INDEX

1 Marginal Costing 1.1 – 1.20

3 Issue of Shares 3.1 – 3.27

5 Cash Flow Statement 5.1 – 5.9

6 Ratio Analysis 6.1 – 6.23

8 Redemption of Preference Shares 8.1 – 8.10

9 Redemption of Debentures 9.1 – 9.33

10 Bonus Shares 10.1 – 10.6

11 Audit Committee (Company Law) 11.1 – 11.16

12 Shares & Shares Capital, Buy Back & 12.1 – 12.15

Reduction (Company Law)

13 Debentures & Underwriting (Company Law) 13.1 – 13.7

14 Employee Stock Option (Company Law) 14.1 – 14.8

15 Holding Company (Company Law) 15.1 – 15.4

Corporate & Mangement Accounting Marginal Costing

Ch
Chapter 1 – Marginal Costing
Marginal Cost
The term 'marginal cost' is defined as the amount at any given volume of output by which aggregate
costs are changed if the volume of output is increased or decreased by one unit. It is a variable cost of
one unit of a product or a service i.e., a cost which would be avoided if that unit was not produced or
provided.

Marginal Costing
Marginal costing, as one of the tools of management accounting helps management in making certain
decisions. It provides management with information regarding the behavior of costs and the incident of
such costs on the profitability of an undertaking. Marginal costing is defined as "the ascertainment of
marginal costs and of the effect on profit of changes in volume or type of output by differentiating
between fixed costs and variable costs". Marginal costing is not a separate costing. It is only a
technique used by accountants to aid management decision. It is also called as "Direct costing" in
U.S.A. This technique of costing is also known as "Variable Costing", "Differential costing" or "Out-
of-pocket" costing.

Features of Marginal Costing

(a) Costs are separated into the fixed and variable elements and semi-variable costs are also
differentiated likewise.
(b) Fixed costs are changed off to revenue wholly during the period in which they are incurred and are
not taken into account for valuing product cost/inventories. Only the variable costs are taken into
account.

Break-Even Analysis/ Cost-Volume Profit Analysis

The categorization of costs into "variable" and "fixed" elements and their relationship with sales and
profits has been developed as "break-even analysis". This break even analysis is also known as Cost
Volume-Profit (CVP) analysis.

In break even analysis or CVP analysis an activity level is determined at which all relevant cost are
recovered and there is a situation of no profit or no loss. This activity level is called breakeven point.
At Break-even point or level, the sales revenues are equal to the costs incurred. Below Breakeven
point level the firm will make losses, while above this it will be making profits.

Marginal Cost Equation

As we know: Sales-Cost=Profit
or Sales- (Fixed cost + Variable cost). Profit
or Sales- Variable cost= Fixed cost + Profit
It is known as marginal cost equation. We can convey it as under:

S–V=F+P.
Where,
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Corporate & Mangement Accounting Marginal Costing

S = Sales
V = Variable cost
F = Fixed cost
P = Profit

Profit-Volume Ratio (P/V Ratio)

The ratio or percentage of contribution margin to sales is known as P/V ratio. This ratio is also
known as marginal income ratio, contribution to sales ratio or variable profit ratio. P/V ratio is
the rate at which profit increases with the increase in volume.

P / V Ratio =

Or

=
Or

A comparison for P/V ratio of different products can be made to find out which product is
more profitable. Higher the ratio more will be the profit and lower the P/V ratio, lesser will
be the profit. P/V ratio can be improved by:
(i) Increasing the selling pri ce per unit.
(ii) Reducing variable costs by effectively utilizing men, machines and materials.

Break Even Points

The sales volume which equates total revenue with related costs and results in neither profit
nor loss is called break-even point (REP). Break-even point can be determined by the following
methods:

Break-Even Point (in Units) =

—

OR

OR

Break-Even Point (in `) =

⁄

OR
=

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Corporate & Mangement Accounting Marginal Costing

Level of sales required to earn a particular level of profit

Required Sales (in `) =
⁄

Illustration 1
Product is sold at a price of 120 per unit and its variable cost is 80 per unit. The fixed expenses of
the business are 8,000 per year. Find (0 BEP in and units, (ii) profits made when sales are 240 units
(iii) Sales to be made to earn a net profit of 5,000 for the year.

Solution
Selling Prices Per Unit 120
Less: Variable cost Contribution per unit 20
Contribution 40

⁄ ⁄

(i) BEP in ` = BEP in Units =

⁄

= = =
⁄

= 200 Units
= ` 24,000

(ii) Contribution Per Unit ` 40

Total Contribution of 240 Units = 240 40 = ` 9,600
Less : Fixed Cost for the Year = ` 8,000
Profit = ` 1,600

(iii) Required Sales (in `) =

⁄
= = ` 39,000
⁄

Margin of Safety
Margin of safety is the difference between the actual sales and sales at break-even point. Sales
beyond break-even volume brings in profits. Such sales represent a margin of safety. Margin of
safety is calculated as follows:
Margin of Safety = Total Sales — Break Even Sales

Margin of safety can also be calculated with the help of P/V ratio i.e.
Profit
Margin of Safety =
⁄

Break Even Chart

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Corporate & Mangement Accounting Marginal Costing

The break even chart means ―a chart which shows profits or loss at various levels of activity,
the level at which neither profit nor loss is shown being termed as the break even points.‖

It is graphics relationship between cost, volume and profit. It show , not only the BEP but also
the effect of cost and revenue at varying levels of sales. The break even chart can therefore, be
more appropriately called the Cost-Volume-Profit graph.

First Method of Break Even Chart

On the X-axis of the graph IS plotted the volume of productions or the quantities of sales
and on the Y-axis (vertical line) costs and sales revenues are represented. The fixed costs
line is drawn parallel to X-axis. The variable costs for different levels of activity are plotted
over the fixed cost line, which shows that the cost is increasing with the increase in the
volume of output. The variable cost line is joined to fixed cost line at zero volume of
production. This line is regarded as the total cost line. Sales values at various levels of
output are plotted from the origin and joined is called the sales line. The sales line will cut
the total cost line at a point where the total costs equal to revenues and this point of
intersection of two lines is known as break-even point or the point of no profit no loss. The
lines produced from the inter-section to Y-axis and X-axis may give sales value and the
number of units produced at break-even point respectively. Loss and profit are as have been
shown in the chart which shows that if production is less than the break-even point, the
business shall be running at a loss and if the production is more than the break-even level,
there will be profit. The angle which the sales line makes with total cost line while intersecting
it at BEP is called angle of incidence.

Illustration 2
From the following data, calculate break-even point by means of a break-even chart:
Selling Price Per Unit = Rs. 15
Variable Cost Per Unit = Rs. 10
Total Fixed Cost = Rs. 1,50,000

Solution
For plotting the data, we need at least two points — one for plotting the total cost line and other for
plotting the total sales line. Therefore, it will be necessary to presume different levels of
output and sales as below:

Output Units Fixed Cost (`) Variable Cost (`) Total Cost (`) Sales (`)
0 1,50,000 — 1,50,000 —
10,000 1,50,000 1,00,000 2,50,000 1,50,000
20,000 1,50,000 2,00,000 3,50,000 3,00,000
30,000 1,50,000 3,00,000 4,50,000 4,50,000
40,000 1,50,000 4,00,000 5,50,000 6,00,000
50,000 1,50,000 5,500,000 6,50,000 7,50,000
60,000 1,50,000 6,00,000 7,50,000 9,00,000

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Corporate & Mangement Accounting Marginal Costing

9
8
Angle of
7 incidence

6
5 Variable
cost
4 Total
Cost
3 Line
Sales Fixed Cost Line
2 Line

1 Fixed
Cost
0
10,000 20,000 30,000 40,000 50,000 60,000
Output (units)

Second Method of Break Even chart

This is variation of the first method in which variable cost line is drawn first and thereafter drawing
the fixed cost line above the variable cost line. The later line will be the total cost line. The sales
line is drawn as usual. The added advantage of this that contributions at various levels of output are
automatically depicted in the chart.

10,000 20,000 30,000 40,000 5 0 , 0 0 0 60,000 X

Output (Units)

(a) Contribution Break Even Chart

The chart helps in ascertaining the amount of contribution at different levels of activity
besides the break-even point. In this method, the fixed cost line is drawn parallel to the x-
axis. The contribution line is then drawn from the origin which goes up with the increase in
output. The sales line is plotted as usual, but the question of intersection of sales line with
cost line does not arise. The contribution line crosses the fixed cost line and the point of

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Corporate & Mangement Accounting Marginal Costing

intersection is treated as break-even point. At this point, contribution is equal to fixed

expenses and there is no profit or loss. If the contribution is more than the fixed expenses,
profit will arise and if the contribution is less than the fixed expenses, loss will arise.

(b) Profit Volume Graph

Profit volume graph is the graphical representation of the relationship between profit and
volume. Separate lines for costs and revenues are eliminated from the P/V graph as only profit
points are plotted. It is based on the same information as is required for traditional break-
even chart and is characterized by the same limitations. The steps in the construction of
profit volume graph are as follows:
(i) Profit and fixed costs are represented on the vertical axis.
(ii) Sales are shown on the horizontal axis.
(iii) The sale line divides the graph into two parts both horizontally and vertically. The area
above the horizontal line is the 'profit area' and that below it is the 'loss area' at which
fixed costs are represented on the vertical axis below the sale line and profits on the
same axis above the sale line.
(iv) Profits and fixed costs are plotted for corresponding sales volume and the points are
joined by a line which is the profit line.

Illustration 3
The sales of a company are @ Rs. 200 per unit 20,00,000
Variable cost 12,00,000
Fixed cost 6,00,000
The capacity of the factory 15,000 Units

Determine the BEP. How much profit is the company making?

Solution

Number of Units Presently Sold by Company =

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Corporate & Mangement Accounting Marginal Costing

= 10,000 Units
Variable Cost Per Unit =

= = Rs. 120

Contribution Per Unit = SP – VC

= Rs. 200 – Rs. 120
= Rs. 80

BEP (in Units) =

= = 7,500 Units

Profit by the Company = (No. of Units Sold Contribution Per Unit) – Fixed Cost
= (Rs. 10,000 Rs. 80) – Rs. 6,00,000
= Rs. 2,00,000

Illustration 4
Sales are Rs. 1,50,000, producing a profit of Rs. 4,000 in period I. Sales are Rs. 1,90,000
producing a profit of Rs. 12,000 in period II. Determine the BEP.

Solution
Sales Profit
Period 1 Rs. 1,50,000 Rs. 4,000
Period 2 Rs. 1,90,000 Rs. 12,000

PV =

–
=
–

= = 0.2 or 20%

As Profit = Sales x PV Ratio - Fixed Cost

4,000 = Rs. 1,50,000 x 20% - Fixed Cost
Fixed Cost = Rs. 30,000 – Rs. 4,000
= Rs. 26,000

BEP (in Units) =

= = Rs. 1,30,000
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Corporate & Mangement Accounting Marginal Costing

Make or Buy Decisions

When the management is confronted with the problem whether it would be economical to
purchase a component or a product from outside sources, or to manufacture it internally,
marginal cost analysis renders useful assistance in the matter. Under such circumstances, a
misleading decision would be taken on the basis of the total cost analysis. In case the proposal
is to buy from outside then, what is already being made, and the price quoted by the
outsider should be lower than the marginal cost. If the proposal is to make something
what is being purchased outside, the cost of making should include all additional costs like
depreciation on new plant, interest on capital involved and that cost should be compared with
the purchase price.

Illustration 5
A T.V. manufacturing company finds that while it costs to 6.25 make component X, the
same is available in the market at 5.75 each, with all assurance of continued supply. The
breakdown of cost is:

Materials Rs. 2.75 each

Labour Rs. 1.75 each
Variable overheads Rs. 0.50 each
Depreciation and other fixed cost Rs. 1.25 each
Rs. 6.25 each

(a) Should the company make or buy the component ?

(b) What should be your decision if the supplier offered component at 4.85 each?

Solution
Marginal cost per unit of component X
Materials Rs. 2,75
Labour Rs. 1.75
Variable overheads Rs. 0.50
Total Rs. 5.00

(a) The purchase cost of the above component is 5.75 each. If the company is having spare
capacity which cannot be filled with more remunerative jobs, it is recommended that the
above component be manufactured in the company since the marginal cost at 5.00 each is
less than the purchase cost of 5.75.
(b) In the event of purchase cost of 4.85 each being less than the marginal cost of 5.00
each, it is recommended that the component be bought from the supplier as this
results in a saving of 0.15 each. The spare capacity thus available can be utilized for
other purposes, as far as possible.

Problem of Key Factor

The product giving the greatest contribution will be the most profitable. To maximize
profit, resources should be mobilized towards that product which gives the maximum
contribution. But contribution is not the only criterion for deciding profitability. In real
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Corporate & Mangement Accounting Marginal Costing

life, there may be several factors which may put a limit on the number of units to be produced
even if the products give a high contribution. These factors are equally important for arriving
at managerial decisions because these factors limit the volume of output at a particular point
of time or over a period. These are called key factors, scarce factors, principal budget
factors or governing factors. The limiting factors may be sale, raw material, labour, plant
capacity and availability of capital e.g., for a concern established in a relatively new town,
labour may be a key factor or the concern may find it difficult to acquire an unlimited
quantity of raw material because of scarcity or the quota system, etc. in the later case
material will be the key factor. The extent of influence of these factors should be carefully
examined before arriving at a particular decision. Contribution per unit of key factor should
be considered and that course of action should be considered and adopted which gives the
highest contribution per unit of key factor.

Illustration 6
You are given the following information in respect of products X and Y of Bee Cee Co. Ltd.
Product X Product Y
Selling price Z 42 Z 33
Direct Material Z 15 Z 15
Labour hours (50 paise per hour) 18 hours 9 hours
Variable overheads 50% of Direct wages

Show which product is more profitable during labour shortage.

Solution
Computation of Marginal Contribution
Particulars Product Product
Selling price per unit in Z X 42 Y 33
Direct Material per unit in Z 15 15
Labours Hours (A) 18 9
Labour cost per hour (B) in Z 0.50 0.50
Labour cost per unit (A x B) in Z 9 4.50
Variable overhead (50% of Labour 4.50 2.25
Cost) in
Total Z
Variable Cost per unit in Z 28.50 21.75
Contribution per unit in Z 13.50 11.25

Since Labour is in shortage so it will be treated as key factor and the product which is
generating higher contribution per hour will be preferred.

Contribution Per Labour Hour:

Product X = Rs. 13.50/18
= Rs. 0.75

Product Y = Rs. 11.25/9

= Rs. 1.25

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Corporate & Mangement Accounting Marginal Costing

Since contribution per labour hour for product Y is higher so Product N, is more profitable.

Selection of a Suitable Product Mix

A concern, which manufactures more than one product, may have to decide in what
proportion should these products be produced or sold. The technique of marginal costing
helps to a great extent in the determination of most profitable product or sales mix. The
best product mix is that which gives the highest contribution will be selected for production.

Composite Break Even Point

A business undertaking may have different manufacturing establishments each having its own
production capacity, and fixed costs but producing the same product. At the same time, the
concern as a whole is a unit having different establishments under the same management.
Hence the combined fixed costs have to be met by the combined BEP sales.

Illustration 7
The product of a company is as under:
Products
A B
Units 36,000 12,000
Selling Price Rs. 5 Rs. 10
Variable Cost Rs. 4 Rs. 3
Fixed Costs Rs. 30,000

You are required to calculate the break-even point in units.

Find the shift in the break-even point in units, if the company discontinues product A and
substitutes products C in its place. The quantity of product C is 6,000 units and its selling price and
variable costs respectively are 12 and 6.

Solution
Product Unit SP VC Contribution P.U. Total Cont. Sale Value
A 36,000 5 4 1 36,000 1,80,000
B 12,000 10 3 7 84,000 1,20,000
48,000 1 20 000 3 00 000

Group contribution p.u. = = 2.5

Group Break-Even Point (in units) = = 12,000

Break-Even Point (in units) of A = 12,000 = 9,000

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Corporate & Mangement Accounting Marginal Costing

Break Even Point (in Units) of B = 12,000 = 3,000

Group PV Ratio = = = 40%

Group Break-Even Point (in Rs.) = = = 75,000

Break-Even Point (in Rs.) of A = 75,000 = 45,000

Break-Even Point (in Rs.) of B = 75,000 = 30,000

Product Unit SP VC Cont. Total Sale Value

p.u. Cont.
C 6,000 12 6 6 36,000 72,000
B 12,000 10 3 7 84,000 1 ,20,000
18,000 1,20,000 1,92,000

Group contribution p.u. = = 6.67

Group Break-Even Point (in units) = = 4,500

Break-Even Point (in units) of A = 4,500 = 1,500

Break Even Point (in Units) of B = 00 = 3,000

Group PV Ratio = = = 62.5%

Group Break-Even Point (in Rs.) = = = 48,000

Break-Even Point (in Rs.) of A = 48,000 = 18,000

Break-Even Point (in Rs.) of B = 48,000 = 30,00

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Corporate & Mangement Accounting Marginal Costing

Practical Questions

Self-Practice Question 1
From the following data, calculate break-even point (BEP):
Selling price per unit 20
Variable cost per unit 15
Fixed overheads 20,000

If sales are 20% above BEP, determine the net profit.

1. The margin of safety may be defined as

(a) The difference between actual sales and break even point
(b) The extent to which sales revenue exceeds fixed cost
(c) The point of sales where break even is achieved
(d) None of the above

2. An increase in fixed cost will be result in

(a) Decr ease in Contr ibution (b) Incr ease in Contr ibution
(c) Incr ease in Br eakeven Sales Level (d) Decr ease in Br eakeven Sales Level

3. Fixed cost is Rs. 96,000, and profit is Rs. 36,000, than contribution is
(a) Rs. 60,000 (b) Rs. 1,32,000
(c) Rs. 96,000 (d) None of above

4. Sales Rs. 40,000 , P/V ratio is 40%, than contribution is

(a) Rs. 24,000 (b) Rs. 16,000
(c) Rs. 40,000 (d) Rs. 20,000

Self-Practice Question 2
Ray Pens Ltd manufactures only pens where the marginal cost of each pen is Rs. 3. It
has Fixed Costs of Rs. 25,000 p.a. Present production and sales of pens is 50,000 units and
selling price per pen is Rs. 5. Any sale beyond 50,000 pens is possible only if the company
reduces 20% of its current selling price.

However, the reduced price applies only to the additional units. The company wants a
target profit of Rs. 1,00,000. How many pens the company must produce and sell if the
target profit is to be achieved?

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Corporate & Mangement Accounting Marginal Costing

5. Break even sales is Rs. 50,000, P/V ratio is 40% and profit Rs. 5,000, than
contribution is
(a) Rs. 20,000 (b) Rs. 30,000
(c) Rs. 25,000 (d) Rs. 15,000

6. Fixed cost Rs. 25,000 , margin of safety sales is Rs. 1,25,000 and P/V ratio is
20% than contribution is
(a) Rs. 25,000 (b) Rs. 50,000
(c) Rs. Nil (d) Rs. 1,00,000

7. Sales is 40 and marginal cost is Z 25, then profit volume ratio (phi ratio) is
(a) 62.5% (b) 60%
(c) 37.5% (d) 40%

8. Marginal Cost Rs. 12 and Contribution is Rs. 8 , then profit volume ratio is
(a) 66.67% (b) 33.33%
(c) 60.00% (d) 40.00%

Self-Practice Question 3
If fixed costs are Rs. 4,000; variable costs Rs. 32,000 and break-even point Rs. 20,000.
Find:
(i) Profit-Volume Ratio
(ii) Sales
(iii) Net Profit
(iv) Margin of Safety

9. Margin of safety is Rs. 45,000, fixed cost is Rs. 11,000 and actual sales is Rs.
1,00,000, then profit volume ratio
(a) 45,00% (b) 60.00%
(c) 40.00% (d) 20.00%

10. Margin of safety ratio is 40%, profit Rs. 16,000 and actual sales is Rs. 2,00,000, then
profit volume ratio

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Corporate & Mangement Accounting Marginal Costing

(a) 20.00% (b) 80.00%

(c) 8.00 (d) None of above

11. Fixed cost Rs. 9,000 and phi ratio is 30% then breakeven point is
(a) Rs. 2,700 (b) Rs. 30,000
(c) Rs. 9,000 (d) None of above

Self-Practice Question 4
Ascertain profit, when Sales Rs. 2,00,000; Fixed Cost Rs. 40,000; BEP Rs. 1,60,000.

