Company Accounts- Share capital & Debentures


LEARNING OBJECTIVES
 Understand the meaning and features of company
I)         Classification of share capital
II)       Understand the accounting treatment of over subscription, calls in arrears, premium and discount on issue of shares.
III)    Understand the meaning of forfeiture of shares
IV)     Pass journal entries regarding forfeiture and reissue of shares
V)        Calculate capital reserve
VI)      Differentiate between capital reserve and reserve capital
VII) Understand the disclosure of the share capital in the balance sheet
            
Salient Features

*A company is an artificial person having separate legal entity.

*A company is created by law and effected by law.

*A private company can be formed with minimum  two members and maximum fifty.

*For a public company minimum members required are 7 and there is no maximum limit.

*The capital of the company is divided into units of small denominations which are called shares.

*Though the company is an artificial person, it has to perform all statutory obligation like a person.

association.

*A public company can allot shares in case of minimum subscription is received.

*Shares can be issued at par, premium, or even at discount.

*Preferences shareholder enjoy preference rights whereas equity share holder enjoy voting

rights.

*When a shareholder fails to pay one or more installments due on the shares held by him,

the company has the authority to forfeit such shares.

*A company can re-issue the forfeited shares in accordance with the provisions contained in the

articles of the company.


(1 marks)

Q.1
Give the definition of a company as contained in the Companies Act,1956.

Ans.
section  3(1)(i) of companies act defines a company as "a company formed and registered under this

act or an existing company."

According to sec3(1)(ii),"An existing company means a company formed and registered under

any of the former companies Acts."


Q.2
Can forfeited shares be issued at a discount? If so to what extent?

Ans.
Re-issue of forfeited shares: Forfeited shares can be reissued at a discount. However, the

discount on  the reissue of such shares can not exceed the amount earlier forfeited on such shares.

In other words, amount received  on received on re-issue plus amount already received on forfeited

shares must not be less than the paid up value of shares.


Q.3
As a director of a company you had invited applications for 20,000 equity shares of Rs.10 each at a

 premium of Rs.2 each. The total applications money received at Rs.3/- 

per share was Rs.72,000. Name the kind of subscription. List the three alternatives for allotting these

share.

Ans.
It is a case of over-subscription. Shares are said to be over-subscribed when the numbers of

shares at more than the number of shares offered:

(i) Allotment for 1st 20,000 shares and the rest  can rejected

(ii) Allotment on prorata basis
(iii)Allotment of some application in full and some on prorata basis, and some refused.

4          What is an Escrow Account?                         
Ans.     In order to fulfill certain obligations under the scheme of buy-back of securities an account is opened, which is known as escrow account.                                                                                             
Q.5         What do you mean by Private placement of shares?
Ans.     Private Placement of shares implies issue and allotment of shares to a selected groups of persons privately and not to public in general through public issue. In order to place the shares privately, a company must pass a special resolution to this effect.
Q.6         What is Sweat Equity?
Ans.        Sweat Equity shares means easily shares issued by the company to its employees or whole time directors at a discount or for consideration other then cash for providing know - how or making available right in the nature of intellectual properly rights or valve addition by whatever name called.
Q.7         What maximum amount of discount can be allowed on the reissue of forfeited shares?
Ans.        The maximum amount of discount on reissue of forfeited shares is that the amount of discount allowed cannot exceed the amount that had been received on forfeited shares on their original issue and that the discount allowed on re issue of forfeited shares should be debited to the share forfeited account.

Q.8         State in brief, the SEBI Guidelines regarding Debenture Redemption Reserve.
Ans.        At per SEBI Guidelines, an amount equal to 50% of the debenture issue must be transferred to DRR before the redemption begins. In other words, before redemption, at least an amount equal to 50% of the debenture issue must stand to the credit of DRR
Q.9         Name the head under which discount on issue of debentures appears in the Balance Sheet of "C" Company.
Ans.        Discount on issue of debentures will appear under the heading Miscellaneous Expenditure.
Q.10       Can a company issue share of discount?  What conditions must a company comply with before the issue of such shares?
Ans.        Section 79 of the companies Act, 1956 permits a company to issue shares at a discount only if the following conditions are fulfilled:
               1)   The shares are of a class already issued.
               2)   At least one year must have elapsed since the company become entitled to             commence business.
               3)   The issue of shares at discount is authorises by a revolution passed by the             company in its general meeting and sanctioned by the central Government.
The resolution specifies the maximum rate of discount at which the shares    are to be issued. The rate must not exceed 10% unless sanctioned by the central Government.

