Chapter 1 Accounting for Share Capital Solutions
Question - 11 : - What do you mean by the term ‘share’? Discuss the type of shares, which can be issued under the Companies Act, 2013 as amended to date.
Answer - 11 : -
The total capital of a company is divided into equal units of small denomination termed as shares. The ownership of these shares is easily transferable, from one person to other, subject to certain conditions. The person who is contributing in the capital in the form of shares is known as shareholder. The ownership of a shareholder is limited to the value of the shares held by him/her.
Types of Shares
As per the Section 44 of the Company Act of 2013, there are two types of shares- Preference Shares and Equity Shares (also known as Ordinary Shares)
i) Preference Shares: Section 43 of the Company Act,2013 defines Preference Shares to be featured by the following rights:
a. Preference Shares entitle its holder the right to receive dividend at a fixed rate or fixed amount.
b. Preference Shares entitle its holder the preferential right to receive repayment of capital invested by them before their equity counterparts at the time of winding up of the company.
ii) Equity Shares: Equity Shareholders have a voting right and control the affairs of a company.
As per Section 43 of Companies Act 2013; equity share is a share that is not a preference share. It does not possess any preferential right of payment of dividend or repayment of capital. The rate of dividend is not fixed on equity shares and varies from year to year, depending upon the amount of profit available for distribution after paying dividend to the preference shareholders.
Question - 12 : - Discuss the process for the allotment of shares of a company in case of over subscription.
Answer - 12 : -
When the total number of applications received for shares exceeds the number of shares offered by the company to the public, the situation of oversubscription arises. A company can opt for any of the three alternatives to allot shares in case of oversubscription of shares.
i) Excess applications are refused and money received on excess applications is returned to the applicants.
The company can refuse excess applications and the money received on these excess applications is returned to the applicants.
Question - 13 : - What is a ‘Preference Share’? Describe the different types of preference shares.
Answer - 13 : -
Preference Shares: Section 85 of the Company Act,1956 defines Preference Shares to be featured by the following rights:
a. Preference Shares entitle its holder the right to receive dividend at a fixed rate or fixed amount.
b. Preference Shares entitle its holder the preferential right to receive repayment of capital invested by them before their equity counterparts at the time of winding up of the company.
Types of Preference Shares
The different types of Preference Shares are diagrammatically explained below.
1. On the basis of Dividend:
a) Cumulative Preference Shares
When a preference shareholder has a right to recover any arrears of dividend, before any dividend is paid to the equity shareholders, then the type of Preference Shares held by the shareholder is known as Cumulative Preference Shares. All Preference Shares are cumulative unless otherwise expressly stated to be non cumulative.
b) Non Cumulative Preference Share
When a preference shareholder receives dividend only in case of profit and is not entitled any right to recover the arrears of dividend, then the type of Preference Shares held by the shareholder is known as Non Cumulative Preference Shares.
2. On the basis of Participation:
a) Participating Preference Share
When a preference shareholder enjoys the right to participate in the surplus profit (in addition to the fixed rate of dividend) that is left after the payment of dividend to the equity shareholders, the type of shares held by the shareholder is known as Participating Preference Share.
b) Non participating Preference Share
When a preference shareholder receives only a fixed rate of dividend every year and do not enjoy the additional participation in the surplus profit, then the type of shares held by the shareholder is known as Non Participating Preference Shares.
It must be noted that all Preference Shares are non-participating until and unless expressly stated.
3. On the basis of Redemption:
a) Redeemable preference share
When a preference shareholder is repaid by the company after a certain specified period in accordance with the term specified in the Section 80 of Company Act of 1956, then the type of the shares held by him/her is known as Redeemable Preference Shares.
b) Non Redeemable Preference share
These shares are not repaid by the company during its lifetime. As per the Section 80A of the Company Act of 1956, no company can issue Non Redeemable Preference Shares. It is merely a theoretical concept.
4. On the basis of Convertibility:
a) Convertible Preference Share
The shareholders holding Convertible Preference Shares have a right to convert his/her shares into equity shares.
b) Non Convertible Preference Share
Unlike Convertible Preference Shares, the shareholders holding Non Convertible Preference Shares do not enjoy the right to convert their shares into equity shares.
Question - 14 : - Describe the provision of law relating to ‘Calls-in-Arrears’ and ‘Calls-in-Advance’.
Answer - 14 : -
Calls-in-Arrears: When a shareholder fails to pay the amount due on allotment or any subsequent calls, then it is termed as Calls-in-Arrears. The Company is authorised by its Article of Association to charge interest at a specified rate on the amount of Call in Arrears from the due date till the date of payment. If the Article of Association is silent in this regard, then Table A shall be applicable that is interest at 5% p.a. is charged from the shareholders. As per the Revised Schedule VI of the Companies Act, Calls-in-Arrears are deducted from the Called-up Share Capital in the Notes to Accounts (that is prepared outside the Balance Sheet) under the head 'Share Capital'. The final amount of Share Capital is shown on the Equity and Liabilities side of the Company’s Balance Sheet. The company can also forfeit the shares on account of non-payment of the calls money after giving proper notice to the shareholders.