12. Margin of safety is 500 units and actual sales is 2,500 units, then breakeven point is
(a) 2,000 units (b) 1,500 units
(c) 3,000 units (d) 1,800 units

13. Margin of safety is 30% and actual sales is Rs. 45,000, then breakeven point is
(a) Rs. 13,500 (b) Rs. 31,500
(c) Rs. 45,000 (d) None of above

14. Profit is Rs. 12,000 and P/V ratio is 30%, then margin of safety is
(a) Rs. 40,000 (b) Rs.3,600
(c) Rs. 43,600 (d) Rs. 17,143

Self-Practice Question 5
From the following data, compute break-even sales and margin of safety:
Sales 10,00,00
Fixed Cost 0
3,00,000
Profit 2,00,000

15. Breakeven sales is 40% and actual sales is Rs. 7,38,600, then margin of safety is
(a) Rs. 2,95,440 (b) Rs. 4,43,160
(c) Rs. 3,69,300 (d) None of above

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Corporate & Mangement Accounting Marginal Costing

16. Fixed cost is Rs. 25,Q00, p/v ratio is 25% and actual sales is Rs. 2,50,000, then margin of
safety is
(a) Rs. 1,00,000 (b) Rs. 4,43,160
(c) Rs. 2,25,000 (d) Rs. 1,50,000

17. Fixed cost is Rs.45,000, variable cost is Rs. 55,000 and profit is Rs. 20,000, then sales is
(a) Rs. 1,00,000 (b) Rs. 1,20,000
(c) Rs.80,000 (d) Rs. 75,000

Self-Practice Question 6
From the following data, find out (i) sales; and (ii) new break-even sales, if selling price is
reduced by 10%:
Fixed Cost 4,000

Break-even sales 20,000

Profit 1,000
Selling price per unit 20

18. Variable cost is Rs. 1,55,000, P/V ratio is 40% then sales is
(a) Rs. 3,25,000 (b) Rs. 3,87,500
(c) Rs. 2,58,333 (d) Rs. 75,000

19. Fixed cost is Rs. 12,000, P/V Ratio is 25% and desired profit is Rs. 3,000, then sales is
(a) Rs. 15,000 (b) Rs. 60,000
(c) Rs. 48,000 (d) Rs. 12,000

20. Breakeven sales is Rs. 1,25,000, margin of safety is Rs. 75,000, then sales is
(a) Rs. 2,00,000 (b) Rs. 1,25,000
(c) Rs. 50,000 (d) None of above

Self-Practice Question 7
The following figures are extracted from the books of a manufacturing concern for 2007 -08.
Direct material Rs.
Direct labour 2,05,00
75,000
Fixed overheads 60,0000
Variable overheads 1,00,000
Sales 5,00,00
0
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Corporate & Mangement Accounting Marginal Costing

Calculate the break-even point (BEP). What will be the effect of BEP of an increase of 10% in:
(i) Fixed expenses
(ii) Variable expenses

21. Margin of safety is Rs. 48,500 and breakeven point is 48.50% of sales then sales is
(a) Rs. 1,00,000 (b) Rs. 94,175
(c) Rs. 95,000 (d) Rs. 97,000

22. Profit is Rs. 30,000, variable cost to sales ratio is 60% break even sale is 25% , then sales is
(a) Rs. 50,000 (b) Rs. 1,00,000
(c) Rs. 66,667 (d) Rs. 2,00,000

23. Profit is Rs. 25,000, variable cost to sales ratio is 45% break even sale is 35%, then sales is
(a) Rs. 55,555 (b) Rs. 44,445
(c) Rs. 69,930 (d) Rs. 1,58,730

Self-Practice Question 8
A company wants to buy a new machine to replace one which is having frequent breakdown. It received
offers for two models Ml and M2. Further details regarding these models are given below:

M1 M2
Installed Capacity (units) 10,000 10,000
Fixed overheads p.a. (Rs.) 2,40,000 1,00,000
Estimated profit at the above capacity (Rs.) 1,60,000 100000
, ,
The product manufactured using this type of machine (M1 or M2) is sold at 100- per unit.
- Yout are
required to determine:
(i) Break-even level of sales for each model
(ii) The level of sales at which both the models will earn the same profit
(iii) The model suitable for different levels of demand for the product

24. Variable cost is Rs. 25,000, and fixed cost Rs. 10,000 and P/V ratio is 25% , then sales is
(a) Rs. 1,00,000 (b) Rs. 33,333
(c) Rs. 66,667 (d) Rs. 2,00,000

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Corporate & Mangement Accounting Marginal Costing

25. Total variable cost is Rs. 1,25,000, and fixed cost is Rs. 25,000, profit rate is 20% on cost, then
sales is
(a) Rs. 1,80,000 (b) Rs. 1,75,000
(c) Rs. 1,87,500 (d) Rs. 2,00,000

26. Total cost is Rs. 2,25,400, P/V ratio is 40% and breakeven sales is Rs. 1,25,000, then
variable cost is
(a) Rs. 1,00,400 (b) Rs. 1,75,400
(c) Rs. 90,160 (d) Rs. 1,35,240

Self-Practice Question 9
A company produces single product which sells for Rs. 20 per unit. Variable cost is Rs. 15 per unit
and Fixed overhead for the year is Rs. 6,30,000.

Required:
(i) Calculate sales value needed to earn a profit of 10% on sales
(ii) Calculate sales price per unit to bring BEP down to 1,20,000 units
(iii) Calculate margin of safety sales if profit is 60,000

27. Sales Rs. 1,20,000, profit Rs. 24,000 and variable cost is Rs. 50,000, then fixed cost is
(a) Rs. 70,000 (b) Rs. 26,000
(c) Rs. 74,000 (d) Rs. 46,000

28. When costing takes into account only the variable cost and not the full production cost we
will be using
(a) Absorption costing (b) Total costing
(c) Activity based costing (d) Marginal costing

29. Under marginal costing, the breakeven point is found by the following formula
(a) Total fixed costs divided by the contribution per unit
(b) Fixed costs per unit divided by the total contribution
(c) Total sales divided by the contribution per unit
(d) Total variable costs divided by the contribution per unit

Self-Practice Question 10
In 1991, the turnover of a company, which operated at a margin of safety of 25% amounted to Rs.
9,00,000 and its profit volume ratio was 33-1/3%. During 1992 the company estimated that although

Unique Academy 1.17 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Marginal Costing

the same volume of sales as in 1991 would be maintained, the sales value would go down due to decrease
in selling price. There will be no change in variable costs.

The company proposes to reduce its fixed costs through an intensive cost reduction programme. These
changes will alter the profit volume ratio and margin of safety to 30% and 40% respectively in 1992.
Even if the company closed down its operations in 1992, it would incur a minimum fixed cost of 50,000.

Required:
(i) Present a comparative statement indicating the sales, variable costs, fixed costs and profit for
1991 and 1992
(ii) At what minimum sales will the company be better off by locking up in business in 1992

30. At break even point contribution is

(a) More than fixed cost (b) Less than fixed cost
(c) Equal to fixed cost (d) None of above

31. Sales is more than break even level than contribution is

(a) Less than fixed cost (b) More than fixed cost
(c) Equal to fixed cost (d) None of above

32. At margin of safety sales level contribution is

(a) Less than fixed cost (b) More than fixed cost
(c) Equal to fixed cost (d) None of above

Self-Practice Question 11
A company has an opening stock of 6,000 units of output. The production planned for the current
period is 24,000 units and expected sales for the current period amount to 28,000 units. The selling
price per unit of output is Rs. 10. Variable cost per unit is expected to be Rs. 6 per unit while it
was only Rs. 5 per unit during the previous period. What is the Break Even volume for the current
period if the total fixed costs for the current period is Rs. 86,000? Assume that the first in first
out system is followed. Assume that the last in first out system is followed.

33. An increase in fixed cost will be result in which of the following

(a) A decrease in the contribution
(b) A decrease in the contribution per unit
Unique Academy 1.18 Prof. Ashish Parikh – 8007978700
Corporate & Mangement Accounting Marginal Costing

(c) An increase in the breakeven point sales

(d) An increase in the margin of safety

34.Sales are Rs. 1,50,000 producing a profit of Rs. 4,000 in period I. Sales are Rs. 1,90,000,
producing a profit of Rs. 12,000 in period II. Determining the BEP
(a) 1,30,000 (b) 2,60,000
(c) 26,000 (d) 1,00,000

35.PQR company manufacture two product — product X and product Y, in the ratio of 3:5. If the
contribution per unit of two products are Rs. 120 and Rs. 160 respectively. Then the overall
contribution of the product mix will be —
(a) Rs. 145 (b) Rs. 160
(c) Rs. 125 (d) Rs. 150

Self-Practice Question 12
The following data are obtained from the records of company:
First Year Second Year
Sales (`) 80,000 90,000
Profit (`) 10,000 14,000

Calculate:
(i) P/V Ratio
( i i ) Break-even point
( i i i ) Profit or loss at Sales of Z 50,000
( i v ) S a les r equ ir ed to ea r n a pr ofi t of Z 19 ,0 0 0
( v ) M ar gi n of s a f ety , if s a le i s Z 6 0 ,0 0 0

36.A company maintains a margin safety of 25% on its current sales and earns profit of Rs. 60 lakhs per
annum. If the company has a profit volume (PV) ratio of 40%, its current sales account to —
(a) Rs. 400 lakhs (b) Rs. 600 lakhs
(c) Rs. 625 lakhs (d) None of the above

37.A company with a contribution/sales ratio of 331/3% and fixed cost of Rs. 3 lakhs per month
should have a monthly sales of Rs. __________to maintain a margin of safety of 10%.
(a) 6 lakhs (b) 8 lakhs
(c) 10 lakhs (d) 12 lakhs

Unique Academy 1.19 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Marginal Costing

38.In two consecutive periods, sales and profit were Rs. 1,60,000 and 8,000 respectively in the first
period and Rs. 1,80,000 and Rs. 14,000 respectively during the second period. If there is no
change in fixed cost between the two periods then P.V. ratio must be —
(a) 20% (b) 25%
(c) 30% (d) 40%

Unique Academy 1.20 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

Chapter 3 – Ch
Issue of Shares
Company can issue two types of Shares

Equity
Preference

 Preference Share as the name suggest Preference Share has preferential right over
the payment of Dividend as well as Repayment of Capital in case of Winding Up
of Company.
 Preference Holder gets Fixed Rate of Dividend.
 Equity Shareholder Receives Dividend at Variable Rate more Profit more Dividends /
Less Profit Less Dividend, No Profit No Dividend.

Authorised Share Capital

Issued Share Capital
It is the Maximum Share Capital that a company It is that part of Authorized Capital which
is can Raise from the Public. It should be registered issued to the Public at Large.
with the registrar of Companies. It is also
known as Registered Capital or Nominal
Capital.
E.g. 1,00,000 Equity Shares of ` 10 each. i.e. E.g. 50,000 Equity Shares of ` 10 each.
i.e.
` 10,00,000 is Authorised Share Capital. ` 5,00,000 is Issued Share Capital

Subscribed Share Capital Called up share capital

It is that part of Issued Capital which is actually It is that part of Subscribed Capital
which is Subscribed by Public at Large. Called Up by Directors in order to
carry on
Business
E.g. 40,000 Equity Shares of ` 10 each. i.e. E.g. 40,000 Equity Shares ` 5, i.e. `
2,00,000
` 4,00,000 is Subscribed Share Capital. is Called Up Capital

Paid up Share Capital Uncalled share capital

It is that part of Called Up Capital which is It is the that part of Subscribe
Capital which is actually Received in Cash. not yet Called Up by the Board Of
Directors. In other words it is the difference between

Unique Academy 3.1 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

E.g. One Shareholder holding 1,000 Shares Subscribed Capital & Called Up Capital.
fail to pay ` 5
Company received
E.g. 40,000 Equity Shares ` 5 i.e ` 2,00,000
` 4,00,000 - ` 5,000 = ` 3,95,000 i.e. Paid Up Capital
is Uncalled Capital.

Reserve Capital
It is a that part of Subscribed Uncalled Up Share Capital which is being Called Up only at the time
of Winding Up of a Company. As per Section 65 of Companies Act, 2013 company can create
Reserve Capital by passing Special Resolution. Reserve Capital has no relation with Capital Reserve.

Types of Preference Share

a) Cumulative Preference Share
It is such share on which dividend is Accumulated. Such a dividend is payable even out of Future
Profit if current year Profit is Insufficient to pay. It should be shown under Balance Sheet Liability
Side as Contingent liability. Preference shares are generally Cumulative Unless Otherwise Stated.

b) Non - Cumulative Preference Share

It is a Preference Share issued where in case of no Dividend is declared in any year, right to
receive such dividend in next year expires. i.e. such holders do not have right over Arrears of
Dividend in future.

c) Participating Preference Share

Other than basic Preferential Right given to All Preference Share this Shareholder gets extra
right in Surplus Profit after Payment of Dividend to Equity Shareholders and right over Assets left
after Repayment of Capital to Equity Shareholders at the time of Winding Up of the Company.

d) Non - Participating Preference Share

Such a share does not Participate in Surplus Profits or Surplus Assets. Unless otherwise stated, a
Preferential Share is always deemed to be a Non-Participating Preference Share.

e) Convertible Preference Share

This type of Share enjoys the right to convert them into Equity Share. Preference share is
converted into Equity Share after Due period.

f) Non - Convertible Preference Share

It is such a Share which cannot be converted in Equity Share. Unless otherwise stated all share are
Non-Convertible Share.

g) Redeemable Preference Share

A share on which amount is repaid after Particular time period is called Redeemable Preference
Share. These shares are Non-Convertible. Generally all Preference Shares are Redeemable Unless
Otherwise Stated.

h) Non - Redeemable Preference Share

Unique Academy 3.2 Prof. Ashish Parikh – 8007978700
Corporate & Mangement Accounting Issue of Shares.

Shares which are Not Redeemable are called as Non-Redeemable Preference Share. As per
Provision of Companies Act No Company can Issue Non-Redeemable Preference Shares.

Journal Entries When Share Issued At Par:

1. On Receipt of Share Application Money
Bank A/c Dr.
To Equity Share Application A/c
(Being Share Application Money
Received)

2. For Transferring Share Application to Share Capital (On Allotment of Shares)

Share Application A/c Dr.
To Share Capital A/c
(Being Share Application Money Transferred to Share Capital A/c)

3. For Rejecting Excess Application

Share Application A/c Dr.
To Bank A/c
(Being Excess Application Rejected)

4. For Transferring Excess Application Amount towards Allotment (In case of Pro-Rata only)
Share Application A/c Dr.
To Share Allotment A/c
(Being Excess Application Money Transferred to Share Allotment)

5. For Allotment Due

Share Allotment A/c Dr.
To Share Capital A/c
(Being Share Allotment Money Due)

6. When Allotment Money Received in Full

Bank A/c Dr.
To Share Allotment A/c
(Being Share Allotment Money Received)

7. When there is Call In Arrear

Bank A/c Dr.
Call-In-Arrears A/c Dr.
To Share Allotment A/c
(Being Share Allotment Received & Defaulted Amount Transferred to Call-In-Arrears A/c)

8. When there is Call In Advance

Bank A/c Dr.
To Share Allotment
A/c To Call-In-
Advance A/c

Unique Academy 3.3 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

(Being Allotment Money Received & Excess Money Transferred to Call-In-Advance A/c)

9. When First Call Due

Share First Call A/c Dr.
To Share capital A/c
(Being Share First Call Money Due)

10. When First Call Money Received in Full

Bank A/c Dr.
To Share First Call A/c
(Being First Call Money Received in Full Amount)

11. When First Call Money Received and Call In Advance Adjusted
Bank A/c Dr.
Call-In-Advance A/c Dr.
To Share First Call A/c
(Being Share First Call Money Received & Call-In-Advance A/c Adjusted)

12. When Final Call Due

Share Final Call A/c Dr.
To Share Capital A/c
(Being Share Final Call Money Due)

13. When Final Call Money Received and Call In Advance Adjusted
Bank A/c Dr.
Call-In-Advance A/c Dr.
To Share Final call A/c
(Being Share Final Call Money Received & Call-In-Advance A/c Adjusted)

14. When Call In Arrear Received

Bank A/c Dr.
To Call-In-Arrears A/c
(Being Call-In-Arrears Amount Received)

When Share are Issued At Premium

Unique Points
 Anything received over and above the face value of share is called Premium.

 Premium may be collected at the time of Application or at the Time of Allotment

 Security Premium is an Income for the Company & should be treated as Capital Profit.
Generally Company cannot declare Dividend out of Capital Profit. Hence, Dividend cannot be
declared out of Securities Premium.
 Security Premium received should be credited to different Account named as Securities
Premium Account.
 Security Premium comes under Balance Sheet Liability side under the head “Reserves &
Unique Academy 3.4 Prof. Ashish Parikh – 8007978700
Corporate & Mangement Accounting Issue of Shares.

Surplus”.
 Use of Security Premium is given under Section 52 of Companies Act, 2013.
 Issue Fully Paid Up Bonus Shares.
 To Write Off Preliminary Expenses.
 To Write Off Expenses of Commission or Discount Allowed on any Security or Debentures of
the Company.
 Write Off Premium on Redemption of Redeemable Preference Share or Debentures of the
Company.
 Buy Back of Shares.

As per the Section 53 Companies Act, 2013 no of Company can Issue Shares at Discount except in
case of Issue of Sweat Equity Shares (Issued to employees and directors)
Thus any issue of shares at discount will be void.

Journal Entries When Shares Issued At Premium:

Situation 1
When Premium is Collected at the time of Application.
1. Bank A/c Dr.
To Share Application A/c
(Being Share Application Money Received)

2. Share Application A/c Dr.

To Share Capital A/c
To Securities Premium A/c
(Being Share Application Money transferred to Share Capital A/c & Securities Premium A/c)

Imp Note: All other Entries will be similar as Shares Issued at Par.
Situation 2
When Premium is Collected at the time of Allotment.
1. Share Allotment A/c Dr.
To Share Capital A/c
To Securities Premium A/c
(Being Share Allotment Money & Securities Premium Amount Due)

2. Bank A/c Dr.

To Share Allotment A/c
(Being Share Allotment Money Received)

Imp Note: All other Entries will be similar as Shares Issued at Par.

Interest on Call In Arrears

 Call In Arrear is the amount Due but not received from Shareholder. Call In Arrear will
always have Debit Balance will be shown in Balance Sheet Liability Side by way of Deduction

Unique Academy 3.5 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

from Paid Up Capital.

 Company can receive interest on Call In Arrears from the date it becomes Due till the date
when the Call is Received.

Interest on Call In Arrears

If provided in Articles of Association If not provided in Articles of

Association Charge Interest as per Articles Follow Table F of Companies Act
Charge Interest @ 10% p.a

Accounting Entries:

1. Interest on Call In Arrears Due (Receivable)

Shareholder A/c Dr.
To Interest on Call In Arrears
(Being Interest Due on Call In
Arrears)

2. When Interest is Received

Bank A/c Dr.
To Shareholder A/c
(Being Interest Money Received)

3. Transferring Interest on Call In Arrears to Profit & Loss at the year end.
Interest on Call In Arrears A/c Dr.
To Profit & Loss A/c
(Being Interest transferred to Profit & Loss Account)

Interest on Call In Advance:

Call In Advance is the Surplus amount received by the Company by its Shareholder. Call In
Advance will always have a Credit Balance & will be shown under Balance Sheet Liability Side. It
is Not Added to the amount of Paid Up Capital.

Generally, no Dividend is paid on Calls In Advance.

The Company is liable to pay Interest On Advance from the Date of Receipt till the Date when the
Call is Due for Payment.

Interest on Call In Advance

If provided in Articles of Association If not provided in Articles of

Association Charge Interest as per Articles Follow Table F of Companies Act
Allow Interest @ 12% p.a

Unique Academy 3.6 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

Accounting Entries:
1. Interest on Call In Advance Due (Payable)
Interest on Call In Advance A/c Dr.
To Shareholder A/c
(Being Interest Due on Call In Advance)

2. When Interest is Paid

Shareholder A/c Dr.
To Bank A/c
(Being Interest on Call In Advance paid)

3. Transferring Interest on Call In Advance to Profit & Loss at the year end.
Profit & Loss A/c Dr.
To Interest on Call In Advance
(Being Interest Transferred to Profit & Loss account)

Pro-Rata Allotment of Shares

In Case of Over Subscription Company has three options.

1. Reject the Excess number of Shares Application.
2. Do Pro-Rata Allotment (Proportionate Allotment)

In case of Pro-Rata Allotment always Excess Application Money should be adjusted towards
Allotment.
Partly Rejection & Partly Pro-Rata Allotment.

Journal Entries:

1. In Case of Rejection
Share Application A/c Dr.
To Bank A/c
(Being Excess Share Application Rejected)

2. In Case of Pro-Rata Allotment

Share Application A/c Dr.
To Share Allotment A/c
(Being Excess Share Application Adjusted towards Share Allotment)

3. In Case of Partly Pro-Rata & Partly Rejection

Share Application A/c Dr.
To Bank A/c
(Being Excess Share Application Adjusted towards Allotment)

Share Application A/c Dr.

To Share Allotment A/c
(Being Excess Share Application Adjusted towards Share Allotment)

Unique Academy 3.7 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

Pro-Rata Allotment means Proportionate Allotment

i.e. No. of Shares Applied for : No of Shares Allotted.
E.g. If Company Issued 20,000 Shares & Public Applied for 40,000 Shares & Company decided to do
Pro-Rata Allotment. In this situation,
No. of Shares Applied : No of Shares Allotted
40000 : 20000 = 4 : 2
It means Person who has Applied for Four Shares must be Allotted Two Shares.

FORFITURE OF SHARES
Sometimes One or More Shareholder fails to pay Call Money due on Allotment, First Call and
Final Call.

this situation company after providing proper notice to the Shareholders can Forfeit the
Shares.

Forfeiture means taking away of Property on Breach of Condition. In other words Forfeiture means
Cancellation of Shares/ Cancellation of Ownership on Non-Payment of Amount due on Calls.

At the time of passing the Entries of Forfeiture Three Points are to be kept in Mind.
1. Called up value on Forfeited Shares.
2. Amount Due but not Received.
3. Amount Actually Received on Forfeited Shares.

Situation 3
Entries for Forfeiture of Shares when Shares were Originally issued at Par
Share Capital A/c Dr. (Called Up Value No. of Shares
Forfeited)
To Share Forfeiture A/c (Amount Actually Received)
To Call In Arrears A/c (Amount Due but not Received No. of
Shares Forfeited) (Being Shares Forfeited due to Non-Payment of Call Amount)
Alternatively following Entry can be passed

Share Capital A/c Dr. (Called Up Value No. of Shares

Forfeited)
To Share Forfeiture A/c (Amount Actually Received)
To Share Allotment A/c (Amount Due but not Received No. of Shares
Forfeited)
To Share First Call A/c (Amount Due but not Received No. of Shares
Forfeited)
To Share Final Call A/c (Amount Due but not Received No. of Shares
Forfeited)
(Being Shares Forfeited due to Non-Payment of Call Amount)

Imp Note
We can Pass above Journal Entry only when at the Time of Issue of Shares Defaulted amount is not
Transferred to Call In Arrear A/c.

Unique Academy 3.8 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

Situation 4
When Shares are Originally issued at Premium
Premium Due & Received in Cash Premium Due but not Received in Cash
Share Capital A/c Dr. Share Capital A/c Dr.
To Share Forfeiture A/c Share Premium A/c Dr.
To Call In Arrears A/c To Share
(Being Shares Forfeited for Non- Forfeited A/c
Payment of Call Amount) To Call In
Arrears A/c
(Being Share Forfeited for Non-Payment
of Call Amount)

Unique Points:
 Premium once received in cash its Company’s Additional Income hence should not be Cancelled.
 Premium Due but not Received in Cash should be cancelled at the time of Forfeiture.
 Till Forfeited share are Re-Issued the Amount is shown as an Addition to Share Capital on
Balance Sheet Liability Side.