Q.11
Write the  difference between an equity share and preference share.
Ans.
*Basis

Preference shares

Equity shares



*Dividend rate
Preference share holders are paid dividend at a fixed rate.
The rate of dividend on equity shares vary from year to year depending upon profits

*Redemption
They can be redeemed
They can't be redeemed.


*Payment of
These shares have a
Payment of dividend is made after paying to
dividend
Preferential right to receive
preference share holders.


dividend before any dividend is paid on equity shares.

Q.12
Differentiate between Reserve capital and capital reserve.
Ans.
*Basis

Reserve capital

Capital reserve



*Meaning and
Reserve capital refers to a
Capital reserve is created out of capital

creation

portion of uncalled capital
profits.




*Special

Is required

no Special resolution required

resolution








*Time when it
It can be used only in the
It can be used to write off capital losses

can be used
event of company's winding up
or to issue bonus shares.

*Disclosure
It is not shown in company's
It is mentioned under the heading reserves
in balance sheet
balance sheet

and surplus on the liabilities side of balance sheet

Q.13
Employees stock option plan-"A right to buy and not an obligation". Comment
Ans.
Employees stock option plan is the right granted to the employees of the company to purchases thew shares lower than the market prices. It is worth mentioning the the options provide a right and not the obligation to bur shares. It means that the  employees under this plan are not necessarily required to purchase the shares. It is their wish to buy or not necessarily required to purchase the shares. It is their wish to buy or not.

Q.14
Write a short note on minimum subscription?
Ans
Minimum subscription is the amount received from share holders which is sufficeint from the
point of view of directors for following purposes:
(a)  For purchasing necessary assets of the company.
(b)  For paying preliminary expenses and commission on sales of shares.
©  For paying loan if arranged for above two purposes.
(d)  For working capital and for any other purposes which the directors agree upon.

Q.15
Rohit Ltd. Purchased assets from Rohan & co. for Rs. 3,50,000. A sum of Rs. 75,000 was paid
by the emans of a bank draft and for the balance due Rohit Ltd. Issued Equity shares of Rs. 10
each at a premium of 10% .Journalise the above transaction in the books of the company.
Ans.
Books of Rohit Ltds.
     JOURNAL
Date
Particulars


L.f
debit
credit






amt.rs
amt.rs

Sund. assets
dr
3,50,000


ToRohan&Co.

3,50,000

(Being assets purchased from Rohan& CO.)











Rohan&Co.
dr.
75,000



To Bank A/c


75,000

(Being amount paid to Rohan & Co.)












Rohan &Co.A/c
dr.
2,75,000


To Equity share capital a/c

                                        2,50,000

To securities Premium A/c

25,000





Q.16
50 shares of Rs. 10 each, issued at as premium of Rs. 5 per share, were forfeited by sohan Ltd. for the nonpayment of allotment money of Rs.9 per share (including premium). The first and final call on these shares at Rs. # per share was not made. Forfeited shares were re-issued @ Rs. 12 per share, fully paid up. Journalise

Ans
Date
Particulars


l.f
debit
credit







amt
amt


Share capital a/c
dr.
350



securities premium a/c
dr.
250




To share forfeited a/c

150



To share allotment a/c

450


(Being 50 shares forfeited for non 




payment of allotment money as per




 board's  resolution dated…)




Bank A/c
dr.
600




To share capital a/c


500



To securities Premium a/c

100


(Being 50 shares reissued @Rs.12




 per share, fully paid)





Shares Forfeited A/c
Dr.
150




To capital reserve a/c

150


(being the balance of forfeited shares




transferred to capital reserve.)
















Q17
AB Ltd. Invited applications for issuing 1,00,000 equity shares of Rs. 10 each. The amount was payable as follows: On Application Rs.3 per share; On allotment Rs.2 per share; and on 1st and final call Rs.5 per share. Applications for 1,50,000 shares were received and prorata allotment was made to all applicants as  follows: Application for 80,000 shares were allotted 60,000 shares on pro-rata basis ; Application for 70,000 shares were allotted 40,000 shares on pro-rata basis; Sudha to whom 600 shares were allotted out of the group 80,000 shares failed to pay allotment money. Her shares were forfeited immediately after allotment. Asha who had applied for 1,400 share out of the group 70,000 shares failed to pay the first and final call.Her shares were also forfeited. Out of forfeited shares 1,000 shares were reissued @ Rs.8 per share fully paid up The reissued shares included all the forfeited shares of Sudha. Pass necessary journal entries to record the above transaction




ans.
Journal Entries in the books of AbLtd.
Date/Sr.
Particulars


l.f
Debit
Credit






Amt.Rs
Amt.Rs.
1
Bank A/c
Dr.