Example- X Ltd. issued 12,000 shares of Rs 10 each. All the shares were duly subscribed, however, the first and final call of Rs 4 on 5,000 shares remained unpaid.
| X Ltd. |
| Balance Sheet |
| Particulars | Note No. | Amount (Rs) |
| I. Equity and Liabilities | | |
| 1. Shareholders’ Funds | | |
| a. Share Capital | 1 | 1,00,000 |
| 2. Non-Current Liabilities | | - |
| 3. Current Liabilities | | - |
| | | |
| Total | | |
| | | |
| II. Assets | | |
| 1. Non-Current Assets | | - |
| 2. Current Assets | | - |
| | | |
| Total | | |
| | | |
NOTES TO ACCOUNTS
| Note No. | Particulars | Amount (Rs) |
| 1 | Share Capital | |
| | Authorised Share Capital | |
| | …….. shares of Rs 10 each | - |
| | Issued Share Capital | |
| | 12,000 shares of Rs 10 each | 1,20,000 |
| | Subscribed, Called-up and Paid-up Share Capital | |
| | 12,000 shares of Rs 10 each | 1,20,000 | |
| | Less: Calls-in-Arrears (5,000×4) | (20,000) | 1,00,000 |
| | | |
Calls-in-Advance: When a shareholder pays the whole amount or a part of the amount in advance, i.e. before the company calls, then it is termed as Calls-in-Advance. The company is authorised by its Article of Association to pay interest at the specified rate on call in advance from the date of payment till the date of call made. If the Article of Association is silent in this regard, then the Table A shall be applicable that is, interest at 6% p.a. is provided to the shareholders. As per the Revised Schedule VI of the Companies Act, Calls-in-Advance (along with interest on it) is added to the 'Other Current Liabilities' in the Notes to Accounts. The final amount of Other Current Liabilities is shown under the main head of 'Current Liabilities' on the Equity and Liabilities side of the Company's Balance Sheet.
Example- X Ltd. issued 12,000 shares of Rs 10 each. All the shares were duly subscribed. The final call of Rs 3 was not yet made, however, a shareholder holding 5,000 shares paid the final call installment in advance along with the allotment money.
| X Ltd. |
| Balance Sheet |
| Particulars | Note No. | Amount (Rs) |
| I. Equity and Liabilities | | |
| 1. Shareholders’ Funds | | |
| a. Share Capital | 1 | 84,000 |
| 2. Non-Current Liabilities | | |
| 3. Current Liabilities | | |
| a. Other Current Liabilities | 2 | 15,000 |
| Total | | |
| | | |
| II. Assets | | |
| 1. Non-Current Assets | | |
| 2. Current Assets | | |
| | | |
| Total | | |
| | | |
NOTES TO ACCOUNTS
| Note No. | Particulars | Amount (Rs) |
| 1 | Share Capital | |
| | Authorised Share Capital | |
| | …….. shares of Rs 10 each | - |
| | Issued Share Capital | |
| | 12,000 shares of Rs 10 each | 1,20,000 |
| | Subscribed, Called-up and Paid-up Share Capital | |
| | 12,000 shares of Rs 10 each, Rs 7 called-up | 84,000 |
| | | |
| 2 | Other Current Liabilities | |
| | Calls-in-Advance (5,000×3) | 15,000 |
| | | |
Question - 15 : - Explain the terms ‘Over-subscription’ and ‘Under-subscription’. How are they dealt with in accounting records?
Answer - 15 : -
When the total number of applications received for shares exceeds the number of shares offered by the company to the public, the situation of Over-subscription arises. A company can opt for any of the three alternatives to allot shares in case of Over-subscription of shares.
i) Excess applications are refused and money received on excess applications is returned to the applicants.
The company can refuse excess applications and the money received on these excess applications is returned to the applicants.
Question - 16 : - Describe the purposes for which a company can use ‘Securities Premium Account’.
Answer - 16 : -
As per the Section 78 of the Companies Act of 1956, the amount of securities premium can be used by the company for the following activities:
1. For paying up unissued shares of the company to be issued to members (shareholders) of the company as fully paid bonus share,
2. For writing off the preliminary expenses of the company,
3. For writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company,
4. For paying up the premium that is to be payable on redemption of preference shares or debentures of the company.
5. Further, as per the Section 77A, the securities premium amount can also be utilised by the company to Buy-back its own shares.
Question - 17 : - State clearly the conditions under which a company can issue shares at a discount.
Answer - 17 : -
As per the Section 79 of the Company Act of 1956, following are the conditions under which a company can issue shares at a discount.
1. A company can issue shares at discount provided it has previously issued such type of shares.
2. The issue of shares at a discount is authorised by a resolution passed by the company in the General Meeting and sanction obtained from the Company Law Tribunal.