Forfeiture of Fully Paid-Up Shares:

 If it is specifically Provided by Articles of Association Fully Paid Share may be Forfeited for
Realization of Debts.

Re-Issue of Shares:
 A Forfeited Share is merely a Share available to the Company for Sale and remains vested in
the company for that purpose only.
 Re-Issue of forfeited shares is not Allotment of Shares but only a Sale.
 The Share, after Forfeited, in hands of the Company is subjected to an obligation to dispose it
off. In Practice, Forfeited Shares are disposed off by Auction.
 These Shares can be Re-Issued at any Price so long as the total Amount received (From Original
Allottee and the Second Purchase) for those shares is not less than the Amount in Arrears on
those Shares.

Accounting Entries:
1) Bank Account Dr. (Actual Amount Received)
Forfeited Share Account Dr. (Loss on Re-Issue)
To Share Capital Account
(Being the Re-Issue of Shares @ ` each as per Board’s
Resolution no Dated)

2) Forfeited Shares Account Dr.

To Capital Reserve Account
(Being the Profit on Re-Issue, Transferred to Capital Reserve)

Unique Points:

Unique Academy 3.9 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

In Connection with Re-issue, the following Points are Important:

1. Loss on Re-Issue should not Exceed the Forfeited Amount.
2. If the Loss on Re-Issue is Less than the amount Forfeited, the Surplus should be Transferred
to Capital Reserve.
3. The Forfeited amount on Share (Amount Originally Paid-Up) not yet Reissued should be shown
under the heading „Share Capital‟.
4. When only portions of the Forfeited Shares are Re-Issued, then the Profit made on Re-Issue
of such shares must be transferred to Capital Reserve.
5. When the shares are Re-Issued at a Price which is more than the Face Value of the Shares,
the Excess amount will be credited to „Securities Premium Account‟.

If the Re-Issued amount and Forfeited Amount (taken together) Exceeds the Face Value of the
shares Re-Issued, it is not necessary to transfer such amount to „Securities Premium Account‟.

Issue Shares For Consideration Other Then Cash

Company generally Issue their Shares for Consideration in Cash.

other Asset.

Company can Issue Shares when Company acquires Business of another Company.

Sometimes Shares may be Issued in Payment of Services Rendered by Promoters, Lawyers in the
formation of Company.

Sheet Liability Side under Share

Capital.

Accounting Entries
When Assets are Purchased in Exchange of Shares
 Asset A/c Dr.
To Vendor A/c
(Being Asset Purchased Purchased)

When shares are issued to Vendor

 Vendor A/c Dr.
To Share Capital A/c
(Being Shares Issued to Vendor’s Company)

When Shares are Issued to Promoters.

 Goodwill A/c Dr.
To Share Capital A/c
(Being Shares Issued to Promoters)

How to Find Number of Shares to be Issued when Share are to be Issued other than Cash???

Unique Academy 3.10 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

Purchase Consideration
Number of Shares to
Issue Price Per / Share

Example 1
One Company Acquired Business of Another Company for a Purchase Consideration of ` 5,00,000.
Purchase Consideration is to be paid by Issue of Shares of ` 100 each. Find out Number of Shares
to be Issued.

Solution
Purchase Consideration
Issue Price Per / Share

`5, 00, 000

`100

No of Shares to be Issued = 5,000 Shares.

Example 2
X Ltd purchased Machinery worth ` 150,000 from TaTa Motors and decided to issue shares of `
10 each at Premium of ` 5/Per Share. Find Number of Shares to be Issued.

Solution
Purchase Consideration
Issue Price Per / Share

`1, 50, 000

`15
No of Shares to be Issued = 5,000 Shares.

Unique Academy 3.11 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

1. The excess price received over the par value of shares, should be credited to _________
a) Calls-in-advance account.
b) Share capital account.
c) Reserve capital account.
d) Securities premium account.

2. Which of the following statements is false?

a) The forfeited shares should not be issued at a premium.
b) At the time of forfeiture of shares, securities premium should not be debited with the
amount of premium already received.
c) Shares can be issued at a discount only after one year from the commencement of
business.
d) Securities premium account cannot be utilized to redeem preference shares.

3. When shares are issued to promoters for the services offered by them, the account that will
be debited with the nominal value of share is ______
a) Preliminary expenses account.
b) Goodwill account.
c) Asset account.
d) Share capital account.

4. The directors of E Ltd. made the final call of ` 30 per share on May 15, 2004 indicating the
last date of payment of call money to be May 31, 2004. Mr. F, holding 5,000 shares paid the
call money on July 15, 2004.
If the company adopts Table A, the amount of interest on calls-in-arrear to be paid by Mr. F=?
a) ` 625.00 c) ` 750.00
b) ` 1875.00 d) ` 1,125.00

Use the following information for questions 5 to 9

B Ltd. was registered with a share capital of ` 1,00,00,000 divided into equity shares of ` 10
each. It issued 9,00,000 equity shares to the general public at par payable as to ` 3 on
application, ` 3 on allotment and balance in 2 equal calls. The public had subscribed for
8,50,000 shares. Till 31st March, 2006, only first call had been made. All the shareholders
had paid up except Mr. C, a holder of 25,000 shares, who did not pay the call money.

5. How much is B Ltd’s authorized share capital.

a) ` 1,00,00,000 c) ` 85,00,000
b) ` 90,00,000 d) ` 68,00,000

6. How much is B Ltd’s issued capital?

a) ` 1,00,00,000 c) ` 85,00,000
b) ` 90,00,000 d) ` 68,00,000

Unique Academy 3.12 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
7. How much is B Ltd’s subscribed capital?
a) ` 1,00,00,000 c) ` 85,00,000
b) ` 90,00,000 d) ` 68,00,000

8. How much is B Ltd’s called up capital?

a) ` 1,00,00,000 c) ` 85,00,000
b) ` 90,00,000 d) ` 68,00,000

9. How much is B Ltd’s paid up capital?

a) ` 1,00,00,000 c) ` 85,00,000
b) ` 90,00,000 d) ` 68,00,000

Use the following information for questions 10 to 23.

D Ltd. issued 2,00,000 shares of ` 100 each at a premium of ` 20 per share payable as follows:
On application ` 20
On allotment ` 50 (including premium)
On first call ` 30
On second and final call ` 20.

Application were received for 3,00,000 shares and pro rata allotment was made to applicants of
2,40,000 shares. Money excess received on application of 2,40,000 shares was employed on
account of sum due on allotment as part of share capital. E, to whom 4,000 shares were allotted,
failed to pay the allotment money and on his subsequent failure to pay the first call, his shares
were forfeited and F, the holder of 6,000 shares failed to pay the two calls and his shares were
forfeited after the second call. Of the forfeited shares, 8,000 shares were reissued to G at a
discount of 10%, the whole of E’s forfeited shares being reissued.

10. Amount received on application = _________

a) ` 40,00,000 c) ` 48,00,000
b) ` 60,00,000 d) ` 2,40,00,000

11. Application money adjusted against allotment = ________.

a) ` 20,00,000 c) ` 12,00,000
b) ` 16,00,000 d) ` 8,00,000

12. Amount refunded to shareholders = ______.

a) ` 20,00,000 c) ` 12,00,000
b) ` 16,00,000 d) ` 8,00,000

13. Total amount paid by E =_______.

a) ` 80,000 c) ` 1,44,000
b) ` 1,00,000 d) ` 96,000

14. Total amount paid by F = _______.

a) ` 80,000 c) ` 4,20,000
b) ` 3,00,000 d) ` 1,44,000

Unique Academy 3.13 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
15. Total amount paid by G = ________.
a) ` 7,20,000 c) ` 8,80,000
b) ` 8,00,000 d) ` 8,64,000

16. Amount transferred to Share forfeiture account at the time of forfeiting E’s shares =
_________.
a) ` 80,000 c) ` 3,00,000
b) ` 1,00,000 d) ` 96,000

17. Amount transferred to Share forfeiture account at the time of forfeiting F’s shares
________.
a) ` 80,000 c) ` 4,20,000
b) ` 3,00,000 d) ` 1,44,000

18. Net balance in Share Capital Account = ________.

a) ` 2,00,000 c) ` 2,04,00,000
b) ` 2,08,00,000 d) ` 1,98,00,000

19. Net balance in Securities Premium Account = _______.

a) ` 39,20,000 c) ` 39,36,000
b) ` 39,28,000 d) ` 39,44,000

20. Net balance in Share Forfeiture Account = ________.

a) ` 1,00,0000 c) ` 96,000
b) ` 3,00,000 d) ` 3,96,000

21. Net balance in Capital Reserve Account = _______.

a) ` 2,96,000 c) ` 2,10,000
b) ` 80,000 d) ` 2,16,000

22. Net balance in Bank Account = ________.

a) ` 2,40,00,000 c) ` 2,40,24,000
b) ` 2,40,12,000 d) ` 2,40,36,000

23. Balance Sheet Total = ________.

a) ` 2,40,00,000 c) ` 2,40,24,000
b) ` 2,40,12,000 d) ` 2,40,36,000

24. When shares are forfeited, the share capital account is debited with ______ and the share
forfeiture account is credited with _______.
a) Paid-up capital of shares forfeited; Called up capital of shares forfeited.
b) Called up capital of shares forfeited; Calls in arrear of shares forfeited.
c) Called up capital of shares forfeited; Amount received on shares forfeited
d) Calls in arrears of shares forfeited; Amount received on shares forfeited.

Use the following information for the questions 25 to 29.

B Ltd. issued 80,000 equity shares of ` 10 each, payable as under:

Unique Academy 3.14 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
On application `3
On allotment `4
On first call `2
On final call `1
The applications received for 1,20,000 shares were dealt with as under:
 Applicants of 20,000 shares were allotted in full.
 Applicants of 80,000 shares were allotted 60,000 shares pro-rata.
 Applications for 20,000 shares were rejected.

25. Amount received on application is _______.

a) ` 2,40,000 c) ` 5,60,000
b) ` 3,60,000 d) ` 8,00,000

26. Total excess money received as compared to the number of shares allotted=?
a) ` 3,00,000 c) ` 3,60,000
b) ` 2,40,000 d) ` 1,20,000

27. Amount to be refunded = ?

a) Nil. c) ` 1,20,000
b) ` 60,000 d) ` 1,80,000

28. Amount of excess application money available for adjustment against allotment money =?
a) Nil c) ` 1,20,000
b) ` 60,000 d) ` 1,80,000

29. Amount of excess application money available for adjustment against call money =?
a) Nil. c) ` 1,20,000
b) 60,000 d) ` 1,80,000

30. Which type of the following shares have the right to receive dividends unpaid in prior years,
whenever earnings become adequate?
a) Cumulative preference shares
b) Participating preference shares
c) Convertible preference shares
d) Callable preference shares

31. Which of the following statement is false?

a) Interest on calls-in-advance is paid from the date of receipt of advance to the date of
relevant call.
b) Calls-in-advance are not entitled for any dividend
c) According to Table A, interest on calls-in-advance is paid at the rate of 6% p.a.
d) Payment of interest on calls-in-advance is at the discretion of the company.

32. T Ltd. proposed to issue 6,000 equity shares of ` 100 each at a premium of 40%. The minimum
amount of application money to be collected per share as per the Companies Act, 1956 = ?
a) ` 5.00 b) ` 6.00 c) ` 7.00 d) ` 8.40.

Unique Academy 3.15 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
33. Dividends are usually paid as a percentage of ______.
a) Authorized share capital.
b) Net profit.
c) Paid-up capital.
d) Called-up capital.

34. E Ltd. had allotted 10,000 shares to the applicants of 14,000 shares on pro rata basis. The
amount payable on application is ` 2. F applied for 420 shares. The number of shares allotted
and the amount carried forward for adjustment against allotment money due from F=?
a) 60 shares; ` 120.
b) 340 shares; ` 160.
c) 320 shares; ` 200.
d) 300 shares; ` 240.

35. O Ltd. issued 10,000 equity shares of ` 10 each at a premium of 20% payable ` 4 on application
(including premium), ` 5 on allotment and the balance on first and final call. The company
received applications for 15,000 shares and allotment was made pro-rata. P, to whom 3,000
shares were allotted, failed to pay the amount due on allotment. All his shares were forfeited
after the call was made. The forfeited shares were reissued to Q at par. Assuming that no
other bank transactions took place, the bank balance of the company after effecting the
above transactions =?
a) ` 1,14,000 c) ` 1,20,000
b) ` 1,32,000 d) ` 1,00,000

36. A company forfeited 2,000 shares of ` 10 each (which were issued at par) held by Mr. John
for non-payment of allotment money of ` 4 per share. The called-up value per share was ` 9.
On forfeiture, the amount debited to share capital=?
a) ` 10,000 c) ` 2,000
b) ` 8,000 d) ` 18,000

37. If forfeited shares (which were originally issued at a discount) are reissued at a premium, the
amount of such premium will be credited to ________.
a) Share forfeiture account.
b) Securities premium account.
c) Capital reserve account.
d) Discount on issue of shares account.

38. The maximum capital beyond which a company is not allowed to raise funds, by issue of shares
is its’_______.
a) Issued share capital
b) Reserve share capital
c) Authorized share capital
d) Subscribed share capital

39. As per the SEBI guidelines, on issue of shares, the application money should not be less than
a) 2.5% of the nominal value of shares
b) 2.5 of the issue price of shares

Unique Academy 3.16 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
c) 25.0% of the nominal value of shares
d) 25.0 of the issue price of shares

40. G Ltd. acquired assets worth ` 7,50,000 from H Ltd. by issue of shares of `100 at a premium
of 25%. The number of shares to be issued by G Ltd. to settle the purchase consideration = ?
a) 6,000 shares c) 9,375 shares
b) 7,500 shares d) 5,625 shares

41. D Ltd. issued 5,000 equity shares of ` 20 each at a premium of 20% payable ` 8 on application
(including premium), ` 10 on allotment and the balance on first and final call. The company
received applications for 7,500 shares and allotment was made pro-rata. E, to whom 1,500
shares were allotted, failed to pay the amount due on allotment. All her shares were forfeited
after the call was made. The forfeited shares were reissued to F at par. Assuming that no
other bank transactions took place, the bank balance of the company after affecting the
above transactions = ?
a) ` 1,14,000 c) ` 1,20,000
b) ` 1,31,000 d) ` 1,00,000

42. Declared dividend should be classified in the Balance Sheet as a _______.

a) Provision c) Reserve
b) Current liability d) Current asset

43. The interest on calls-in-advance is paid for the period from the ________.
a) Date of receipt of application money to the date of appropriation
b) Date of receipt of allotment money to the date of appropriation
c) Date of receipt of calls-in-advance to the date of appropriation of the call
d) Date of appropriation to the date of dividend payment To Be Ignored

44. As per Schedule VI of the Companies Act, 1956, under which of the following heads is
‘Premium on issue of Preference Shares’ shown in the balance sheet of a company?
a) Miscellaneous expenditure
b) Debentures
c) Reserves and surplus
d) Current liabilities and provisions To Be Ignored

45. Which of the following signifies the difference between par value and an issue price below
par?
a) Securities premium
b) Discount on issue of shares
c) Calls in arrear
d) Calls in advance

46. The excess price received over the par value of shares, should be credited to
a) Calls-in-advance account
b) Share capital account
c) Reserve capital account
d) Securities premium account
Unique Academy 3.17 Prof. Ashish Parikh – 8007978700
Corporate & Mangement Accounting Issue of Shares.

47. The rate of discount on issue of shares can not exceed ______ percent of the nominal value
of the shares.
a) 10 b) 20 c) 15 d) 5 To Be Ignored

48. The Securities Premium Account should be shown under

a) Share Capital
b) Current Liabilities
c) Current Assets
d) Reserves and Surplus

Use the following information for questions 49 and 50

Consider the following data pertaining to W Ltd. as on March 31, 2009 Share
Capital
Issued, Subscribed Called-up (20,000 shares of ` 100 each) ` 20,00,000
Calls in arrear ` 10,000
Profit and loss account (Cr.) as on April 01, 2008 ` 67,000
Profit for the year ` 1,90,610

 The company wants to create a Debenture Redemption Reserve and to transfer ` 50,000 every
year out of profits to redeem the debentures.
 The company declared 10% dividends.

49. The amount of dividend declared = ?

a) ` 1,00,700 c) ` 1,99,000
b) ` 2,25,761 d) ` 2,00,000

50. The balance of Profit and Loss Appropriation account transferred to Balance Sheet after
effecting the above transactions = ?
a) ` 6,000 c) ` 8,610
b) ` 68,100 d) ` 6,810

51. If the forfeited shares are issued at a premium, the amount of the premium shall be credited
to
a) Profit and loss account
b) Capital reserve account
c) Share forfeiture account
d) Securities premium account

52. IJK Ltd. issued 20,000 shares of ` 10 each at a premium of 20% on May 01, 2009, payable as
follows:
On application ` 4.50 (inclusive of premium)
On allotment ` 2.50
On first and final call ` 5.00
Mrs. M, to whom 1,000 shares were allotted, has paid ` 5,000 on June 01, 2009. At the time of
remitting the allotment money, she indicated that the excess money should be adjusted towards
Unique Academy 3.18 Prof. Ashish Parikh – 8007978700
Corporate & Mangement Accounting Issue of Shares.
the call money. The directors of the company made the first and final call on October 31, 2009.
The company has a policy of paying interest on calls-in-advance. The amount of interest paid
to Mrs. M on calls-in-advance=?
a) ` 62.50 b) ` 52.08 c) ` 125.00 d) ` 150.00

53. The following information pertains to X Ltd.

i. Equity share capital called up ` 5,00,000.
ii. Calls in arrear ` 40,000.
iii. Calls in advance ` 25,000.
iv. Proposed dividend 15%

The amount of dividend payable = ?

a) ` 75,000 c) ` 71,250
b) ` 72,750 d) ` 69,000

54. Z Ltd. issued 10,000 shares of ` 10 each. The called up value per share was ` 8. The company
forfeited 200 shares of Mr. A for non-payment of 1st call money of ` 2 per share. He paid ` 6
for application and allotment money. On forfeiture, the share capital account will be _______.
a) Debited by ` 2,000 (b) Debited by ` 1,600
c) Credited by ` 1,600 (d) Debited by ` 1,200

55. B Ltd. issued shares of ` 10 each at a discount of 10%. Mr. C purchased 30 shares and paid ` 2
on application but did not pay the allotment money of ` 3. If the company forfeited his entire
shares, the forfeiture account will be credited by ________.
a) ` 90 b) ` 81
c) ` 60 d) ` 54

Use the following information for questions 56 and 57.

B Ltd. invited application for 5,000 shares of ` 10 each at a premium of ` 2 per share payable as
follows:
On application - ` 5 (including premium)
On allotment -`4
On final call -`3
Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. C to whom 60
shares
were allotted, failed to pay allotment money and call money. Mr. D the holder of 100 shares,
failed
to pay call money. All these shares were forfeited after proper notice.

56. On forfeiture, the amount credited to share allotment account = ?

a) ` 480 b) ` 640
c) ` 180 d) ` 400

57. On forfeiture, the amount credited to share forfeiture account = ?

a) ` 300 b) ` 880
c) ` 320 d) ` 940

Unique Academy 3.19 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
58. Which of the following statements is false?
a) Shares can be issued for cash or any other consideration.
b) In the event of over subscription, excess amount has to be refunded or a pro rata
allotment is to be made.
c) A company must receive a minimum of 90% subscription against the entire issue as per the
SEBI guidelines.
d) The share application money is automatically converted to share capital.

59. A company invited application for 25,000 equity shares of ` 10 each and received 30,000
applications along with the application money of ` 4 per share. Which of the following
alternatives can be followed?
I. Refund the excess applications.
II. Make pro rata allotment to all the applicants, and refund the excess application money.
III. Not to allot any shares to some applicants, full allotment to some of the applicants and pro
rata allotment to the rest of the applicants.
IV. Not to allot any shares to some applicants and make pro rata allotment to other applicants.
V. Make pro rata allotment to all the applicants and adjust the excess money received
towards call money.
a) Only (II) above
b) Both (I) and (IV) above
c) All (I), (II), (IV) and (V) above
d) Only (III) above

60. The document inviting offers from public to subscribe for the debentures or shares or
deposit of a body corporate is known as ______.
a) Share certificate (b) Stock invest
c) Fixed deposit receipt (d) Prospectus

61. As per Schedule VI of the Companies Act,1956, forfeited shares account will be
a) Added to paid-up capital
b) Deducted from paid-up capital
c) Shown as a capital reserve
d) Shown as a revenue reserve

62. The authorized capital of M Ltd. consists of both cumulative preference shares and equity
shares. Each 5% cumulative preference share has a par value ` 100. Each equity share has a
par value ` 10. At the end of the year 2007-08 and 2008-09, the cumulative preference share
capital balance was ` 2,00,000 and the equity share capital balance was ` 5,00,000.
If dividend declarations totaled ` 8,000 and ` 15,000 in the year 2007-08 and 2008-09
respectively, the dividends allocated to the equity share holders in the year 2008-09 =?
a) ` 3,000 c) ` 10,000
b) ` 5,000 d) ` 12,000

63. At the time of forfeiture of shares which were originally issued at a discount, the accounting
entry involves ________.
I. A debit to Share capital account with the called-up value of shares forfeited.
II. A credit to Share forfeiture account with the amount received on forfeited shares.

Unique Academy 3.20 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
III. A credit to Discount on issue of shares with the amount of discount allowed on forfeited
shares.
IV. A credit to Calls-in-arrears with the amount due but not paid on forfeited shares.
a) Both (I) and (IV) above.
b) Both (IV) and (III) above.
c) Both (I) and (II) above.
d) (I), (II), (III) and (IV) above.

64. As per the Companies Act, only preference shares, which are redeemable within ______ can
be issued.
a) 24 years c) 30 years
b) 22 years d) 20 years.