4,50,000


To Equity share Application a/c

4,50,000

(For application money received on



1,50,000 shares @ Rs.3 per share)


2
Equity share application a/c
    Dr.

4,50,000


To Equity share capital a/c

3,00,000

To equity share allotment a/c

1,50,000

(For an application money capitalised



and transferred to allotment a/c.)


3
Equity share allotment a/c
          Dr.

2,00,000


To equity share capital

2,00,000

(For allotment money due on 1,00,000



shares @ Rs.2 per share.)


4
Bank A/c
Dr.

49,400


To equity share allotment

49,400

(For amount received on allotment)


5
Equity share capital a/c
Dr.

3,000


To Equity Share allotment a/c

600

To share forfeiture a/c

2,400

(For 600 shares of sudha forfeited)


6
Equity share first& final calla/c.        Dr.

4,97,000


To Equity share capital

4,97,000

(For first and final call money due on



99,400 shares @ Rs.5 per shares.)


7
Bank a/c
Dr

4,93,000


To equity share first &final call

4,93,000

(For money received on first & final



call.)


8
Equity share capital
Dr

8,000


To Equity share first & final/c

4,000

To share forfeiture a/c

4,000

(for 800 share of Asha forfeited.)


9
Bank a/c                                          Dr.

8,000


Share forfeiture a/c                         Dr.

2,000


To Equity share capital

10,000

(For 1,000 share received and loss on



re-issue charged from share forfeiture



a/c.)










10
Share Forfeiture
Dr.

2,400


To capital ReserveA/c

2,400

(For proportionate balance of share



forfeiture a/c transferred to capital



reserve a/c.)


Working notes:
       Amount Received on application
Amount due                                                                                   2,00,000
Less: Excess Received on application                                          1,50,000
                                                                                                         50,000
Less: Calls in arrears                                                                             600        
                                                                                                         49,400
Due from Sudha on Allotment on 600 shares @2 each                       1,200
Less: Excess on application on 200 shares
@Rs.3 each                                                                                            600        
                                                                                                                600
If 60,000 shares allotted than applied 80,000
If 600 shares applied than  80000/60000*600=800 shares

Shares allotted to Asha
If 70000 shares applied ,allotted 40,000
If 1,400 shares than   40000/70000*1,400
Amount transferred to capital reserve
Balance of share forfeited a/c on Sudha’s share               2400
Balance of share forfeited a/c on Asha’s share                 2000
                                                                                          4400
Less: Loss on capital Re-issue                                          2000
                                                                                          2400
Q.18          New India Ltd. forfeited 100 shares of Rs. 10 each, issued at a discount of 10%.  The company had called up only Rs. 8 per share.  Final call of Rs. 2 each has not been made on these shares.  These shares were allotted to Ram, who did not pay the first call of Rs. 3.  60 shares were reissued at Rs. 7 per share, as Rs. 8 paid up.  Give Journal entries in the books of the company, showing the working clearly.



JOURNAL
               Date     Particulars                                                                   L.F.  Dr. (Rs.)   Cr.(Rs)
                           Share Capital A/c (100 x Rs. 8)                        ...Dr.                   800
                                  To Forfeited Shares A/c (100 xRs. 4)                                                  400
                                  To  Discount on Issue of Shares (1 00 x Re. 1 )                                   100
                                  To  Share First Calf A/c (100 x Rs. 3)                                                 300
                           (Being 100 scares forfeited for non-payment of first call ...)
                           Bank A/c (60 x Rs. 7)                                       ...Dr.                   420              
                           Discount on issue of Shares A/c (60 x Re. 1)   ...Dr.                     60
                           Forfeited Shares A/c                                         ...Dr.                     60
                                  To  Share Capital A/c                                                                           540
                           (Being 60 shares were reissued at Rs. 7 per share,                                          
                           as Rs. 8 paid up)
                           Forfeited Shares A/c                                         ...Dr.                   180
                                  To Capital Reserve A/c                                                                        180
                        (Being the transfer of profit  on reissue o' shoes':