3. The resolution specifies that the maximum rate of discount is 10% of the face value of the shares, unless higher percentage of discount allowed by the Company Law Tribunal.
4. A company can issue shares at discount atleast after one year from the date of commencing business.
5. If a company wants to issue shares at discount, then it must issue them within two months of obtaining sanction from the Company Law Tribunal.
6. Every prospectus related to the issue of the shares should explicitly and clearly contain particulars of the discount allowed on the issue of shares.
Question - 18 : - Explain the term ‘Forfeiture of Shares’ and give the accounting treatment on forfeiture.
Answer - 18 : -
If a shareholder fails to pay the allotment money and/or any subsequent calls, then the company has the right to forfeit shares by giving a proper notice to the shareholder.
As per the Table A of the Company Act, the procedure of forfeiting shares is mentioned below.
1. A notice is sent to default shareholder stating him/her to pay Calls in Arrears along with the interest accrued on the outstanding calls money within a period of 14 days of the receipt of notice, otherwise, the shares will be forfeited.
2. If the shareholder does not pay the amount, then the company has the right to forfeit his/her share by passing a resolution.
3. A notice of that resolution is send to the default shareholder and a public notice of the same is published in a daily newspaper.
4. The name of the shareholder is removed from the register of members (i.e. shareholders).
Accounting Treatment for Forfeiture of Shares:
i) Forfeiture of Shares that were issued at Par
Anish Limited issued 30,000 equity shares of Rs 100 each payable at Rs 30 on application, Rs 50 on allotment and Rs 20 on Ist and final call. All money was duly received.
Record these transactions in the journal of the company.
Answer - 19 : -
| Books of Anish Limited |
| Date | Particulars | L.F. | Debit Amount Rs | Credit Amount Rs |
| | Bank A/c | Dr. | | 9,00,000 | |
| | | To Equity Share Application A/c | | | 9,00,000 |
| | (Application money received on application for 30,000 equity shares @ Rs 30 per share) | | | | |
| | | | | | |
| | Equity Share Application A/c | Dr. | | 9,00,000 | |
| | | To Equity Share Capital A/c | | | 9,00,000 |
| | (Share Application money transferred to Share Capital Account) | | | | |
| | | | | |
| | Equity Share Allotment A/c | Dr. | | 15,00,000 | |
| | | To Equity Share Capital A/c | | | 15,00,000 |
| | (Allotment money due on 30,000 @ Rs 50 per share) | | | | |
| | | | | |
| | Bank A/c | Dr. | | 15,00,000 | |
| | | To Equity Share Allotment A/c | | | 15,00,000 |
| | (Share Allotment money received for 30,000 shares @ Rs 50 per share) | | | | |
| | | | | | | | |
| | Equity Share First and Final Call A/c | Dr. | | 6,00,000 | |
| | | To Equity Share Capital A/c | | | 6,00,000 |
| | Share First and Final call due on 30,000 shares @ Rs 20 per share) | | | | |
| | | | | | | | |
| | Bank A/c | Dr. | | 6,00,000 | |
| | | To Equity Share First and Final Call A/c | | | 6,00,000 |
| | (Share First and Final Call money received for 30,000 shares @ Rs20 per share) | | | | |
| | | | | | |
Question - 20 : - The Adersh Control Device Ltd was registered with the authorised capital of Rs 3,00,000 divided into 30,000 shares of Rs 10 each, which were offered to the public. Amount payable as Rs 3 per share on application, Rs 4 per share on allotment and Rs 3 per share on first and final call. These share were fully subscribed and all money was dully received. Prepare journal and Cash Book.
Answer - 20 : -
| Books of Adersh Control Device Ltd Journal |
| Date | Particulars | L.F. | Debit Amount Rs | Credit Amount Rs |
| | Equity Share Application A/c | Dr. | | 90,000 | |
| | | To Equity Share Capital A/c | | | 90,000 |
| | (Share Application money for 30,000 shares @ Rs 3 per share transferred to Share Capital Account) | | | | |
| | | | | |
| | Equity Share Allotment A/c | Dr. | | 1,20,000 | |
| | | To Equity Share Capital A/c | | | | 1,20,000 |
| | (Share Allotment money due on 30,000 @ Rs 4 per share) | | | | |
| | | | | | |
| | Equity Share First and Final Call A/c | Dr. | | 90,000 | |
| | | To Equity Share Capital A/c | | | | 90,000 |
| | (Share First and Final Call due on 30,000 @ Rs 3 per share) | | | | |
| | | | | | |
| Cash Book (Bank Column) |
| Dr. | Cr. |
| Date | Particulars | J.F. | Amount Rs | Date | Particulars | J.F. | Amount Rs |
| | Equity Share Application | | 90,000 | | | | |
| | Equity Share Allotment | | 1,20,000 | | | | |
| | Equity Share First and Final Call | | 90,000 | | By Balance c/d | | 3,00,000 |
| | | | 3,00,000 | | | | 3,00,000 |
| | | | | | | | |