65. Which of the following is not true?

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

66. The subscribed share capital of S Ltd. is ` 80,00,000 of ` 100 each. There were no calls in
arrear till the final call was made. The final call made was paid on 77,500 shares. The calls in
arrear amounted to ` 62,500. The final call per share =?
a) ` 25 b) ` 7.80
c) ` 20 d) ` 62.50

67. Which of the following should be deducted from the called-up share capital to find out paid-up
capital?
a) Calls-in-advance
b) Calls-in-arrears
c) Share forfeiture
d) Discount on issue of shares

68. If a shareholder does not pay his dues on allotment, for the amount due, there will be a
_______.
a) Credit balance in the share allotment account.
b) Debit balance in the share forfeiture account.
c) Credit balance in the share forfeiture account.
d) Debit balance in the share allotment account.

69. The discount allowed on re-issue of forfeited shares is debited to _______.

a) General reserve account.
b) Capital reserve account.
c) Revaluation reserve account.
d) None of these.

Unique Academy 3.21 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.

70. Maximum amount that can be collected as premium as a percentage of face value = ?
a) 20% b) 30%
c) 40% d) Unlimited.

71. The company issued shares of ` 10 each at a premium of ` 2 payable as:

On application - ` 3
On allotment - ` 4 (including premium)
On first call -`3
On second and final call - ` 2
Mr. E who holds 100 shares failed to pay the first call money. The company has forfeited the
100
shares after the first call. On forfeiture, the amount debited to share capital account = ?
a) ` 1,200 (b) ` 1,000
(c) ` 800 (d) ` 700

Use the following information for questions 72 and 73.

D Ltd. issued 10,000 equity shares of ` 10 each at a premium of 20%. The share amount was
payable
as:
On application `2
On allotment (including premium) `5
On first call `3
On second and final call `2
Applications were received for 14,000 shares and the shares were allotted to applicants on pro
rata basis. E, who was allotted 300 shares, failed to pay the first call. On his subsequent failure
to pay the second and final call, all his shares were forfeited. Out of the forfeited shares, 200
shares were re-issued @ ` 9 per share.

72. The amount transferred to capital reserve = ?

a) ` 200 c) ` 800
b) ` 1,100 d) ` 1,300

73. Balance in share forfeiture accounts = ?

a) ` Nil. c) ` 800
b) ` 700 d) ` 1,300

74. The following statements apply to equity / preference shareholders. Which one of them
applies only to Preference Shareholders?
a) Shareholders risk the loss of investment.
b) Shareholders bear the risk of no dividends in the event of losses.
c) Shareholders usually have the right to vote.
d) Dividends are usually a fixed amount in every financial year.

75. The Securities Premium amount may be utilized by a company for ______
a) Writing off any loss on sale of fixed asset
b) Writing off any loss of revenue nature

Unique Academy 3.22 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
c) Payment of dividends.
d) Writing off the expenses / discount on the issue of debentures.

Answers
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
d a B b A b c D d b d c d c a d b d a a d d d c b
26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
d b B a A d a C d b d b c d a b b c c b d a d c c
51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75
d a D b c C d D c d a a d d d a b d d d c c c d d

1. Nominal value of shares allotted to the public is called capital.

(a) Authorized (b) Reserve
(c) Paid up (d) Nominal.

2. Paid up value of shares allotted is called capital

(a) Uncalled (b) Issued
(c) Subscribed (d) Nominal.

3 As per section 69 (3) of the Companies Act, 1956, the minimum amount payable on share
application should be percent.
(a) 10 (b) 5
(c) 20 (d) 5

4 As per SEBI guidelines, the minimum amount payable on share application should be of
nominal value of share.
(a) 10 (b) 20
(c) 25 (d) 5

5 As per table A, the amount on call on a share must not exceed ____ percent.
(a) 5 (b) 10
(c) 20 (d) 25

9 If shares are issued at it’s face value, it is called as issue at

(a) Premium (b) Discount e
(c) Par (d) None of these

10 is deducted from the share capital to know the paid up value of shares
(a) Calls in Advance (b) Calls in Arrears
(c) Forfeited Shares (d) Discount on Issue

11. Interest on Calls –in–arrears is for the company.

Unique Academy 3.23 Prof. Ashish Parikh – 8007978700
Corporate & Mangement Accounting Issue of Shares.
(a) Income (b) Expenditure
(c) Gain (d) Loss

12. When shares are forfeited, share capital account is

(a) Debited (b) Credited
(c) Adjusted (d) None of these

13. The excess price received over the par value of shares, should be to Securities Premium
Account.
(a) Debited (b) Credited
(c) Adjusted (d) None of these.

14. The shares which are redeemed after a particular period are called
(a) Ordinary Shares (b) Redeemable Preference Shares
(c) Cumulative Preference Shares

15 . A share is a property.
(a) Movable (b) Immovable

16. Share Capital of a Joint stock company is a

(a) Owned Capital (b) Borrowed Capital

17. A shareholder is a of a Joint stock company.

(a) Creditor (b) Owner
(c) Donor

18 . Preference shares entitled to arrears of dividend are known as

(a) Participating Preference Shares (b) Convertible Preference Shares
(c) Cumulative Preference Shares.

19. The Capital with which a company is registered is called

(a) Authorised Capital (b) Issued Capital
(c) Subscribed Capital.

20. A person who purchases shares of a company is known as

(a) Creditor (b) Debtor
(c) Owner

21. The amount of capital which is actually subscribed by the public is known as
(a) Issued capital (b) Paid up Capital
(c) Subscribed Capital.

22. The shares which can claim the arrears of dividend in future are known as
(a) Redeemable Preference Shares (b) Cumulative Preference Shares
(c) Participating Preference Shares.

Unique Academy 3.24 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
ANSWERS
1 Nominal. 13 Credited.
2 Subscribed 14 Redeemable preference shares.
3 5 15 Movable
4 20. 16 Owned Capital
5 20 17 Owner.
6 5% 18 Cumulative Preference shares.
7 6% 19 Authorised Capital.
8 Prospectus. 20 Owner.
9 par. 21 Subscribed Capital.
10 Calls in arrears. 22 Cumulative Preference shares.
11 Income. 23 Reserve.
12 Debited.

(1) The Board of Directors of a company decided to issue minimum number of equity shared of ` 10
each at 10% discount to redeem ` 5,00,000 preference shares. The maximum amount of divisible
profits available for redemption is ` 3,00,000. The number of share to be issued by the company
will be
(a) ` 18,182 shares (b) ` 22,223 shares
(c) ` 20,000 shares (d) ` 25,000 shares

(2) Preference shares amounting to ` 2,00,000 are redeemed at a premium of 5% issue of equity
shares amounting to ` 1,00,000 at a premium of 10% the amount to be transferred to capital
redemption reserve account will be
(a) ` 1,05,000 (b) ` 1,00,000
(c) ` 2,00,000 (d) ` 1,11,000

(3) Preference shares of ` 3,00,000 are redeemed at par for which fresh equity shares of `
1,20,000 are issued at 20% premium. What amount should be transferred to capital redemption
reserve account?
(a) ` 60,000 (b) ` 24,000
(c) ` 36,000 (d) ` 1,80,000

(4) Preference shares amounting to ` 50,000 are redeemed at a premium of 5% by issue of equity
shares amounting to ` 25,000 at a premium of 10%. The amount to be transferred to capital
redemption reserve
(a) ` 75,000 (b) ` 25,000
(c) ` 10,000 (d) ` 50,000

(5) A company cannot issue redeemable preference shares for a period exceeding
(a) 10 years (b) 20 years
(c) 15 years (d) 25 years
Unique Academy 3.25 Prof. Ashish Parikh – 8007978700
Corporate & Mangement Accounting Issue of Shares.

(6) Preference shares amounting to ` 75,000 are redeemed at a premium of 5% by issue of equity
shares amounting to ` 40,000 at a premium of 10%. The amount to be transferred to capital
redemption reserve account will be
(a) ` 35,000 (b) ` 36,750
(c) ` 38,500 (d) ` 1,15,000

(7) A company cannot issue redeemable preference shares for the period exceeding
(a) ` 10 years (b) ` 20 years
(c) ` 30 years (d) ` 15 years

(8) A company issued ` 20,000, 15% debentures at a discount of 10% redeemable after 15 year at a
premium of 5%. Loss on issue of debentures will be
(a) ` 1,400 (b) ` 1,000
(c) ` 3,000 (d) None of the above

(9) S Ltd. issued 2,000, 10% Preference shares of ` 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 ` 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) ` 50,000 (b) ` 40,000
(c) ` 2,00,000 (d) ` 2,20,000

(10) S Ltd. issued 2,000, 10% Preference shares of `. 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 ` 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 to the Capital Redemption Reserve Account will
be__________
(a) ` 50,000 (b) ` 40,000
(c) ` 2,00,000 (d) ` 2,20,000

(11) A company cannot issue redeemable preference shares for a period exceeding.
(a) 6 years (b) 7 years
(c) 8 years (d) 20 years

(12) Light Ltd. has 10,000 5% preference shares of ` 10 each to be redeemed after 5 years. The
company forfeited 500 preference shares on which final call of ` 2 has not been received after due
notice, and cancelled these shares on account of redemption. Remaining shares were redeemed out
of reserves of the company. The amount to be credited to capital redemption reserve will be
(a) ` 1,00,000 (b) ` 95,000
(c) ` 99,000 (d) ` 99,500

(13) Indigo Ltd. had 9,000, 10% redeemable preference shares of ` 10 each, fully paid up. The
company decided to redeem these [reference shares at par by the issue of sufficient number of
equity shares of ` 10 each fully paid up at a discount of 10%. The number of equity shares issued
should be:
(a) ` 9,000 (b) ` 11,000

Unique Academy 3.26 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue of Shares.
(c) ` 10,000 (d) None of the above

(14) Preference shares amounting to ` 1,00,000 are redeemed at a premium of 5% by issue of

shares amounting to ` 50,000 at a premium of 10%. The amount to be transferred to capital
redemption reserve account will be:
(a) ` 55,000 (b) ` 50,000
(c) ` 45,000 (d) ` 57,500

(15) Ankush Ltd. had issued 10,000, 10% Redeemable Preference Shares of ` 100 each, fully paid up.
The company decided to redeem these preference shares at par, by issue of sufficient number of
equity shares of ` 10 each at a premium of ` 2 per share as fully paid up. The amount to be
transferred to capital redemption reserve account will be_______
(a) `. 10,00,000 (b) ` 12,00,000
(c) ` 8,00,000 (d) Nil

(16) The Board of Directors of a company decided to issue minimum number of equity shares of ` 10
each at 10% discount to redeem ` 5,00,000 preference shares. The maximum amount of divisible
profits available for redemption is ` 3,00,000. The number of shares to be issued by the company
will be
(a) 20,000 shares (b) 22,223 shares
(c) 18,182 shares (d) 25,000 shares

(17) Rich Ltd. had 3,000, 12% Redeemable preference shares of ` 100 each, fully paid up. The
company issued 25,000 equity shares of ` 10 each at par and 1,000 14% debentures of ` 100 each.
All amounts were received in full. The payment was made in full. The amount to be transferred to
Capital Redemption Reserve Account is
(a) Nil (b) 2,00,000
(c) Rs. 3,00,000 (d) 50,000

(18) Ankush Ltd. had issued 10,000, 10% Redeemable Preference Shares of ` 100 each, fully paid up.
The company decided to redeem these preference shares at par, by issue of sufficient number of
equity shares of ` 10 each at a premium of ` 2 per share as fully paid up. The amount to be
transferred to capital redemption reserve account will be
(a) ` 10,00,000 (b) ` 12,00,000
(c) ` 8,00,000 (d) Nil

(19) The paid up capital of the company consisted of 3,000 6% preference shares of ` 100 each and
40,000 equity shares of ` 10 each. Interim dividend on equity shares was paid during he year at 75
paise per share. Last year’s profit is ` 31,000; Current year’s profit ` 52,000; The following
appropriations were passed at the annual general meeting of the company
(i) To pay the years dividend on preference shares.
(ii) To pay final dividend on equity shares at 50 paise per share
(iii) To transfer ` 5,000 to general reserve.
The balance of Profit and Loss appropriation A/c to be transferred to Balance Sheet will be
(a) ` 40,000 (b) ` 12,000
(c) ` 15,000 (d) None of the three

Unique Academy 3.27 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Cash Flow Statement

Chapter 5 – Cash Flow Statements

Cash Flow Statement provides information about the cash receipts and payments of a firm for
a given period. It provides important information that compliments the profit and loss
account and balance sheet. The information about the cash flows of a firm is useful in
providing users or financial statements with a basis to assess the ability of the enterprise
to generate cash and cash equivalents and the needs of the enterprise to utilize these cash
flows. The statement deals with the provision of information about the historical changes in cash
equivalents of an enterprise by means of a cash flow statement which classifies cash flows
during the period in operating, investing and financing activities.

AS-3 Revised — Cash Flow Statements

 Cash flow statement provides information about the cash receipts and payments of
an enterprises for a given period. It provides important information that supplements
the profit and loss account and balance sheet.
 AS-3 (Revised) is mandatory in nature in respect of accounting periods commencing on or
after 1-4-2001 for the following:
(i) Enterprises whose equity or debt securities are listed on a recognized stock exchange in
India, and enterprises that are in the process of issuing equity or debt securities that will
be listed on a recognized stock exchange in India.
(ii) All other commercial, industrial and business reporting enterprises, whose turnover for
the accounting period exceeds 50 crores.

Meaning of Certain Terms

 'Cash' comprises cash on hand and demand deposit with banks.

 'Cash equivalents' are short term, highly liquid investments that are readily convertible
into known amounts of cash and which are subject to an insignificant risk of changes in value.
Examples of cash equivalents are, treasury bills, commercial paper, etc.
 'Cash flows' are inflows and outflows of cash and cash equivalents. It means the
movement of cash into the organization and movement of cash out of the organization. The
difference between the cash inflows and outflows is known as 'net cash flow' which can be
either net inflow or net cash outflow.

Classification of Cash Flows

The cash flow statement relating to a particular period is classified into the following three
main categories of cash inflows and cash outflows:
(a) Cash flows from operating activities .
(b) Cash flows from investing activities.
(c) Cash flows from financing activities.

Cash Flows from Operating Activities

Operating activities are the principal revenue -producing activities of the enterprise
and other activities that are not investing or financing activities. Operating activities

Unique Academy 5.1 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Cash Flow Statement
include cash effects of those transactions and events that enter into the determination
of net profit or loss. Following are examples of cash flows from operating activities.
 Cash receipts from the sale of goods and the rendering of services.
Cash receipts from royalties, fees, commissions, and other revenue.
 Cash payments to suppliers for goods and services.
 Cash payments to and on behalf of employees.
Cash receipts and payments of an insurance enterprise for premiums and claims,
annuities and other policy benefits.
 Cash payments or refunds of income tax unless they can be specifically identified
with financing and investing activities, and
Cash receipts and payments relating to future contracts, forward contracts, option
contracts, and swap contracts when the contracts are held for dealing or trading
purposes.

Cash Flows from Investing Activities

Investing activities are the acquisition and disposal of long -term assets and other
investments not included in cash equivalents. In other words, investing activities include
transactions and events that involve the purchase and sale of long -term productive
assets (i.e., land, building, plant and machinery, etc.) not held for resale and other
investments. The following are examples of cash flows arising from investing activities.
x Cash payments to acquire fixed assets (including intan gibles). These payments include
those relating to capitalized research and development costs and self -constructed fixed
assets.
 Cash receipts from disposal of fixed assets (including intangibles).
 Cash payments to acquire shares, warrants, or debt instruments of other
enterprises and interest in joint ventures (other than payments for those instruments
considered to be cash equivalents and those held for dealing or trading purposes).
 Cash receipts from disposal of shares, warrants, or debt instruments of other
enterprises and interests in joint ventures (other than receipts from those instruments
considered to be cash equivalents and those held for dealing or trading purposes).
 Cash advances and loans made to third parties (other than advances and loans made by
a financial enterprise).
 Cash receipts from the repayments of advances and loans made to third parties (other
than advances and loans of a financial enterprise)
■ Cash receipts and payments relating to futures contracts, forward contracts,
option contracts, and swap contracts except when the contracts are held for dealing or
trading purposes, or the receipts and payments are classified as financing activities.

Cash flows from from Financing Activities

Financing activities are activities that result in change in the size and composition of the
owners' capital (including preference share capital in the case of a company) and
borrowings of the enterprise. Following are the examples of cash flows arising from
financing activities.
 Cash proceeds from issuing shares or other similar instruments.

Unique Academy 5.2 Prof. Ashish Parikh – 8007978700

 Corporate & Mangement Accounting Cash Flow Statement
 Cash proceeds from issuing debentur es, loans, notes, bonds and other shor t
ter m borrowings.
 Cash repayments of amounts borrowed, i.e., redemption of debentures, bonds, etc.
 Cash payments to redeem preference shares.
 Payment of dividend.

In addition to the general classification of three types of cash flows, AS — 3 (Revised) provides
for the treatment of the cash flows of certain special items as under:
Cash flow Statement (Direct Method)
Cashflows From Operating Acctivities
Cash Receipts from Customers xxx
Cash Paid to Suppliers and Employees (xxx)
Cash Generated from Operations xxx
Income Tax Paid (xxx)
Cashflow before Extraordinary Items xxx
Proceeds from Earthquake Disaster Settlement Etc. xxx
Net Cashflow from Operating Activities (a) xxx

Cashflow from Investing Activities

Purchase of Fixed Assets (xxx)
Proceeds from Sale of Equipment xxx
Interest Received xxx
Dividend Received xxx
Net Cashflow from Investing Activities (b) xxx

Cashflows from Financing Activities

Proceeds from Issuance of Share Capital xxx
Proceed from Long Term Borrowings xxx
Repayments of Long Term Borrowings (xxx)
Interest Paid (xxx)
Dividend Paid (xxx)
Net Cashflow from Financing Activities (c) xxx

Net Increase (Decrease) in Cash Equivalents during the period (a + b + c) xxx

Cash and Cash Equivalents at Beginning of Period xxx
Cash and Equivalents at End of Period xxx

Cash flow Statement (Indirect Method)

Cashflow from Operating Activities
Net Profit Before Tax and Extraordinary Items xxx
Adjustment For :
 Depreciation xxx
 Foreign Exchange xxx
 Investments xxx
 Gain or Loss on Sale of Fixed Assets (xxx)
 Interest / Dividend xxx

Unique Academy 5.3 Prof. Ashish Parikh – 8007978700

 Corporate & Mangement Accounting Cash Flow Statement

Operating Profit Before Working Capital Changes xxx

Add : Increase in Current Liabilities (Excluding Bank Overdraft) xxx
Decrease in Current Assets (Excluding Cash and Bank Balance) (xxx)
Less : Increase in Current Assets (Excluding Cash Bank Balance) xxx
Decrease in Current Liabilities (Excluding Bank Overdraft) (xxx)
Cash Generated from Operations xxx
Less : Direct Tax Paid (xxx)
Net Cashflow from Operating Activities (a) xxx

Cashflow from Investing Activities

Purchase of Fixed Assets (xxx)
Sale of Fixed Assets xxx
Sale of Investments xxx
Purchase of Investments (xxx)
Interest Received xxx
Dividend Received xxx
Loans to Subsidiaries xxx
Net Cashflow from Investing Activities (b) xxx

Cashflow Financing Activities

Proceeds from Issue of Share Capital xxx
Proceeds from Long Term Borrowings xxx
Repayment to Finance / Lease Liabilities (xxx)
Dividend Paid (xxx)
Net Cashflow from Financing Activities (c) xxx

Net Increase (Decrease) in Cash and Cash Equivalents during the period (a + b + c) xxx
Cash and Cash Equivalents at the beginning of the year xxx
Cash and Cash Equivalents at the End of the Year .
xxx
` R M "

Practical Questions

Self-Practice Question 1
Prepare Cash flow Statement using Direct Method from the following Cash Account.

Particulars ` Particulars `

Unique Academy 5.4 Prof. Ashish Parikh – 8007978700

 Corporate & Mangement Accounting Cash Flow Statem
Opening Balance 10,000 Tax Paid 27,000
Cash Sales 1,50,000 Creditors 4,50,000
Sale of Machinery 70,000 Purchase of Land 1,00,000
Debtors 6,00,000 Interest paid 22,000
Dividend Received 10,000 Payment to Hire Vendor 14,000
Issue of Shares 1,00,000 (Interest Accrued D/V 4,000)
Bank Loan 50,000 Royalty paid 13,000
Sale of Investment 12,000 Payment to Creditors for plant 51,000
Brokerage Received 25,000 Dividend paid 40,000
Redemption of Preference share 1,00,000
Purchase of investment 20,000
Buyback of shares 1,00,000
Closing Balance 90,000
10,27,000 10,27,000

Self-Practice Question 2
Comparative Balance Sheets for 1998 and 1999 and income statement for 1999 of Meenakshi
Corporation Ltd. is given below:
Balance Sheets as on 31st December
Assets 1999 1998
Cash 9,000 12,000
Short Term Investments 2,000 1,000
Debtors 95,000 79,000
Provision for doubtful debts
(3,000) (2,000)
Inventory
1,03,000 92,000
Prepaid expenses
Land 6,000 5,000
Machinery and Equipment 69,000 66,000
Provision for Depreciation 1,72,000 1,56,000
(1,13,000) (1,02,000)
3,40,000 3,07,000
Liabilities
Creditors
Dividend Payable 66,000 78,000
Income Tax Payable 2,000 --
Long term Debt 3,000 5,000
Equity Share Capital 75,000 42,000
Profit and Loss Appropriation A/c 26,000 26,000
1,68,000 1,56,000
3,40,000 3,07,000

Unique Academy 5.5 Prof. Ashish Parikh – 80079787

Corporate & Mangement Accounting Cash Flow Statement
Income Statement For the year
Particulars `
Net Sales Revenue 6,00,000
Cost of Goods Sold (5,00,000)
Gross Margin 1,00,000
Operating Expenses (66,000)
Operating Income 34,000
Interest Expense (4,000)
Income Before Tax 30,000
Lawsuit Compensation 5,000
35,000
Income Tax (17,000)
18,000

The following additional information is available:

(i) Dividends declared during 1999- Z 6,000.
(ii) Market price per share on 31st December 1999- Z 14.50.
(iii) Equipment worth Z 16,000 was acquired by the issuance of long term note- Z 10,000 and by paying cash- Z
6,000.
(iv) Land was acquired for Z 3,000.

