if is permitted by (i) the Articles of Association of the company; and (ii) if a resolution to this effect is passed by the company in the general meeting. A company can alter share capital in any of the following ways:
(a) The company may increase its capital by issuing new shares.
(b) It may consolidate the whole or any part of its share capital into shares of larger amount.
(c) It may convert shares into stock or vice versa.
(d) It may sub-divide the whole or any part of its share capital into shares of smaller amount.
(e) It may cancel those shares which have not been taken up and reduce its capital accordingly.
To alter capital by any of the above modes require a resolution at a general meeting, but does not require confirmation by the National Company Law Tribunal. The company is required to give a notice to the Registrar within thirty days of alteration.
The accounting treatment of the above five types of capital alteration is discussed below.
(a) If the company has issued all of its authorised capital, then, for the purpose of raising fund by the issue of fresh shares, it will have to increase its authorised capital first. For increasing the authorised capital, the Capital clause of Memorandum of Association of the company is required to be altered and permission of S.E.B.I. is also required to be obtained. No accounting entry is necessary for increasing authorised share capital. The company will have to observe the formalities prescribed under the Companies Act, 2013.
(b) The company may decide to change the shares of smaller denomination into larger denomination. This process is called consolidation of shares. On account of consolidation, the total amount of capital of the company will not change but the number of shares will decrease.
(c) A company, in order to alter its share capital, may convert all or any of its fully paid up shares into Stock or Stock into fully paid up shares. In case, shares are converted into Stock, the members get a part of Stock Capital in place of shares. By converting Shares into Stock, any amount of Stock Capital can be transferred to any other person.
(d) When the shares of a company are sub-divided in shares of small value, it is known as sub-division of shares. In sub-division of shares, the face value of a share is converted into smaller denomination from larger denomination. The total capital of the company remains unaffected by sub-division but the total number of shares increase.
(e) Cancellation of capital may take the following form:
(i) Cancellation of unissued capital; and
(ii) Cancellation of uncalled capital.
(i) Cancellation of unissued capital: Cancellation of unissued capital means cancellation of unissued shares by a company. It means that the part of the authorised capital which has not yet been issued to the public may be cancelled by the company.
(ii) Cancellation of uncalled capital: Cancellation of uncalled capital means cancellation of that part of the face value of the share which has not yet been called by the company.
Reduction of Capital: Sometimes there may be a genuine necessity for the reduction of capital. This power is, given by Section 66 of the Companies Act, 2013, subject to the compliance of conditions. According to this, a company may,
(1) Extinguish or reduce the liability on any of its shares in respect of share capital not paid up
(2) cancel any paid-up share capital which is lost or is unrepresented by any available assets;
(3) pay off any paid-up share capital which is in excess of what is required by the company. Conditions for effecting a reduction
Following conditions are required to be fulfilled by a company to reduce its share capital –
(a) The Articles of Association of the company must permit it to reduce its capital;
(b) The company in general meeting shall pass a special resolution to reduce its capital; and
(c) The approval of National Company Law Tribunal (previously Court) shall be obtained for the scheme of reduction in share capital.
Kamrup Company Ltd had the following Balance Sheet as on 31st March, 2012:
5000 Shares of Rs. 100 each
Issued and Subscribed Capital:
2000 Shares of Rs 100 each
200, 6% debenture of Rs 1000 each
Land & Building
Plant & Machinery
Cash at Bank
Profit & Loss A/c (Dr)
The Following schemes of reconstruction were adopted:
(1) Without altering the number of shares in authorised, issued and subscribed capital, the face value and paid value of each shares was to be reduced to Rs. 50
(2) The existing debentures be converted into 100, 9 1/2% Debentures of Rs. 1000 each
(3) The assets be revalued as under: Land and Building Rs. 82000, Plant and Machinery Rs. 175000, Stock Rs. 44500, Sundry Debtors subject to a bad debts provision Rs.5000
(4) Goodwill, preliminary expenses and the debit balance of Profit & Loss A/C are completely written off. Give Journal Entries to implement the above schemes of reconstruction and prepare the Balance Sheet.
6.(a) Who are the ‘Preferential Creditors’?
(b) The balance sheet of Assam Ltd. As on 31st December, 2012:
Authorised & Issued:
2000, 6% Preference Shares of Rs. 100 each
1000 Equity Shares of Rs. 100 each, Rs. 75 paid
3000 Equity Shares of Rs. 100 each, 60 Paid
(having a floating charges on all assets)
Land and building
Cash at Bank
Profit & Loss
The company went into liquidation on that date. The preference divided in arrear for two years. Creditors include a loan of 50000 on the mortgage of land and building. The assets were realized as follows:
Land and Building: 120000; Machinery: 200000; Patent: 30000; Stock: 60000; Sundry Debtors: 80000
The expenses of liquidation amounted to Rs. 10900. The liquidator is entitled to a commission of 3 per cent on all assets realised except cash and a commission of 2 percent on amount distributed to unsecured creditors. Preferential creditors amounted to Rs. 1500. Prepare Liquidators Final Statement of Account.
7. (a) Distinguish between Holding Company and Subsidiary Company.
Ans: Holding Company: As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. According to this section, one company can become the holding company of another in any of the following three ways:
1. By holding more than 50% of nominal value of the equity shares of the other company i.e. the holding company holds the majority of voting power in the subsidiary company.
2. By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.
Meaning of “subsidiary Company”
As per Section 2(87) of the Companies Act, 2013, a company is a “subsidiary company” of another company, i .e.“holding company”, if that other company:
a) holds a majority of the voting rights in it, or
b) is a member of it and has the right to appoint or remove a majority of its board of directors, or
c) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.
(b) Mention two advantages and two disadvantages of Holding Company.
Ans: Advantages of Holding Company: Following are the important advantages of holding company:
a) Easy Formation: The holding company can be formed very easily. There is no legal formality. Any company may purchase the majority shares from stock exchange and can become holding company.
b) Large Business: A holding company can collect the capital and expand the business on large scale.
Disadvantages or Defects of Holding Company: Following are the main defects of the holding company:
a) Problem of Monopoly: A holding company tries to create monopoly over the market. Monopoly is always against the public interest. It fixes higher prices and consumer suffers a loss.
b) Unequal Distribution of Wealth: Due to holding companies wealth goes in few hands and society is divided into two classes, rich and poor. Rich class enjoys all the amenities of life while poor class faces poverty and hunger.
(c) A Ltd. Acquired 1000 shares of Rs. 10 each in B Ltd. At a cost of Rs. 16000 and 500 shares of Rs. 10 each in C Ltd. At a cost of Rs. 4000 on 1st January2012 out of a total issue of share capital of 1500 and 800 shares respectively. Neither of the subsidiary company had issued any Preference Shares. At the date of acquisition, the accounts of B Ltd. Showed a General Reserve of Rs. 12000 and credit balance of Rs. 4500 in the Profit & Loss Account and the accounts of C Ltd. Showed a debit Balance of Rs. 6400 in the Profit and loss Account.
Show how these facts would be set out in the Consolidated Balance Sheet of A Ltd. and its Subsidiary companies.