Required:
Prepare statement of cash flows using the (i) Indirect Method. (ii) Direct Method.

1. ____means those deposits which are repayable by bank on demand by the depositor.
(a) Cash in hand (b) Demand deposits
(c) Fixed deposits (d) None of the above

2. ____ are short term, highly liquid investments that are readily convertible into known
amounts of cash and which are subject to an insignificant risk of changes in value.
(a) Cash (b) Cash Equivalents
(c) Cash Flow (d) All of the above

3. are inflows and outflows of cash and cash equivalents.

(a) Cash (b) Cash Equivalents
(c) Cash Flows (d) All of the above

4. The difference between the cash inflows and outflows are known as —
(a) Net Cash Flow (b) Cash Equivalents
(c) Working Capital (d) Cash Management
Unique Academy 5.6 Prof. Ashish Parikh – 8007978700
Corporate & Mangement Accounting Cash Flow Statement

5. The cash flow statement during a period is classified into ________main categories of cash
outflows.
(a) Two (b) Three
(c) Four (d) Five

6. _____________are the principal revenue-producing activities of the enterprise and other

activities that are not investing and financing activities.
(a) Operating Activities (b) Investing Activities
(c) Financing Activities (d) None of the above

7. are the activities that results in changes in size and composition of the owner's
capital (including preference share capital in the case of a company) and borrowings of the
enterprise.
(a) Operating activities (b) Investing activities
(c) Financing activities (d) None of the above

8. Out of the following, examples of cash flow from financing activities are —
(I) Cash proceeds from issuing shares or other similar instruments.
(ii) Cash proceeds from issuing debentures, loans noted, bonds and other short term borrowing.
(iii) Cash repayments of amounts borrowed i.e. redemption of debenture, bonds etc.
(iv) Cash payments to redeem preferences shares.
(v) P a y m e n t o f d i v i d e n d
(a) (i), (ii), (iii) (b) (ii), (iii), (iv)
(c) (ii), (iv), (v) (d) All of the above

9. In the case of financial enterprises, cash flow arising from interest paid and interest and
dividends received, should be classified as —
(a) Cash flows from operating activities
(b) Cash flows from investing activities
(c) Cash flows from Financing activities
(d) All of the above

10. The aggregate cash flow arising from acquisitions and from disposals of subsidiaries or other
business units should be presented separately and classified as —
(a) Operating activities (b) Investing activities
(c) Financial Activities (d) None of the above

11. The method of converting net profit into net cash flows from operating activity is —
(a) Direct method (b) Indirect method
(c) Both (a) and (b) (d) None of the above

12. In_____ the net profit (loss) is used as the base to calculate net cash provided by or used in
operating activities.
(a) Direct method (b) Indirect method
(c) Both (a) and (b) (d) None of the above

13. K Ltd. made a profit of Z 7,00,000 after considering the following items :
Unique Academy 5.7 Prof. Ashish Parikh – 8007978700
Corporate & Mangement Accounting Cash Flow Statement

Particulars `
Preliminary Expense Written Off 10,000
Depreciation on Fixed Assets 70,000
Loss on Sale of Machinery 10,000
Provision for Doubtful Debt 15,000
Gain on Sale of Land 9,000

The following is the position of current assets and current liabilities:

Particulars 2013 ` 2014 `

Debtors 55,000 80,000
Bills Receivable 18,000 15,000
Prepaid Expenses 4,000 5,000
Creditors 35,000 45,000
Bills Payable 20,000 11,000
Expenses Payable 36,000 21,000

Calculate cash from Operating Activities.

(a) 7,49,000 (b) 7,69,000
(c) 7,59,000 (d) 7,79,000

14. Zed Ltd. provides the following information, calculate net cash flows financing activities:

Particulars 2013 ` 2014 `

Equity Share Capital 6,00,000 7,00,000
11% Debentures 1,50,000 -
14% Debentures - 3,00,000

Additional information:
(i) Interest paid on debentures Z 16,500
(ii) Dividends paid ! 60,000

During the year 2014, Zed Ltd. issued 2 bonus shares for every 3 shares held by Capitalizing
Reserve
(a) 1,75,500 (b) 1,73,500
(c) 1,73,300 (d) 1,73,330

15. Calculate the cash outflow in the following situation.

Income Tax liability for current year was estimated to 1,20,000/-.

Provision for 31.03.2014 31.03.2013

Taxation 1,00,000 70,000

(a) 1,75,500 (b) 1,73,500

(c) 1,73,300 (d) 1,73,330

Unique Academy 5.8 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Cash Flow Statement
16. The following information is available from the books of exclusive Ltd. for the year ended 31st
March 2014:
(i) Cash sales for the year were 10,00,000 and sales on account 12,00,000.
(ii) Payments on accounts payable for inventory totaled 7,80,000.
(iii) Collection against accounts receivable were 7,60,000..
(iv) Rent paid in cash 2,20,000, outstanding rent being 20,000.
(v) 4,00,000 Equity shares of 10 par value were issued for 48,00,000.
(vi) Equipment was purchased for cash 16,80,000.
(vii) Dividend amounting to 10,00,000 was declared, but yet to be paid.
(viii) 4,00,000 of dividends declared in the previous year were paid.
(ix) An equipment having a book value of 1,60,000 was sold for 2,40,000.

Calculate

(i) Cash flow from Operating Activities.

(a) 7,60,000 (b) (14,40,000)
(c) 44,00,000 (d) 37,20,000

(ii) Cash Flow from investing Activities.

(a) 7,60,000 (b) (14,40,000)
(c) 44,00,000 (d) 37,20,000

(iii) Cash Flow from Financing Activities.

(a) 7,60,000 (b) (14,40,000)
(c) 44,00,000 (d) 37,20,000

Unique Academy 5.9 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Ratio Analysis

Chapter 6 – Ratio Analysis

Ratio analysis is used to evaluate relationship among financial statement items. The ratios are used to
identify trends overtime for one organization or to compare two or more organization at one point of
time.

Ratio analysis is an important tool for any business organization. The computation of ratios facilitates
the comparison of firms which differ in size. Ratios can be used to compare a firm’s financial
performance with industry averages. In addition, ratios can be used in form of trend analysis to
identify areas where performance has improved or deteriorated over time.

Classification of Ratios

1. Profitability Ratios
Profitability ratios gives some yardstick to measure the profit in relatives terms with reference to
sales, assets or capital employed. These rations highlight the end result of business activities. The
main objective is to judge the efficiency of the business.

2. Turnover Ratios or Activity Ratios

These ratios are used to measure the effectiveness of the use of capital/assets in the business. These
ratios are usually calculated on the basis of sales or cost of goods sold and are expressed in integers
rather than as percentages.

3. Financial Ratios or Solvency Ratios

These ratios are calculated to judge the financial position of the organization from short-term as well as
long-term solvency point of view. Thus, it can be subdivided into: (a) Short-term Solvency Ratios
[Liquidity Ratios] and (b) Long-term Solvency Ratios [Capital Structure Ratios]

4. Market Test Ratios

These are of course, some profitability ratios, having a bearing on the market value of the shares.

Profitability Ratios

1. Return on Investment
This ratio is also known as overall profitability ratio or return on capital employed. The income (output)
as compared to the capital employed (input) indicates the return on investment. It shows how much the
company is earning on its investment. This ratio is calculated as follows:-

Return on Investment =

Unique Academy 6.1 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis

Net Operating Profit = EBIT – Non operating income

Capital Employed = Share Capital + Reserve and Surplus + Long Term Loans - Non Operating
Investment - Fictitious Assets
Or
Capital Employed = Net Fixed Asses + Working Capital

DU - POINT ANALYSIS
The overall profitability ratio has two components. These are the net profit ratio. These are the new
profit ratio (operating profit/sales *100) multiplied by turnover ratio (sales/capital
employed).Therefore, ROI, in terms of percentage:

If a management wants to maximize its profitability, it could do so by improving its net profit ratio and
turnover ratio. The former refers to the margin made in each sale in terms of percentage whereas, the
latter shows the utilization, i.e. , rotation of the capital in making the sale.

2. Return on shareholders’ Funds

It is also referred to as return on net worth. In this case it is desired to work out the profitability of
the company from the shareholders’ point of view and it is computed as follows:

3. Return on Assets
Here the profitability is measured in terms of the relationship between net profits and assets. It
shows whether the assets are being properly utilized or not. It is calculated as :-

Where, total asset is sum of fixed assets & current assets.

4. Gross Profit Ratio or Gross Margin

Gross Profit Ratio expresses the relationship of gross profit to net sales or turnover. Gross profit is
the excess of proceeds of goods sold and services rendered during a period over their cost, before
taking into account administration, selling and distribution and financing charges. Gross profit ratio is
expressed as follows:-

Unique Academy 6.2 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
5. Net Profit Ratio
.

One of the components of return on capital employed is the net profit ratio (or margin on sales) :-

6. Operating Ratio
The ratio of all operating expenses ( i.e., material used, labour, factory overheads, office and selling
expenses) to sales is the operating ratio. A comparison of the operating ratio would indicate whether
the cost content is high or low in the figure of sales

Material Cost Ratio =

Labour Cost Ratio =

Factory Overheads Cost Ratio =

Administrative Expenses Ratio =

Selling and distribution expenses ratio =

All these Ratio Total upto the Operating Ratio.

Activity Ratio or Turnover Ratios

1. Capital Turnover Ratio

This ratio shows the efficiency of capital employed in the business and calculated as follows :-

Capital Turnover Ratio =

2. Total Assets Turnover Ratio

This ratio is ascertained by dividing the net sales by the value of total assets. Thus

Total Assets Turnover Ratio =

3. Fixed Assets Turnover Ratio

This ratio indicates the number of times fixed assets are being turned over in a stated period. It is
calculated as :-

Unique Academy 6.3 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis

Fixed Assets Turnover Ratio =

4.Working Capital Turnover Ratio

This ratio shows the number of times working capital is turned-over in a stated period. This ratio is
calculated as :-

Working Capital Turnover Ratio =

5. Stock Turnover Ratio

This ratio is an indicator of the efficiency of the use of investment in stock .It is calculated as :-

Stock Turnover Ratio = Or

6. Debtors Turnover Ratio

These days some amount of sales always locked up in the form of book debts. Efficient credit control
and prompt collection of amounts due will means lower investments in book debts. This ratio measures
the net credit sales of a firm to the recorded trade debtors thereby indicating the rate at which cash
is generated by turnover of receivable or debtors. This ratio is calculated as :-

Debtors Turnover Ratio =

Debt Collection Period

This ratio indicates the extent to which the debts have been collected in time. This ratio is infact,
interrelated with and dependent upon the debtors turnover ratio. It is calculated by dividing the days
in a year by the debtors turnover. This ratio can be computed as follows :-

Or
⁄

Or

7. Creditors Turnover Ratio

Unique Academy 6.4 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
This ratio indicated the speed at which the payments for credit purchases are made to creditors. This
ratio is computed as follows:-

Creditors Turnover Ratio =

The term ‘creditors’ include, trade creditors and bills payable. In case the details regarding credit
purchases, opening and closing balances of creditors are not available, then instead of credit
purchases, total purchases may be taken and in place of average creditors, the balance available may
be substituted.

Debt Collection Period

This ratio gives the average credit period enjoyed from the creditors. It can be computed as under:-

Or
⁄

Or

Financial Ratios or Solvency Ratios

A. Liquidity Ratio

1. Current Ratio
Current ratio is also known as the working capital ratio is the most widely used ratio. It is the ratio of
total current assets to current liabilities and is calculated by dividing the current assets by current
liabilities.
Current Ratio =

Current assets are those assets which can be converted into cash in the short-run or within one year.
Likewise current liabilities are those which are to be paid off in the short-run. Current assets normally
include cash in hand or at bank, inventories, sundry debtors, loans and advances etc while current
liabilities consists of sundry creditors, bills payable, provisions for taxation, bank overdraft etc.

2. Liquid Ratio or Quick Ratio or Acid Test Ratio

Unique Academy 6.5 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
This ratio is calculated by relating liquid assets to current liabilities. Liquid assets mean those which
are intermediary converted into cash without much loss. All current assets except inventories and
prepaid expenses are categorized as liquid assets. This ratio can be computed as :-

Current Ratio =

This ratio may also be computed by substituting liquid liabilities in place of current liabilities. Liquid
liabilities mean those liabilities which are payable within a short period. Bank overdraft and cash credit
facilities are to be excluded from current liabilities to arrive at liquid liabilities. Thus :-

Quick Ratio =

This ratio is an indicator of the liquid position of an enterprise. Generally, a Quick Ratio of 1:1
considered as ideal as the firm can easily meet all current liabilities.

B. Long Term Solvency Ratios

1. Debt-Equity Ratio
Debt-equity ratio is the relation between borrowed and owners’ capital in a firm, it is also known as
external-internal equity ratio. The debt-equity ratio is used to ascertain the soundness of long-term
financial policies of the business. Debt means long-term loans i.e. debentures of long term loans from
financial institutions. Equity here means shareholders’ fund i.e. preference share capital, equity share
capital, reserves less loss and fictitious assets like preliminary expenses.
It is calculated in the following way :-

Normally in India an ideal debt equity ratio is considered to be 2:1.

2. Proprietary Ratio
This ratio is variant of debt-equity ratio which establishes the relationship between shareholders fund
and total assets. Shareholders’ fund means, share capital both equity and preference and reserve and
surplus less loss.

This ratio is worked out as follows:-

Proprietary Ratio =

3. Fixed Assets Ratio

Unique Academy 6.6 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
The ratio of fixed assets to long-term funds is knows as fixed assets ratio. It focus on the proportion
of long-term funds invested in fixed assets. The ratio is expressed as follows.

Fixed Assets Ratio =

Fixed assets refer to net fixed assets. (i.e. original cost –depreciation to date) and trade investments
including shares in subsidiary. Long-term funds include share capital reserves and long-term loans.

4. Debt-Services Ratio
This ratio is also known as fixed charges cover or interest cover. This ratio measures the debt-
servicing capacity of a firm in so far as fixed interest on long-term loan is concerned. It is determined
by dividing the net profit before interest and taxes by the fixed charges on loans. Thus :-

Debt - Services Ratio =

This ratio is expressed as ‘number of times’ to indicate that profit is number of times the interest
charges. The ideal ratio should be 6 to 7 times.

5. Capital Gearing Ratio

The proportion between fixed interest bearing funds and non-fixed interest bearing funds in the total
capital employed in the business is termed as capital gearing ratio. Debentures, long-term loans and
preference shares capital belongs to the category of fixed interest bearing funds. Equity share
capital, reserve and surplus constitute non-fixed interest bearing funds.

This ratio calculated as follows :-

Capital Gearing Ratio =

Market Test Ratios

These ratios are calculated generally in case of such companies whose shares and stock are traded in
the stock exchanges. Shareholder, present and probable, are interested not only in the profits of the
company but also in the appreciation of the value of their shares in the stock market.

1. Earnings Per Share (EPS)

This ratio measures the profit available to the equity shareholder on a per share basis.

EPS =

2. Price Earning Ratio

Unique Academy 6.7 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
This ratio establishes relationship between the market price of the shares of a company and it’s
earning per share (EPS). It is calculated as under :-

Price Earning Ratio (P/E) =

3. Pay-Out Ratio
This ratio expresses the relationship between what is available as earning per share and what is
actually paid in the form of dividends out of available earnings.

Pay-out Ratio =

4. Dividend Yield Ratio

This ratio establishes the relationship between the market price and the dividend paid per shares. It
is expressed as a percentage and gives the rate of return as a market value of the shares and helps in
the decision of investors who are more concerned about returns on their investment rather than its
capital appreciation. This ratio is calculated as under :-

Dividend Yield Ratio =

Practical Questions

Self-Practice Question 1
Find Return on Investment, Return of Shareholder Fund, Return on Equity Share

Fixed Assets -> Rs.4,50,000

Current Assets-> Rs.1,50,000
Investment in Government Securities -> Rs.1,00,000
Sales -> Rs.5,00,000
Cost of goods sold -> Rs.3,00,000
Equity Share capital-> Rs.2,00,000
Preference Share Capital -> Rs.1,00,000
Reserve and Surplus -> Rs.1,00,000
Income from Investment -> Rs.1,00,000
Interest on debenture @ 10% -> Rs.10,000
Preference Share Capital = 10%
Provision for Tax @ 50% of Net Profit for Rs.1,00,000

Self-Practice Question 2
Earning before Tax = Rs.1,00,000
Tax Rate = 15%
10% Preference Share Capital = Rs.1,00,000

Unique Academy 6.8 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
Equity Share Capital (Rs.10)= Rs.1,00,000
Find Earning Per Share.

Self-Practice Question 3
Market Price Per Share = Rs 30
Earning Per share = Rs 6
Find Price Earning Ratio.

Self-Practice Question 4
Current Ratio = 2.5
Working Capital = Rs.60,000

Find :- Current Asset = ?

Current Liability = ?

Self-Practice Question 5
Opening Stock = Rs.29,000
Closing Stock = Rs.31,000
Sales = Rs.3,20,000
Gross Profit Ratio = 25% of Sales
Calculate Inventory Turnover Ratio.

Self-Practice Question 6
Debtors Velocity = 3 months
Stock Velocity = 8 months
Creditors Velocity = 2 months
Gross Profit Ratio = 25%
Gross Profit = Rs.4,00,000
Closing sock is Rs.10,000 more than the opening stock.
Bills Receivable = Rs.25,000
Bills Payable = Rs.10,000

Find =
a) Sales
b) Debtors
c) Closing stock
d) Creditors

Self-Practice Question 7
Stock Velocity = 6
Capital Turnover Ratio (Based on COGS) = 2
Fixed asset turnover ratio (COGS) = 4
Gross Profit Ratio = 20%

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Corporate & Mangement Accounting Ratio Analysis
Debtor Velocity = 2 months
Creditor Velocity = 73 days
Gross Profit = Rs.60,000
Reserve and surplus = Rs.20,000
Closing Stock = Opening stock + Rs.50,000

Find
a) Current Assets
b) Current Liabilities
c) Debtors
d) Creditors
e) Closing Stock
f) Average Stock
g) Cost of goods sold
h) Purchase

Self-Practice Question 8
Current Ratio = 2:5
Liquid Ratio = 1:5
Working capital = Rs.3,00,000
Stock Turnover Ratio (COGS) = 6 times
Gross Profit Ratio = 20%
Fixed asset turnover ratio (COGS) = 2 times
Debt collection period of 2 months
Fixed assets to Shareholder Net worth = 0.80
Reserve and Surplus to Capital = 0.50

Prepare Balance Sheet.

Self-Practice Question 9
Working Capital = Rs.75,000
Current Ratio = 1.75
Liquid Ratio = 1.15
Reserve and surplus = Rs.1,00,000
Bank overdraft = Rs.60,000
Fixed assets to provident fund = 0.75
Long term Liabilities = Nil

Prepare Balance Sheet.

Self-Practice Question 10
Current Ratio = 2
Working capital = Rs.4,00,000

Unique Academy 6.10 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
Capital block to current asset = 3:2
Fixed Asset to Turnover = 1:3
Cash Sales/Credit Sales = 1:2
Stock Velocity = 2 months
Creditors Velocity = 2 months
Debtors Velocity = 3 months

Capital Block :-
Net profit = 10% of Turnover
Reserve 2 ½ of Turnover
Debentures/share capital = 1:2
Gross Profit Ratio = 25% of sales.

Additional Questions

Illustration 1
From the Following figures extracted from the Income Statement and the Balance Sheet of Anu Sales
Pvt. Ltd., calculate the Return on Total Capital Employed (ROI):
Particulars Rs. Particulars Rs.
Fixed Assets 4,50,000 Reserves 1,00,000
Current Assets 1,50,000 Debentures 1,00,000
Investment in Govt. Securities 1,00,000 Income from Investments 10,000
Sales 5,00,000 Interest on Debentures at 10% 10,0000
Cost of goods Sold 3,00,000 Provision for Tax at 50% of Net 1,00,000
share capital: Profits
10% Preference 1,00,000
Equity 2,00,000

Illustration 2
The profit of a company works out to 12.5% on capital employed in 1996. The details are as follows:
Particulars (Rs. ‘000)
Sales 500
Direct Materials 250
Direct Labour 100
Variable Overheads 40
Capital employed 400

Forecast for 1997 indicates that sales will increase by 10%; selling price will go up by 4%; and cost
elements will go down by 2%. Assuming no change in the capital employed. Calculate the return on
Capital Employed?

Illustration 3

Unique Academy 6.11 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
Calculate the earnings per share from the following data:
Net Profit before Tax Rs.1,00,000.
Taxation at 50% of Net Profit.
10% Preference Share Capital (Rs.10 each) Rs.1,00,000.
Equity Share Capital (Rs.10 share) Rs.1,00,000.

Illustration 4
Calculate the Gross Profit Ratio from the following figures:
Particulars Rs. Particulars Rs.
Sales 1,00,000 Purchases 60,000
Sales Returns 10,000 Purchases Returns 15,000
Opening Stock 20,000 Closing Stock 5,0000

Illustration 5
Calculate Net Profit from the following data:

Particulars Rs. Particulars Rs.

Sales less Returns 1,00,000 Selling Expenses 10,000
Gross Profit 40,000 Income from Investment 5,000
Administration Expenses 10,000 Loss on account of fire 3,000

Illustration 6
The operating profit of A Ltd. after charging interest on debentures and tax is a sum of Rs.10,000.
The amount of interest charged is Rs.2,000 and the provision for tax has been made of Rs.4,000.
Calculate the interest charges cover ratio.

Illustration 7
Compute the Pay-out Ratio and the Retained Earnings Ratio from the following data:

Particulars Rs. Particulars Rs.

Net Profit 10,000 No. of Equity Shares 3,000
Provision for Tax 5,000 Dividend per equity share Re.0.40
Preference Dividend 2,000

Illustration 8
Determine which company is more profitable.
Particulars A Ltd. B Ltd.
Net Profit Ratio 5% 8%
Turnover Ratio 6 times 3times

Illustration 9

Unique Academy 6.12 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
The following details have been given to you for Messer’s Reckless Ltd. for two years. You are required
to find out the Fixed Assets Turnover Ratio and comment on it.
Particulars 1994 1995
Fixed assets at written down 1,50,000 3,00,000
value 6,00,000 8,00,000
Sales less Returns

Illustration 10
Calculate the Debtors Turnover Ratio from the following figures:
Particulars Rs.
Total Sales for the year 1995 1,00,000
Cash Sales for the year 1995 20,0000
Debtors as on 1.1.1995 10,000
Debtors as on 31.12.1995 15,000
Bills Receivable as on 1.1.1995 7,500
Bills Receivable as on 31.12.1995 12,500

Illustration 11
From the following figures, calculate the Creditors’ Turnover Ratio and the Average Age of Account
Payable:
Particulars Rs. Particulars Rs.
Creditors Purchases during 1995 1,00,000 Bills Payable on 1.1.1995 4,000
Creditors on 1.1.1995 20,000 Bills Payable on 31.12.1995 6,000
Creditors on 31.12.1995 10,000

Illustration 12
Following is the Trading Account of Skylarks Ltd. Calculate the Stock Turnover Ratio:

Trading Company
Particulars Rs. Particulars Rs.
To Opening Stock 40,000 By Sales 2,00,000
To Purchases 1,00,000 By Closing Stock 20,000
To Carriage 10,000
To Gross Profit 70,000
2,20,000 2,20,000

Illustration 13
From the following, Compute the Fixed Assets Ratio:
Particulars Rs. Particulars Rs.
Share Capital 1,00,000 Furniture 25,000

Unique Academy 6.13 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
Reserves 50,000 Trade Debtors 50,000
6% Debentures 1,00,000 Cash Balance 30,000
Trade Creditors 50,000 Bills Payable 10,000
Plant and Machinery 1,00,000 Stock 40,000
Land and Buildings 1,00,000

Illustration 14
From the following, Compute the Current Ratio:
Particulars Rs. Particulars Rs.
Sundry Debtors 40,000 Sundry Creditors 20,000
Prepaid Expenses 20,000 Debentures 1,00,000
Short-term Investments 10,000 Inventories 20,000
Loose Tools 5,000 Outstanding Expenses 20,000
Bills Payable 10,000

Illustration 15
Particulars Particulars Rs.
Current Assets: Sundry Debtors 40,000
Inventories 60,000
Cash in hand 1,00,000
Current Liabilities Sundry Creditors 80,000
Bills Payable 20,000
Current Ratio 2,00,000
=  2.
100,000

In case the creditors are paid to the extent of Rs.50,000 out of cash in hand, the current ratio will be
as follows;
1,50,000
Current Ratio =  3.
50,000

Illustration 16
A business has current assets of Rs.30,000 including stock of goods of Rs.5,000. Its current liabilities
are of Rs.15,000. The current ratio is 2. However, if the business should have maintained stock of
Rs.1,50,000, the current ratio would have been as follows:
30,000  10,000 40,000
  1.
15,000  10,000 25,000

Illustration 17
From the following figures Calculate the “Debt-Equity Ratio:
Particulars Rs. Particulars Rs.
Preference Share Capital 1,00,000 Unsecured Loans 50,000

Unique Academy 6.14 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis
Equity Share Capital 2,00,000 Creditors 40,000
Capital Reserve 50,000 Bills Payable 20,000
Profit & Loss Account 50,000 Provision for Taxes 10,000
12% Mortgage Debentures 1,00,000 Provisions for Dividends 20,000

Illustration 18
(i) Current Ratio 2:5; Working Capital Rs.60,000. Calculate the amount of Current Assets and
Current Liabilities.

(ii) Opening Stock Rs.29,000; Closing Stock Rs.31,000; Sales Rs.3,20,000; Gross Profit Ratio 25% on
Sales. Calculate Stock Turnover Ratio.

Illustration 19
Following are the ratios of the trading activities of National Traders Ltd.:
Debtors Velocity 3 months
Stock Velocity 8 months
Creditors’ Velocity 2 months
Gross Profit Ratio 25 per cent
st
Gross Profit for the year ended 31 December, 1995 amounts to Rs.4,00,000. Closing Stock of the
year is Rs.10,000 above the Opening Stock. Bills Receivable amount to Rs.25,000 and Bill Payable to
Rs.10,000.

Find out:
(a) Sales
(b) Sundry Debtors
(c) Closing Stock and
(d) Sundry creditors

Illustration 20
From the following details, prepare Statement of Proprietary Funds with as many details possible:
(i) Stock Velocity = 6
(ii) Capital Turnover Ratio (on Cost of Sales) : 2
(iii) Fixed Assets Turnover Ratio (on Cost of Sales) : 4
(iv) Gross Profit Turnover Ratio : 20 percent
(v) Debtors’ Velocity : 2 months
(vi) Creditors’ Velocity : 73 days
The Gross Profit was Rs.60,000. Reserves and Surplus amount to Rs.20,000. Closing Stock was
Rs.5,000 in excess of Opening Stock.

Illustration 21
With the help of the following ratios regarding Indu Films, draw the Balance Sheet of the Company for
the year 1995:
Current Ratio 2.5
Unique Academy 6.15 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Ratio Analysis
Liquidity Ratio 1.5
Net Working Capital Rs.3,00,000
Stock Turnover Ratio (cost of sales/closing stock) 6 times
Gross Profit Ratio 20%
Fixed Assets Turnover Ratio (on cost of sales) 2 times
Debt Collection Period 2 months
Fixed Assets to Shareholders Net Worth 0.80
Reserve and Surplus to capital 0.50

Illustration 22
From the following information, prepare a Balance Sheet.
Rs.
Working Capital 75,000
Reserves and Surplus 1,00,000
Bank Overdraft 60,000
Current Ratio 1.75
Liquid Ratio 1.15
Fixed Assets to Proprietors’ Funds 0.75
Long-term Liabilities Nil

Illustration 23
From the following particulars prepare the Balance Sheet of Sri Mohan Ram & Co. Ltd.

Rs.
Current Ratio 2
Working Capital 4,00,000
Capital Block to Current Assets 3:2
Fixed Assets to Turnover 1:3
Sales Cash/Credit 1:2
Stock Velocity 2 months
Creditors Velocity 2 months
Debtors Velocity 3 months
Capital Block:
Net Profit 10% of Turnover
Reserve 2 ½ of Turnover
Debentures / Share Capital 1:2
Gross Profit Ratio – 25% (to Sales)

Illustration 24
With the following ratio and further information given below, prepare a Trading Account, Profit and
Loss Account and a Balance Sheet of ShriNarain:

Gross Profit Ratio 25%

Unique Academy 6.16 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Ratio Analysis
Net Profit/Sales 20%
Stock-turnover Ratio 10
Net Profit/Capital 1/5
Capital to Total Liabilities ½
Fixed Assets / Capital 5/4
Fixed Assets / Total Current Assets 5/7
Fixed Assets Rs.10,00,000
Closing Stock Rs.1,00,000

Illustration 25
From the following figures and ratios, draw out Balance Sheet and Trading and Profit and Loss
Account:

Rs.
Share Capital 1,80,000
Working Capital 63,000
Bank Overdraft 10,000
,,
There is no fictitious asset. In current assets there is no asset other than stock, debtors and cash.
Closing stock is 20% higher than the opening stock.
Current Ratio : 2.5
Proprietary Ratio : 0.7
Stock Velocity : 4
Net Profit Ratio : 10% (to average capital employed)
Quick Ratio : 1.5
Gross Profit Ratio : 20% to sales
Debtors’ Velocity : 36.5 days

Illustration 26
From the following information of a textile company complete the proforma balance sheet if its sales
are Rs.32,00,000.

Sales to Net Worth 2.3 times

Current Debt to Net Worth 42%
Total Debt to Net Worth 75%
Current Ratio 2.9 times
Net Sales to Inventory 4.7 times
Average Collection Period 64 days
Fixed Assets to net Worth 53.2%

Proforma Balance Sheet

New Worth ? Fixed Assets ?
Long-term debt ? Cash ?
Unique Academy 6.17 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Ratio Analysis
Current debt ? Stock ?
Sundry debtors ?
? ?

Illustration 27
Star Enterprises Ltd. indicates the following financial ratios and performance figures for the year
ending 31.3.2005:

Current ratio 2.5

Liquid ratio 1.6
Inventory turnover (on cost of sales) 8
Gross profit on sales 20%
Credit allowed 1.5 months
Net working capital Rs.3 lakhs

The Company’s fixed assets are equivalent to 80%; of its net worth i.e. share Capital and reserve &
surplus, while the latter amount to 50% of share capital.
Prepare balance sheet of the company as on 31.3.2005. Explain your workings. CWA (Inter)
June, 2005.

1._______is used to evaluate relationship among financial items

a) Ratio Analysis b) Trends Ratios
c) Accounting Ratio d) None of the above

2. The computation of____is simply a clerical work but interpretation is a test requiring act and
skill.
a) Trend b) Ratio
c) Cash d) Fund

3. _____gives some yardstick to measure the profit in relative items with reference to sales,
assets or capital employed.
a) Profitability Ratio b) Turnover Ratio
c) Financial Ratio d) Market Test Ratio

4. _______are calculated to judge the financial position of the organization from short-term as
well as long-term. Solvency point of view.
a) Profitability Ratio b) Turnover Ratio
c) Financial Ratio d) Market Test Ratio

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Corporate & Mangement Accounting Ratio Analysis
5. ______ ratio is also known as overall profitability ratio or return on capital employed.
a) Profitability b) Return on investment
c) Return on shareholders fund d) Return on assets

6. Return on investments =
a) b)

c) d)

7. Capital employed comprise –

a) Share Capital+Reserve and Surplus+Long-term Loans+non operating assets + Fictitious Assets
b) Share Capital+Reserve and Surplus+Long-term Loans-non operating assets- Fictitious Assets
c) Share Capital+Reserve and Surplus-Long-term Loans+ non operating assets + Fictitious Assets
d) Share Capital-Reserve and Surplus-Long-term Loans+ non operating assets + Fictitious Assets

8. Capital Employed =
a) Net fixed assets + Working Capital
b) Net fixed assets - Working Capital
c) Net fixed assets x Working Capital
d) Net fixed assets ÷Working Capital

9. _______ is also refer to as return on net worth.

a) Profitability b) Return on investment
c) Return on shareholders fund d) Return on assets

10. Return on assets =

a) b)

c) d)

11. The ratio of all operating expenses (i.e. materials used, labour, factory overheads, office
and selling expenses) to sales is the ______ ratio.
a) Gross Profit b) Net Profit
c) Operating d) Activity

12. Capital Turnover Ratio =

a) Net Sales + Capital Employed b) Capital Employed ÷ Net Sales
Unique Academy 6.19 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Ratio Analysis
c) Net Sales Capital Employed d) Net Sales ÷ Capital Employed

13. ______ ratio is an indicator of the efficiency of the use of investment in stock.
a) Fixed assets turnover b) Working Capital Turnover
c) Stock Turnover d) Debtors Turnover

14. ______ ratio indicates the extent to which the debt have been selected in time.
a) Debt collection Period b) Debt-Equity Ratio
c) Financial d) Liquidity

15. Creditors Turnover Ratio =

a) Credit Purchase + Average Creditors b) Average Creditors ÷ Credit Purchase
c) Credit Purchase x Average Creditors d) Credit Purchase ÷ Average Creditors

16.The term’ creditors’ includes

a)Trade Creditors b) Bills payable
c) Both (a) and (b) d) None of the above

17. ________ ratio is the relation between borrowed funds and owners’ capital in a firm.
a) Liquid b) Long-term solvency
c) Debt-Equity d) Proprietary

18. Proprietary Ratio =

a) Long-Term Funds b) Fixed Assets
c) Total Assets d) Interest Charges

19. ________ ratio is also known fixed charges cover or interest cover.
a) Debt Service b) Capital Gearing
c) Market Test d) Earning Per Share

20. The proportion between fixed interest or dividend bearing funds and non-fixed interest or
dividend bearing fund in the total capital employed in the business is termed as ____ ratio.
a) Debt Service b) Capital Gearing
c) Market Test d) Earning Per Share

21.______ ratio express the relationship between what is available as earnings per share and
what is actually paid in the form of dividends out of available earnings.
a) Price Earnings b) Pay-Out
c) Dividend Yield d) Debt-Equity.

22. Bank generally prefer debt-equity ratio at______

a) 1:1 b) 1:3
c) 2:1 d) 3:1

Unique Academy 6.20 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Ratio Analysis

23. If a company issue bonus shares the debt-equity will _____

a) Remain Unaffected b) Will Not Affected
c) Will Improve d) None of the above

24. The ideal quick ratio is ____

a) 2:1 b) 1:1
c) 5:1 d) 5:1

25. A current ratio of less than one implies that the working capital is ______
a) Positive b) Lesser
c) Negative d) More

26. The net income of company after preference dividend is Rs.40,000 and the number of equity
shares is 6,000 the EPS =
a) Rs 0.15 Per Share b) Rs.6.66 Per Share
c) Rs.1.5 Per Share d) Rs.15 Per Share

27. The market value of a share to be Rs.40 and EPS is Rs.6.66 per share . Calculate price
earning ratio
a) 6 Times b) 8 Times
c) 3 Times d) 4 Times

28. If a company declares 20% dividend on its shares of Rs.20 each having a market value Rs.40
each, then the dividend yield ratio is _____
a) 20% b) 5%
c) 10% d) 40%

29. If the dividend payout ratio is 0.40 and the P/E Ratio is 8, then calculate the dividend
yield.
a) 8% b) 5%
c) 7% d) 6%

30. The average collection period of a company is 40 days. If the receivable balance is Rs.20
lakhs then calculate the amount of sales______
a) Rs. 182.00 Lakhs b) Rs.182.52 Lakhs
c) Rs182.50 Lakhs d) Rs. 181.00 Lakhs

31. If the stock turnover = 6, cost of goods sold = Rs.54,000 & opening stock = Rs.8,000 ,
then calculate the value of closing stock.
a) Rs. 5,000 b) Rs. 15,000
c) Rs. 20,000 d) Rs. 10,000

32. The following data has been extracted from its annual accounts of a company :-
Unique Academy 6.21 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Ratio Analysis
Rs. In Lakhs
20,00,000 Equity shares of Rs 10 each 200
General Reserve 150
Investment Allowance Reserve 50
15% Long Term Loan 300
Profit before tax 140
Provision for tax 84
Proposed Dividends 10

Calculate
(i) Return on Capital Employed
a) 26.4% b) 14%
c) 25.4% d) 116%

(ii) Return on Net worth

a) 26.4% b) 14%
c) 25.4% d) 116%

33. Following information’s are given below :

 Inventory turnover ratio is 6 times.
 Year end debtors are outstanding for 2 months; Year end debtors are outstanding for 73 days.
 Ratios of cost of goods sold to : (a) Proprietors’ funds is 2:1;(b) Fixed assets is 4:1
 Closing stock is greater than the opening the opening stock by Rs.10,000
 The gross profit for the year ended 31st March,2014 is Rs.1,20,000
 Reserves and surplus appearing in the Balance sheet as at 31st March,2014 total to Rs.40,000.

The directors of Bharucha Enterprises Ltd. Ask you to ascertain :-

(i) Proprietors’ Funds

a) Rs.2,40,000 b) Rs.1,20,000
c) Rs.1,00,000 d) Rs.98,000

(ii) Fixed assets

a) Rs.2,40,000 b) Rs.1,20,000
c) Rs.1,00,000 d) Rs.98,000

(iii) Closing debtors

a) Rs.2,40,000 b) Rs.1,20,000
c) Rs.1,00,000 d) Rs.98,000

(iv) Closing stock

a) Rs.85,000 b) Rs.2,00,000
c) Rs.33,000 d) Rs.83,000

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Corporate & Mangement Accounting Ratio Analysis
v) Share Capital
a) Rs.85,000 b) Rs.2,00,000
c) Rs.33,000 d) Rs.83,000

34. Oliver incorporated has a current ratio = 1.6, and quick ratio = 1.2. The company has Rs.2
million in Sales ad its current liabilities are Rs.1 million what is company’s inventory turnover
ratio.
a) 5.0 b) 5.2
c) 5.5 d) 6.0

35. Last year, Quayle Energy had sales of Rs.200 million, and its inventory turnover ratio was
5.0 The Company’s current assets totaled Rs.100 million, and its current ratio was 1.2. What
was the Company’s quick ratio?
a) 1.20 b) 1.39
c) 0.72 d) 0.55

36. Perry Technologies Inc. had the following financial information for the past year:
Inventory turnover = 8
Quick ratio = 1.5
Sales = Rs.8,60,000
Current Ratio = 1.75

What were Perry’s current liabilities ?

a) Rs.4,30,000 b) Rs.5,00,000
c) Rs.1,07,500 d) Rs.61,429

37. Current Ratio is 2:5 Current Liability is Rs. 30,000. The Net working capital is
a) Rs. 18,000 b) Rs. 45,000
c) Rs. (-) 45,000 d) Rs.(-) 18,000

Unique Academy 6.23 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Redemption of Preference Shares s

Chapter 8 – Redemption of Preference Shares

Illustration 1
Hindustan Construction Company Ltd, had 5,000 8% Redeemable Preference Shares of ` 100 each,
fully paid up. The company decided to redeem these preference shares at par by the issue of
sufficient number of equity shares of ` 10 each fully paid up at par. You are required to pass
necessary Journal Entries including cash transactions in the book of the company.

Illustration 2
M.M.C. Ltd had 10,000 10% Redeemable Preference Shares of ` 100 each, fully paid up. The company
decided to redeem these preference shares at par, by issue of sufficient number of equity share of `
10 each at a premium of ` 2 per share as fully paid up. You are required to pass Journal Entries
including cash transactions in the books of the company.

Illustration 3
The following are the extracts from the Balance Sheet of A. Ltd. as on 31st December, 1997.

Share Capital: 40,000 Equity shares of ` 10 each fully paid – ` 4,00,000; 1,000 10% Redeemable
Preference shares of ` 100 each fully paid – ` 1,00,000;

Reserve & Surplus : Capital reserve – ` 50,000; Securities Premium – ` 50,000; General Reserve – `
75,000; Profit and loss account – ` 35,000.
On 1st January 1998, the Board of Director decided to redeem the preference shares at par by
utilization of reserve.

You are required to pass necessary Journal Entries including cash transactions in the books of the
company.

Illustration 4
Calcutta Limited had 3,000, 12% Redeemable Preference shares of ` 100 each, fully paid up. The
company had to redeem these shares at a premium of 10%.

It was decided by the company to issue the following:

(i) 25,000 Equity Shares of ` 10 each at par.
(ii) 1,000 14% Debentures of ` 100 each.

The issue was fully subscribed and all amounts were received in full. The payment was duly made. The
company had sufficient profits. Show Journal Entries in the books of the company.

Illustration 5
The capital structure of a company consists of 20,000 Equity Shares of ` 10 each fully paid up and
1,000 8% Redeemable Preference Shares of ` 100 each fully paid up.

Undistributed reserve and surplus stood as: General Reserve ` 80,000; Profit and Loss Account `
10,000; Investment Allowance Reserve (out of which ` 5000, not free for distribution as dividend) `

Unique Academy 8.1 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Redemption of Preference Shares s
10,000; Securities Premium ` 12,000. Cash at bank amounted to ` 98,000.

Preference Shares are to be redeemed at a premium of 10% and for the purpose of redemption; the
directors are empowered to make fresh issue of Equity Shares at par after utilizing the
undistributed reserve and surplus, subject to the condition that a sum of ` 20,000 shall be retained
in general reserve and which should not be utilized.

Pass Journal Entries to give effect to the above arrangements and also how the relevant items will
appear in the Balance Sheet of the company after the redemption carried out.

Illustration 6
The books of S.B. Ltd showed the following balances on 31st December, 1997:

30,000 Equity Shares of ` 10 each fully paid; 18,000 12% Redeemable Preference Shares of ` 10
each fully paid; 4,000 10% Redeemable Preference Shares of ` 10 each, ` 8 paid up.

Undistributed Reserve and Surplus stood as: Profit and Loss Account ` 80,000; General Reserve `
1,20,000; Securities Premium Account ` 15,000 and Capital Reserve ` 21,000.

Preference shares are redeemed on 1st January, 1998 at a premium of ` 2 per share. The where about
of the holders of 100 shares of ` 10 each fully paid, are not known.

For redemption, 3,000 equity shares of ` 10 each are issued at a premium of 10%. At the same time,
a bonus issue of equity share was made at par, two shares being issued for every five held on that
date out of the Capital Redemption Reserve Account.

Show the necessary Journal Entries to record the transactions.

Illustration 7
The Balance Sheet of Ananda Ltd as on 31st December, 1996 is given below:
Liabilities `. Assets `
Authorized Capital: Fixed Assets 4,00,000
10,000 Equity shares of ` 100 each 10,00,000 Investment 2,00,000
20,000 9% Redeemable preference shares Bank Balance 10,000
of ` 10 each 2,00,000 Other Current Assets 3,70,000
12,00,000
Issued and Paid-up Capital:
5,000 Equity shares of ` 100 each fully
paid-up 5,00,000
9% Redeemable preference shares of ` 10
each fully paid-up 2,00,000
Profit and Loss Account 1,60,000
Current Liabilities 1,20,000
9,80,000 9,80,000

On 1.1.97 the Company – (a) redeemed the Preference Shares at a premium of ` 2 per share; (b)

Unique Academy 8.2 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Redemption of Preference Shares s
realized Investments at a value of ` 1,60,000; (c) issued at a premium of ` 40 per share, such a
number of Equity shares for the purpose of aforesaid redemption as to ensure that after the
compliance with the requirements of the Companies Act, 1956, in regard to redemption of Preference
Shares, the Credit Balance in Profit & Loss
Account would be ` 25,000; (d) issued as bonus Equity Share at par at the rate of one share for
every 20 shares held on 31st December, 1996 out of the said balance in Profit and Loss Account.

You are required to show:

(a) Necessary Journal Entries to record the above transactions (including cash); and
(b) The Balance Sheet as on completion of the above transactions.

Illustration 8
The following is the Balance Sheet of Srabanti Company Limited as on 31.12.1995:
Liabilities ` Assets `
Share Capital: Fixed Assets
Issued and Subscribed Capital: Land and Building 8,00,000
5,000, 7.5% Redeemable Preference Plant and Machinery 6,00,000
Shares of ` 100 each 5,00,000 Furniture and Fittings 1,00,000
1,00,000 Equity Shares of ` 10 each 10,00,000 Investments, at cost (market
Reserve and Surplus value ` 2,80,000) 3,00,000
Securities Premium Account 1,00,000 Current Assets
General Reserve 7,50,000 Stock 4,70,000
Profit and Loss Account 2,00,000 Debtors 2,00,000
Current Liabilities 3,50,000 Bills Receivable 2,00,000
Cash at Bank 1,75,00
Cash at Hand 55,000
29,00,000 29,00,000

On 1.1.1996, it was decided to redeem the preference shares at a premium of 5%. To finance the
redemption, all the investments were sold at market price. 10,000 equity shares of ` 10 each at ` 9
per share and 1,000, 6% debentures of ` 100 each at par were issued.

On 1.2.1996, the company made a bonus issue of 1 equity share of ` 10 each for every 2 shares held
on that date. It was also decided to use General Reserve as minimum as possible.

Draft the Journal Entries including Cash Book entries to give effect to the above decisions and also
prepare a Balance Sheet.

Illustration 9
X Ltd. has the following Balance Sheet as on 31.3.2005:
Liabilities ` Assets `
Share Capital: Fixed Assets 22,00,000
Issued, Subscribed and fully paid-up Current Assets 8,00,000
10,000Equity shares of ` 100 each 10,00,000
5,000 Preference Shares of ` 100 each 5,00,000
Capital Reserve 1,00,000
Unique Academy 8.3 Prof. Ashish Parikh – 8007978700
 Corporate & Mangement Accounting Redemption of Preference Shares s
Securities Premium A/c 1,00,000
General Reserve 2,00,000
Profit & Loss A/c 1,00,000
Current Liabilities 10,00,000
30,00,000 30,00,000

The Preference Shares are to be redeemed at 10% premium. Fresh issue of equity shares is to be
made to the extent it is required under the Companies Act for the purpose of this redemption. The
shortfall in funds for the
purpose of the redemption after utilizing the proceeds of the fresh issue are to be met by taking a
bank loan.
Show Journal Entries. CS (Inter) –
June 2005

Illustration 10
Given below is the Balance Sheet of Shamasri Ltd. as on 31.03.2005:
Liabilities Amount ` Amount `
12% Preference Shares
5,000 Shares of ` 100 each 5,00,000.00
Less Call in arrears on 100 shares 2,000.00 4,98,000.00
General Reserve 7,50,000.00
Security Premium 50,000.00
Current Liabilities 2,50,000.00
15,48,000.00
Assets
Fixed assets 8,00,000.00
Investments 50,000.00
Bank 2,25,000.00
Cash 1,800.00
Other Current Assets 4,71,200.00
15,48,000.00

Preference shares were due for redemption on 31st July 2005 at a premium of 10%. 50 shareholders
paid the amount due on their shares and the balance shares on which call amount was not forfeited.
The forfeited shares were reissued and on receiving 80% of the face value were considered fully
paid. 4,000 Equity shares were issued at par face value being ` 100/-

On the due date Preference shares were duly redeemed and amount due settled.
Pass Journal entries and prepare Balance Sheet after redemption. CS (Inter) – June
2006

Illustration 11
The following is the balance sheet of Sachin Ltd. as on 31.03.2008:
Liabilities ` Assets `
Share Capital: Fixed Assets:
Authorized Gross Block
Unique Academy 8.4 Prof. Ashish Parikh – 8007978700
 Corporate & Mangement Accounting Redemption of Preference Shares s
20,000, 10% redeemable preference 6,00,000 4,00,000
shares of ` 10 each 2,00,000 Less Depreciation 2,00,000
1,80,000 Equity Shares of ` 10 each 18,00,000 2,00,000
20,00,000 Investments
Issued, Subscribed and paid up Current Assets, Loans & Advances:
capital: Inventory 2,00,000
20,000, 10% redeemable preference 2,00,000 50,000
share of ` 10 each 2,00,000 Debtors 40,000
20,000 equity shares of ` 10 each 4,00,000 50,000
Cash & Bank balances 1,00,000
Reserves and Surplus: 2,40,000 Miscellaneous Expenditure to the
General Reserve 1,40,000 extent not written off
Securities premium 37,000
Profit and Loss Account 23,000
Current Liabilities & Provision
Total 8,40,000 8,40,000

For the year ended 31.3.2009, the company made a net profit of ` 30,000 after providing for `
40,000 depreciation and writing off miscellaneous expenditure of ` 40,000. The following additional
information is available with regard to company’s operation.
(1) The preference dividend for the year ended 31.3.2009 was paid before 31.3.2009.
(2) Except cash & bank balances, other current assets and current liabilities on 31.3.2009, was the
same as on 31.3.2008.
(3) The company redeemed the preference share at a premium of 10%.
(4) The company issued bonus shares in the ratio of 1 share for every two equity shares held as on
31.3.2009.
(5) To meet the cash requirements of redemption, the company sold a portion of the investments, so
as to leave a minimum balance of ` 60,000 after such redemption.
(6) Investments were sold at 90% of cost as on 31.3.2009.

Prepare:-
(i) Necessary journal entries to record redemption and issue of shares.
(ii) Cash & Bank Account.
(iii) Balance Sheet as on 31.3.2009 CS (Inter) – Dec. 2009, CA
(Inter) – Nov. 1996

(1) The Board of Directors of a company decided to issue minimum number of equity shared of ` 10
each at 10% discount to redeem ` 5,00,000 preference shares. The maximum amount of divisible
profits available for redemption is ` 3,00,000. The number of share to be issued by the company
will be
(a) ` 18,182 shares (b) ` 22,223 shares

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Corporate & Mangement Accounting Redemption of Preference Shares s
(c) ` 20,000 shares (d) ` 25,000 shares

(2) Preference shares amounting to ` 2,00,000 are redeemed at a premium of 5% issue of equity
shares amounting to ` 1,00,000 at a premium of 10% the amount to be transferred to capital
redemption reserve account will be
(a) ` 1,05,000 (b) ` 1,00,000
(c) ` 2,00,000 (d) ` 1,11,000

(3) Preference shares of ` 3,00,000 are redeemed at par for which fresh equity shares of `
1,20,000 are issued at 20% premium. What amount should be transferred to capital redemption
reserve account?
(a) ` 60,000 (b) ` 24,000
(c) ` 36,000 (d) ` 1,80,000

(4) Preference shares amounting to ` 50,000 are redeemed at a premium of 5% by issue of equity
shares amounting to ` 25,000 at a premium of 10%. The amount to be transferred to capital
redemption reserve
(a) ` 75,000 (b) ` 25,000
(c) ` 10,000 (d) ` 50,000

(5) A company cannot issue redeemable preference shares for a period exceeding
(a) ` 10 years (b) ` 20 years
(c) ` 15 years (d) ` 25 years

(6) Preference shares amounting to ` 75,000 are redeemed at a premium of 5% by issue of equity
shares amounting to ` 40,000 at a premium of 10%. The amount to be transferred to capital
redemption reserve account will be
(a) ` 35,000 (b) ` 36,750
(c) ` 38,500 (d) ` 1,15,000

(7) A company cannot issue redeemable preference shares for the period exceeding
(a) 10 years (b) 20 years
(c) 30 years (d) 15 years

(8) A company issued ` 20,000, 15% debentures at a discount of 10% redeemable after 15 year at a
premium of 5%. Loss on issue of debentures will be
(a) ` 1,400 (b) ` 1,000
(c) ` 3,000 (d) None of the above

(9) S Ltd. issued 2,000, 10% Preference shares of ` 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 ` 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) ` 50,000 (b) ` 40,000
(c) ` 2,00,000 (d) ` 2,20,000

(10) S Ltd. issued 2,000, 10% Preference shares of ` 100 each at par, which are redeemable at a

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Corporate & Mangement Accounting Redemption of Preference Shares s
premium of 10%. For the purpose of redemption, the company issued 1,500 Equity Shares of ` 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 to the Capital Redemption Reserve Account will
be__________
(a) ` 50,000 (b) ` 40,000
(c) ` 2,00,000 (d) ` 2,20,000

(11)A company cannot issue redeemable preference shares for a period exceeding.
(a) 6 years (b) 7 years
(c) 8 years (d) 20 years

(12) Light Ltd. has 10,000 5% preference shares of ` 10 each to be redeemed after 5 years. The
company forfeited 500 preference shares on which final call of ` 2 has not been received after due
notice, and cancelled these shares on account of redemption. Remaining shares were redeemed out
of reserves of the company. The amount to be credited to capital redemption reserve will be
(a) ` 1,00,000 (b) ` 95,000
(c) ` 99,000 (d) ` 99,500

(13) Indigo Ltd. had 9,000, 10% redeemable preference shares of ` 10 each, fully paid up. The
company decided to redeem these [reference shares at par by the issue of sufficient number of
equity shares of ` 10 each fully paid up at a discount of 10%. The number of equity shares issued
should be:
(a) ` 9,000 (b) ` 11,000
(c) ` 10,000 (d) None of the above

(14) Preference shares amounting to ` 1,00,000 are redeemed at a premium of 5% by issue of

shares amounting to ` 50,000 at a premium of 10%. The amount to be transferred to capital
redemption reserve account will be:
(a) ` 55,000 (b) ` 50,000
(c) ` 45,000 (d) ` 57,500

(15) Ankush Ltd. had issued 10,000, 10% Redeemable Preference Shares of ` 100 each, fully paid up.
The company decided to redeem these preference shares at par, by issue of sufficient number of
equity shares of ` 10 each at a premium of ` 2 per share as fully paid up. The amount to be
transferred to capital redemption reserve account will be_______
(a) ` 10,00,000 (b) ` 12,00,000
(c) ` 8,00,000 (d) Nil

(16) The Board of Directors of a company decided to issue minimum number of equity shares of ` 10
each at 10% discount to redeem ` 5,00,000 preference shares. The maximum amount of divisible
profits available for redemption is ` 3,00,000. The number of shares to be issued by the company
will be
(a) 20,000 shares (b) 22,223 shares
(c) 18,182 shares (d) 25,000 shares

(17) Rich Ltd. had 3,000, 12% Redeemable preference shares of ` 100 each, fully paid up. The
company issued 25,000 equity shares of ` 10 each at par and 1,000 14% debentures of ` 100 each.

Unique Academy 8.7 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Redemption of Preference Shares s
All amounts were received in full. The payment was made in full. The amount to be transferred to
Capital Redemption Reserve Account is
(a) Nil (b) 2,00,000
(c) 3,00,000 (d) 50,000

(18) Ankush Ltd. had issued 10,000, 10% Redeemable Preference Shares of ` 100 each, fully paid
up. The company decided to redeem these preference shares at par, by issue of sufficient number
of equity shares of ` 10 each at a premium of ` 2 per share as fully paid up. The amount to be
transferred to capital redemption reserve account will be
(a) ` 10,00,000 (b) ` 12,00,000
(c) ` 8,00,000 (d) Nil

(19) The paid up capital of the company consisted of 3,000 6% preference shares of ` 100 each and
40,000 equity shares of ` 10 each. Interim dividend on equity shares was paid during he year at 75
paise per share. Last year’s profit is ` 31,000; Current year’s profit ` 52,000; The following
appropriations were passed at the annual general meeting of the company
(i) To pay the years dividend on preference shares.
(ii) To pay final dividend on equity shares at 50 paise per share
(iii) To transfer ` 5,000 to general reserve.
The balance of Profit and Loss appropriation A/c to be transferred to Balance Sheet will be
(a) ` 40,000 (b) ` 12,000
(c) ` 15,000 (d) None of the three

1. Which of the following statements is false?

a) A company can redeem in preference shares.
b) Preference shareholders are creditors of a company.
c) The part of the authorized capital which can be called up only in the event of liquidation of a
company is called reserve capital.
d) Capital redemption reserve can be utilized for issuing fully paid bonus shares.

2. S Ltd. issued 2,000, 10% Preference shares of ` 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 `
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 = ?
a) ` 50,000 c) ` 2,00,000
b) ` 40,000 d) ` 2,20,000

3. During the year 2002-2001, T Ltd. issued 20,000, 12% Preference shares of ` 10 each at a
premium of 5%, which are redeemable after 4 years at par. During the year 2005-2006, as the
company did not have sufficient cash resources to redeem the preference shares, it issued
10,000, 14% debentures of ` 10 each at a premium of 10%. At the time of redemption of 12%
preference shares, the amount to be transferred to capital redemption reserve = ?
a) ` 90,000 c) ` 2,00,000
b) `` 1,00,000 d) ` 1,10,000

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Corporate & Mangement Accounting Redemption of Preference Shares s
4. According to section 78 of the Companies Act, the amount in the Securities Premium A/c cannot
be used for the purpose of
a) Issue of fully paid bonus shares.
b) Writing off losses of the company.
c) Writing off preliminary expenses.
d) Writing off commission or discount on issue of shares.

5. Which of the following can be utilized for redemption of preference shares?

a) The proceeds of fresh issue of equity shares.
b) The proceeds of issue of debentures.
c) The proceeds of issue of fixed deposit.
d) All of the above.

6. Which of the following statements is True?

a) Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses.
b) Capital profit realized in cash can be used for payment of dividend.
c) Reserves created by revaluation of fixed assets are not permitted to be capitalized.
d) Dividend is payable on the calls paid in advance by shareholders.

7. Consider the following information pertaining to E Ltd.

On September 4, 2009, the company issued 12,000 7% Debentures having a face value of ` 100
each at a discount of 2.5%. On September 12, the company issued 25,000, 8% Preference share
of ` 100 each. On September 29, the company redeemed 30,000, 6% Preference shares of ` 100
each at a premium of 5% together with one month dividend thereon. Bank balance as on August
31, 2009 was ` 29,25,000.
After effecting the above transactions, the Bank balance as on September 30, 2009 =?
a) ` 33,15,000 c) ` 33,45,000
b) ` 33,30,000 d) ` 34,30,000

8. Which of the following accounts can be used for transfer to capital redemption reserve
account?
a) General reserve account.
b) Forfeited shares account.
c) Profit prior to incorporation.
d) Securities premium account.

9. Preference shares amounting to ` 2,00,000 are redeemed at a premium of 5%, by issue of

shares amounting to ` 1,00,000 at a premium of 10%. The amount to be transferred to capital
redemption reserve = ?
a) ` 1,05,000 c) ` 2,00,000
b) ` 1,00,000 d) ` 1,11,000

10. Securities premium cannot be used to _____.

a) Issue bonus shares.

Unique Academy 8.9 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Redemption of Preference Shares s
b) Redeem preference shares.
c) Write-off preliminary expenses.
d) Write-off discount on issue of shares.

11. A company cannot issue redeemable preference shares for a period exceeding _______.
a) 5 years c) 15 years
b) 10 years d) 20 years

12. Which of the following cannot be used for the purpose of creation of capital redemption
reserve account?
a) Profit and loss account (credit balance).
b) General reserve account.
c) Unclaimed dividend account.
d) All of the above.

Answers
1 2 3 4 5 6 7
a c b a a d a
8 9 10 11
b b d c

Unique Academy 8.10 Prof. Ashish Parikh – 8007978700

Corporate & Mangement Accounting Issue & Redemption of Debentures.

Chapter 9 – Redemption of Debentures

Debentures Issued at a Premium
Debentures are rarely issued at a premium. A company issues debentures at a premium when the
market rate of interest is lower than the debenture interest rate. The debentures, which are
issued at a premium, are issued at a higher price than their nominal value; that is, if a debenture
with a nominal value of Rs.100 is issued at 10% premium, the company receives Rs.110 where the
investor gets slightly less interest than stated in the debenture. For example, 12% Debenture of
Rs.100 issued at a premium of 10%. The investor will get Rs.12 p.a. for his investment of 110.
Therefore, the effective rate of interest on investment is (12/110 x 100) = 10.91%.

There is no restriction in the Companies Act 1956 regarding the utilization of Debenture Premium.
This is different from Share Premium. It can be used to write-off:
(a) Discount on issue of shares or debentures;
(b) Premium on redemption of shares or debentures;
(c) Capital losses.
(d) Intangible assets, such as goodwill, etc.
Any balance left in the Debentures Premium Account should be transferred to Capital Reserve
Account.

The accounting entries would be as follows:

(a) When cash is received
Bank Account Dr. [Nominal value plus premium]
To Debentures Application Account
(Being money received on ….. debentures @ Rs….. each including premium of Rs…. Each)

(b) When excess money is refunded

Debentures Application Account Dr.
To Bank Account
(Being refund of money on …… debentures @ Rs…. Each, as per Board‟s Resolution No…… dated ….)

(c) When the debentures are allotted

Debentures Application Account Dr.
To Debentures Account
To Debentures Premium Account
(Being the allotment of ……. Debentures, premium transferred to Debentures Premium Account, as
per Board‟s Resolution No … dated ….)

(d) When debentures premium is transferred

Debentures Premium Account Dr.
To Capital Reserve Account
(Being the amount transferred to capital reserve)

Debentures Issued at a Discount

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

The Companies Act does not impose any restriction on the price at which debentures can be issued.
Unlike shares, there is no maximum limit for discount on issue of debenture. This is why it is very
common for debentures to be issued at a discount. The debentures which are issued at a discount
are issued at a lower price than nominal value, that is, if a debenture with a nominal value of Rs.100
is issued at 10% discount, the company receives Rs.90 only. This issue of debentures at a discount
slightly increases the true rate of interest payable. For example, 12% Debentures of Rs.100 issued
at a discount of 10%. The Company will have to pay Rs.12 for a loan of Rs.90. Therefore, the true
rate of interest is (12/90 x 100) = 13.33%.

A company issues debentures at a discount when the market rate of interest is higher than the
debenture interest rate. Like shares, Debentures Account is credited with the nominal value. The
difference between the nominal value of debentures and cash received in transferred to “Discount
on Issue of Debenture Account.” In the Balance Sheet. Discount on Issue of Debentures: is shown
on the Assets side under “Miscellaneous Expenditure”. In the subsequent years, Discount on Issue
of Debentures is written-off proportionately by charging to the Profit and Loss Account.

The accounting entries would be as follows:

(a) When cash is received
Bank Account Dr. [Actual cash received]
To Debentures Application Account
(Being money received on ….. debentures @ Rs….. each)

(b) When excess money is refunded

Debentures Application Account Dr.
To Bank Account
(Being excess money on …… debentures refunded as per Board‟s Resolution No…… dated ….)

(c) When the debentures are allotted

Debentures Application Account Dr. [Actual cash received]
Discount on Issue of Debentures Account Dr. [Discount on debentures]
To Debentures Account [Nominal value of
debentures]
(Being the allotment of ……. Debentures, of Rs …. Each @ Rs…. Each as per Board‟s Resolution No….
dated……)

In fact, the discount on issue of debentures is considered as incremental interest expense. The
true interest expense (net borrowing cost) for a particular accounting period is, therefore, the
total interest payment plus the discount written-off.

Accounting Entries at Issue, when Debentures are Redeemable:

(i) At Par
(ii) At a Discount
(iii) At a Premium

Where debentures are to be redeemed at par or at a discount (rare in practice), no extra entry is
to be made at the time of issue and allotment of debentures. For better understanding, we would
like to show the entries in the following manner:
Unique Academy 9.2 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Issue & Redemption of Debentures.

Case 1: When debentures are issued at par and redeemable at par or at a discount

(a) Bank Account Dr.

To Debentures Application Account

(b) Application Account Dr.

To Debentures Account

Case 2: When debentures are issued at a discount and redeemable at par or at a discount

(a) Bank Account Dr.

To Debentures Application Account

(b) Debentures Application Account Dr.

Discount on Issue of Debentures Account Dr.
To Debentures Account

Case 3: When debentures are issued at a premium but redeemable at par or at a discount

(a) Bank Account Dr.

To Debentures Application Account

(b) Debentures Application Account Dr.

To Debentures Account
To Debentures Premium Account

Where debentures are to be redeemed at a premium, an extra entry is to be made at the time of
issue and allotment of debentures. This extra entry is to be passed for providing premium payable
on redemption.

The accounting entries are as follows:

Case 1: When debentures are issued at par but redeemable at a premium

(a) Bank Account Dr.
To Debentures Application Account

(b) Debentures Application Account Dr.

To Debentures Account

(c) Loss on Issue of Debentures Account Dr [For providing premium payable

on redemption]
To Premium on Redemption of Debentures Account

Students should note that, instead of passing the separate entries above, a combined entry can be
passed.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

Bank Account Dr.

Loss on Issue of Debentures Account Dr.
To debentures Account
To Premium on Redemption of Debentures Account

“Loss on Issue of Debentures” should be treated in the same way as the “Discount on Issue of
Debentures” is written-off. The balance of “Loss on Issue of Debentures Account” should be shown
on the assets side of the
Balance Sheet. “Premium on Redemption of Debentures” should be shown on the liabilities side of
the Balance Sheet till the date or redemption of debentures.

Case 2: When debentures are issued at a discount but redeemable at a premium

(a) Bank Account Dr.
To Debentures Application Account

(b) Debentures Application Account Dr.

Discount on Issue of Debentures Account Dr.
To Debentures Account

(c) Loss on Issue of Debentures Account Dr. [For providing premium on

redemption]
To Premium on Redemption of Debentures Account

Alternatively:

Bank Account Dr.

Discount on Issue of Debentures Account Dr.
Loss on Issue of Debentures Account Dr.
To Debentures Account
To Premium on Redemption of Debentures Account

Case 3: When debentures are issued at a premium and redeemable at a premium

(a) Bank Account Dr.
To Debentures Application Account

(b) Debentures Application Account Dr.

To Debentures Account
To debentures Premium Account

(c) Loss on Issue of Debentures Account Dr.

To Premium on Redemption of Debentures Account

Alternatively:

Bank Account Dr.

Loss on Issue of Debentures Account Dr.
To Debentures Account

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 Corporate & Mangement Accounting Issue & Redemption of Debentures.

To Premium on Redemption of Debentures Account

To Debentures Premium Account

In this case, debentures premium can be adjusted with the loss on issue of debentures at the year
– end.

Redemption of Debentures

Redemption

There is no Sinking Fund There is Sinking Fund

By payment in a lump By payment in annual By purchase in the By conversion into

sum at the end of the installments open market shares
specified period

(i) Immediate (ii) Own debenture

cancellation investments and
cancellation, when
required

Redemption of Debentures

1. Where there is no Sinking Fund

Generally, no Sinking Fund is created where the amount of debentures to be redeemed is small.

The debentures may be redeemed:

(i) By payment in a lump sum at the end of a specified period;
(ii) By payment in annual installments; and
(iii) By purchase in the open market.

Payments in a Lump Sum at the End of a Specified Period

In this case, all debentures are redeemed at a time at the end of a specified period. The accounting
entries are:

(a) When debentures are redeemed at par

(i) Debentures Account Dr.
To Debenture holders Account

(ii) Debenture holders Account Dr.

To Bank Account
Unique Academy 9.5 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Issue & Redemption of Debentures.

(b) When debentures are redeemed at a premium

(i) Debentures Account Dr. [Nominal value]

Premium on Redemption of Debentures Account Dr. [Premium]
To Debenture holders Account

(ii) Debenture holders Account Dr.

To Bank Account

Payment in Annual Installments

In this case, debentures to be redeemed are selected by lottery or drawings. The accounting
entries are simple. When debentures are redeemed, Debentures Account is debited with the face
value of debentures and Debenture holders Account is credited. On actual payment, Debenture
holders Account is debited and Bank Account is credited. If the debentures are redeemed at a
premium, the Debenture holders Account is credited with the premium and Premium on Redemption
of Debentures Account is debited.

Accounting Entries
(a) When debentures are redeemed at par
(i) Debentures Account Dr. [Nominal value]
To Debenture holders Account [Actual amount]

(ii) Debenture holders Account Dr. [Actual amount paid]

To Bank Account

(b) When debentures are redeemed at a premium

(i) Debentures Account Dr. [Nominal value]
Premium on Redemption of Debentures Account Dr. [Premium]
To Debenture holders Account

(ii) Debenture holders Account Dr. [Actual amount paid]

To Bank Account

(c) When debentures are redeemed at a discount

(i) Debentures Account Dr. [Nominal value]
To debenture holders Account [Actual amount]
To Profit on Redemption of debentures Account [Discount]

(ii) Debenture holders Account Dr.

To Bank Account

In fact, premium paid on redemption is a loss. Generally, at the time of issue of debentures, a
provision is made for the premium payable on redemption by debiting “Loss on Issue of Debentures
Account” and crediting “Premium on Redemption Debentures Account”. Till the date of redemption,
it is shown on the liabilities side of the Balance Sheet.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

However, a portion of “loss on issue of debentures” is written-off every year by debiting Profit and
Loss Account.
Where no provision is made, Premium on Redemption of Debentures Account is closed by passing the
following entry:
Debenture/Share Premium Account Dr.
Profit and Loss Account Dr.
To Premium on Redemption of Debentures Account

It should be noted that as a matter of financial prudence, an amount equal to the face value of
debentures redeemed is transferred to General Reserve by debiting Profit and Loss Account (mind
it, this is prudent, but not obligatory).

Debenture Market Price

The market price of a debenture is quoted as a percentage of its face value. A debenture selling at
a market price greater than its face value is said to be selling at a premium; a debenture selling at a
price below its face value is selling at a discount. Thus, a debenture quotation of 96 means the
market price is 96% of face value, or at a discount; a debenture quotation of 104 means the market
price is 104% of face value or at a premium.

The market price of a debenture constantly fluctuates since it raises with the safety of the
investment. The primary factors which determine the market price of a debenture are:
(1) The relationship of the debentures interest rate to other investment opportunities;
(2) The length of time until the debentures interest rate to other investment opportunities;
(3) Investors‟ confidence in regard to company‟s strength to make all future payments of interest
and principal amounts promptly.

These factors often results in a difference between the face value of a debenture and the price at
which it can be purchased or sold in a stock exchange.

As a debenture nears its maturity date, the market price of the debenture moves toward the
maturity value.
Early Extinguishment of Debentures – Purchases in the Open Market
A company may redeem its debentures prior to maturity.

The company may purchase its own debentures from stock market either:
(i) For immediate cancellation
(ii) As an investment (to be cancelled when required)

The principal reason for cancelling debentures before maturity date is to relieve the issuing
company of the
obligation to make future interest payments. If the debentures are listed in the stock market, they
can be easily purchased and sold.

Generally, the company is interested to purchase its own debentures when the interest rate on the
debentures is considerably higher than the current market interest rate.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

The advantage of the company is that by issuing new debentures or by arranging loan at a lower
interest rate, it can use the funds to reacquire the original, higher interest debentures.

When debentures are not listed on a stock exchange and issued privately, the company may
negotiate a price with the debenture holders to buy back the debentures for cancellation. Purchase
of debentures in the open market prior to their maturity calls for the recognition of a gain or a loss
for the difference between the amount paid and the face value of debentures. When the
debentures are cancelled before maturity date, it calls for the cancellation of debenture face value
together with any amortized debenture discount.

(i) Purchases of Debentures for Immediate Cancellation – On the Date of Interest

A Company may purchase its own debentures at any date for immediate cancellation. If the date of
purchase of debentures and the date for payment of interest on debentures are the same, interest
up to the date of purchase will be paid to the (old) debenture holders. The entries for purchase and
cancellation of debentures will be as follows:

(a) When debentures are purchases

Debentures Redemption Account Dr. [Quoted price x No. of debentures
purchased]
To Bank Account

(b) When debentures are cancelled

(i) Debentures Account Dr. [Face value]
To Debentures Redemption Account [purchase price]
To Profit on cancellation of Debentures Account [profit]

(ii) If there is a loss on cancellation, it is transferred to Profit and Loss Account.

Profit and Loss Account Dr. [Loss]
To Debentures Redemption Account

(c) When profit on cancellation of debentures is transferred to Capital Reserve

Profit on Cancellation of Debenture Account Dr.
To Capital Reserve Account

 Profit on cancellation is a capital profit, it should be transferred to capital reserve.

(d) When face value of debentures is transferred to General Reserve

Profit & Loss Account Dr.
To General Reserve Account

(ii) Purchase of Debentures for Immediate Cancellation – before the Date of Payment of
Interest

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

When debentures are purchased before the due date of interest, a problem may arise whether the
quoted price includes interest upto the date of purchase or not. Price may be quoted “Ex-interest”
or “Cum-interest”.

Meaning of Cum-interest and Ex-interest

„Cum‟ and „Ex‟ are latin wods. „Cum‟ means with and „Ex‟ means without. The terms “Cum-interest” and
“Ex-interest” relates to debentures and come up for consideration when debentures are purchased
or sold. Cum-interest can be expanded as cumulative or inclusive of interest and Ex-interest can be
expanded as exclusive of interest. The quotation, Cum-interest, not only covers the cost but also
includes the interest accrued upto the date of purchase; when interest becomes due, it would be
the right of the buyer to claim that. Conversely, the quotation, Ex-interest, only covers the cost of
the debentures and the buyer is liable to pay additional amount as interest accrued up to the date
of purchase of debentures.

The block diagram illustrating the meaning of cum-interest and ex-interest.

Cum-Interest Ex-Interest
Cost

Quotation Quotation Cost

Price Price

Interest +
Accrued Accrued Interest
Payment to Seller

Payment to Seller

In this connection, the following points are important:

(i) In respect of Government securities and debentures, the price quoted is Ex-interest unless
otherwise stated: and
(ii) In respect of Non-Government securities and debentures, it is Cum-interest unless otherwise
stated.

When debentures are purchased Cum-interest, care must be taken at the time of passing entry for
purchase of debentures. In this case, quotation price consists of cost plus accrued interest.
Payment of accrued interest on debenture reacquisition is separately treated as a debit to
debenture interest. Debentures Redemption Account will be debited with the cost price only and
Debenture Interest Account will be debited with the accrued interest up to the date of purchase
from the date of last interest paid. Bank Account will be credited with the quotation price.

For calculating cost and accrued interest, the following steps should be followed:

Step 1: Calculate the period between the date of last interest paid and the date of purchase of
debentures.

Step 2: Calculate accrued interest by applying the following formulas:

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

Rateof interestx Period(in months)

 x Face value of debenturespurchased
12

Step 3: Calculate cost as follows:

(Quotation price x No. of debentures purchased) less Accrued interest as calculated in Step 2

Example: On 1st April 1998, X Ltd purchased 2,000, 12% debentures of Rs.100 each @ Rs.98 (cum-
interest). Debentures interest is payable half-yearly, on 30th June and 31st December. Date of
closing the books of account is 31st December every year. Cost and accrued interest is to be
calculated as follows:

Step 1: Calculation of period (in months) From 1.1.1998 to 31.3.1998 = 3 months.

Step 2: Accrued interest = 12% x 3/12 x Rs.2,00,000 = Rs.6,000.

Step 3: Cost = (Rs.98 x 2,00) Less Rs.6,000 = Rs.1,90,000.

The entry for purchase will be as follows:

Debentures Redemption Account Dr. Rs.1,90,000
Debentures Interest Account Dr. Rs.6,000
To Bank Account (Rs.98 x 2,000) Rs.1,96,000
(Being purchase of 2,0000. 12% Debentures @ Rs.98 Cum-interest for cancellation)

When debentures are purchased Ex-interest, the Debentures Redemption Account will be debited
with quotation price (which is, in fact, nothing but the cost price) and Debenture Interest Account
will be debited with accrued interest. Bank Account will be credited with the quotation price plus
accrued interest.

In such a situation, the entry for purchase of debentures will be as follows:

Debentures Redemption Account Dr. Rs.1,90,000

Debentures Interest Account Dr. Rs.6,000
To Bank Account (Rs.98 x 2,000) Rs.2,02,000
(Being purchase of 2,0000. 12% Debentures @ Rs.98 ex-interest for cancellation)

Accounting Entries
(a) When debentures are purchased
Debentures Redemption Account Dr. [Cost]
Debentures Interest Account Dr. [Accrued interest]
To Bank Account [Total payment]

(b) When debentures are cancelled

(i) Debentures Account Dr. [Face value]
To Debentures Redemption Account [Cost]
To Profit on Cancellation of Debentures Account [Profit]

(ii) Loss on cancellation is transferred to Profit and Loss Account.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

Profit and Loss Account Dr.

To Debentures Redemption Account

(c) When profit on cancellation of debentures is transferred to Capital Reserve

Profit on cancellation of Debentures Account Dr.
To Capital Reserve Account

(d) When face value of debentures is transferred to General Reserve

Profit and Loss Account Dr.
To General Reserve Account

(i) Purchase of Debentures as Investment – On the Date of Interest

A company may purchase its own debentures as investment. Such debentures are kept alive. In
future, it can be sold in the market again or it will be cancelled. When own debentures are
purchased as investment, an account called “Investment in Own Debentures Account” or “Own
Debentures Account” is debited with the quotation price and Bank Account is credited with the
same amount. “Investment in Own Debentures Account” is shown on the assets side of the Balance
Sheet under the heading “Investment”.

Interest on own debentures of the post-purchase period is credited to Profit and Loss Account just
like any other income from other investments. Debenture Interest Account is debited with the
total interest (payable to outside debenture holders plus interest on own debentures held as
investment.)

The accounting entries will bas a follows:

(a) When debentures are purchased
Investment in Own Debentures Account Dr. [Quotation price x No. of
debentures purchased]
To Bank Account
(Being the purchase ….. debentures @ Rs….. each as investment)

(b) When interest on debentures is due and paid

Debenture Interest Account Dr. [Total interest]
To Bank Account
[Interest paid to outside debenture holders]
To Interest on Own Debentures Account [Own Debentures]
(Being the interest on debenture paid and adjusted)

(c) When debentures are cancelled

Debentures Account Dr. [Face value]
To Investment in Own Debentures Account [Purchase price]
To Profit on Cancellation of Debentures Account [Profit]
(Being the cancellation of ……. Debentures)

(d) When profit on cancellation of debentures is transferred to Capital Reserve

Profit on Cancellation of Debentures Account Dr.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

To Capital Reserve Account

(Being profit on cancellation is transferred to Capital Reserve Account)

(e) When face value of debentures is transferred to General Reserve

Profit & Loss Account Dr.
To General Reserve Account
(Being the amount equal to the face value of debentures redeemed is transferred to general
reserve)

(f) When interest on own debentures is transferred

Interest on Own Debentures Account Dr.
To Profit and Loss Account
(Being the interest on own debentures is transferred to Profit and Loss Account)

(g) When debentures interest (paid during the year) is transferred to Profit and Loss Account
Profit and Loss Account Dr.
To debenture Interest Account
(Being interest charged to Profit and Loss Account)

Treatment of Interest on Own Debentures

When debentures are purchased as investment, the interest of the post-purchase period is
calculated and credited to “Interest on Own Debentures Account”. Debentures Interest Account is
debited with the full interest (whether held by the company or outsiders). At the end of the
accounting period, Profit and Loss Account is debited with the full amount of “Debenture Interest:
ad credited with the : interest on Own Debentures”.

Purchase of Debentures as Investment – Before the Date of Payment of Interest

When debentures are purchased before the date of payment of interest, Investment in Own
Debentures Account is debited with the cost (which is determined in the same manner as we do in
case of purchase of debentures for immediate cancellation).

Debenture Interest Account is also debited with the amount of accrued interest upto the date of
purchase from the date of last payment of interest. The Bank Account is credited with the amount
paid to the seller of debentures.

Interest on own debentures of the post-purchase period is credited to Profit and Loss Account.
Until cancellation, Investment in Own Debentures is shown in the Balance Sheet under the heading
“Investment”.

Accounting Entries
(a) When debentures are purchased
Investment in own Debentures Account Dr. [Cost]
Debentures Interest Account Dr. [Accrued interest]
To Bank Account [Total payment]

(b) When interest on debentures is due and paid

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

Debentures Interest Account Dr. [Total interest – interest paid

during purchase]
To Bank Account [Interest paid to
outside Debenture
holders]
To Interest Own Debentures Account [Own
Debentures]

(c) When debentures are Cancelled

(i) Debentures Account Dr. [Face value]
To Investment in Own Debentures Account [Cost]
To Profit and Loss on Cancellation of Debentures Account [Profit]

(ii) Loss on cancellation is debited to Profit and Loss Account

Profit and Loss Account Dr.
To Profit and Loss on Cancellation of Debentures Account

(d) When debentures are sold without cancelling

(i) Bank Account Dr. [Sale proceeds]
To Investment in Own Debentures Account [Cost]
To Profit on Sale of Own Debentures Account

(ii) Loss on sale is debited to Profit and Loss Account

Profit and Loss Account Dr.
To Loss on Sale of Own Debentures Account

(e) When profit on cancellation of debentures is transferred to Capital Reserve

Profit on Cancellation of Debentures Account Dr.
To Capital Reserve Account

(f) When face value of debentures is transferred to General Reserve

Profit and Loss Account Dr.
To General Reserve Account

(g) When interest on own debentures is transferred to Profit and Loss Account
Interest on Own Debentures Account Dr.
To Profit and Loss Account

(h) When debentures interest (paid for the year) is transferred to Profit and Loss Account
Profit and Loss Account Dr.
To Debenture Interest Account.

Where there is Sinking Fund

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

A sinking fund is a fund created for the repayment of a liability or for the replacement of an asset.
It is created by equal periodic installments in order to accumulate the amount of money required to
repay a loan at a set date in the future.

When the debentures are issued for a fixed period, their payment must be made after the expiry
of that period. When the debentures are redeemed, the company requires a huge amount of money
to pay-off debenture holders. If proper provisions are not made, there will be a strain on working
capital and the company will face liquidity crisis, because a lot of money will go out of business.

For collecting funds, a sinking fund is created voluntarily by making a charge against distributable
profits. Every year, an equal amount is debited to Profit and Loss Appropriation Account and
credited to Sinking Fund Account. The amount so appropriated is invested outside the business in
gilt-edged securities (debiting investment and crediting cash) and allowed to accumulate at
compounded interest, so as to produce the amount required to repay the debenture holders on the
date of redemption. In the Balance Sheet, Sinking Fund Account is shown on the Liability side and
Sinking Fund Investment Account shown on the Asset side. Other things remaining the same,
balances on these two accounts should b equal. In the year of redemption, sinking fund

Investments will be realize and debentures holders will be paid-off. After redemption, the balance
of the Sinking Fund Account is transferred to General Reserve Account.
The creation of a sinking fund is a method of amortization or extinguishment of a debt
(debentures) not yet matured. The establishment of a sinking fund for the redemption is a
condition of issuing the debentures. It is as binding on the company as any other provision of the
contract.

Definition of Sinking Fund

B.G. Wickery has defined sinking fund, as under:
“A sinking fund may be defined as a fund, created by a charge against or an appropriation of profits
and represented by specific investments, which is brought into existence for a special purpose,
such as replacement of an asset at the expiration of its life, or the redemption of debentures”.

Accounting Entries for Creation of Sinking Fund

At the end of 1st Year

(a) For annual contribution (determined with the help of Sinking Fund Table)
Profit and Loss Appropriation Account Dr.
To Sinking Fund Account
(b) For investing the amount set aside
Sinking Fund Investment Account Dr.
To Bank Account
At the end of the 2nd and subsequent years
(a) For receiving interest on sinking fund investment
Bank Account Dr.
To Interest on Sinking Fund Investment Account
(b) For transferring interest on sinking fund investment to sinking fund account
Interest on Sinking Fund Investment Account Dr.
To Sinking Fund Account
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Corporate & Mangement Accounting Issue & Redemption of Debentures.

Alternatively,
Bank Account Dr.
To Sinking Fund Account
(c) For annual contribution
Profit and Loss Appropriation Account Dr.
To Sinking Fund Account
(d) For investing the amount set aside plus interest received during the year
Sinking Fund Investment Account Dr. (Contribution plus
Interest)‟
To Bank Account
At the end of the year of redemption
(a) For receiving interest on sinking fund investment
Bank Account Dr.
To Interest on Sinking Fund Investment Account
(b) For transferring interest on sinking fund investment to sinking fund account
Interest on Sinking Fund Investment Account Dr.
To Sinking Fund Account
(c) For annual contribution
Profit and Loss Appropriation Account Dr.
To Sinking Fund Account
At the end of the year of redemption of debenture, annual contribution and interest of that
year are not invested outside. On that date all the investments are sold.
(d) For realization of sinking fund investments
Bank Account Dr.
To Sinking Fund Investment Account
(e) For profit on sale investment
Sinking Fund Investment Account Dr.
To Sinking Fund Account
(f) For loss on sale of investment
Sinking Fund account Dr.
To Sinking Fund Investment Account
(g) For redemption of debentures at a premium
Debenture Account Dr.
Premium on Redemption of Debenture Account Dr.
To Debenture holders Account
(h) For payment to debenture holders
Debenture holders Account Dr.
To Bank Account
(i) For transferring premium on redemption of debentures
Sinking Fund Account Dr.
To Premium on Redemption of Debentures Account
Note: Reverse entry will be made in case of a redemption at a discount
(j) For transferring part of the sinking fund no longer required
Sinking Fund Account Dr.
To General Reserve Account

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

The students should note that frequently the expression “Debenture Redemption Fund Account” is
used instead of “Sinking Fund Account”, Likewise, “Debenture Redemption Fund Investment
Account” is used in place of Sinking Fund Investment Account”. These expressions are used
interchangeably.

Conversion of Debentures into Shares

Journal Entries
1. On receipt of application money
Cash/Bank Account Dr.
To Debenture Application Account

2. For allotment of debentures

Debentures Application Account Dr.
To Convertible Debenture Account

3. For conversion of the convertible debentures into equity / preference shares at par
Convertible Debentures Account Dr.
To Equity / Preference Share Capital Account

4. For conversion of the convertible debentures into equity / preference shares at a premium
Convertible Debentures Account Dr.
To Equity / Preference Share Capital Account
To Security Premium Account

Practical Questions

Illustration 1
Simmons Ltd issued 10,000, 12% Debentures of Rs.100 each at par payable in full on application by
1st April, 1998.3 Application were received for 11,000 Debentures. Debentures were allotted on 7 th
April, 1998. Excess money were refunded on the same date.

You are required to pass necessary Journal Entries (including cash transactions) in the books of the
company and also show the Ledger Accounts and the Balance Sheet.

Illustration 2
Kapil Ltd. issued 10,000, 12% Debentures of Rs.100 each at a premium of 10% payable in full on
application by 1st March, 1998. The issue was fully subscribed and debentures were allotted on 9th
March 1998.
Pass necessary Journal Entries (including cash transactions)

Illustration 3
X Ltd. issued 10,000 12% Debentures of Rs.100 each at a discount of 10% payable in full on
application by 31st Mat 1998. Applications were received for 12,000 debentures. Debentures were
allotted on 9th June 1998. Excess monies were refunded on the same date. Pass necessary Journal
entries and show Ledger Accounts and the Balance Sheet after issue.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

Illustration 4
HDC Ltd. issues 10,000. 12% debentures of Rs.100 each at Rs.94 on 1st January 1998. Under the
terms of issue, the debentures are redeemable at the end of 8 years from the date of the issue.
Calculate the amount of discount to be written-off in each of the 8 years.

Illustration 5
HDC Ltd. issues 10,000. 12% debentures of Rs.100 each at Rs.94 on 1st January 1998. Under the
terms of issue. 1/5th of the debentures are annually redeemable by drawings, the first redemption
occurring on 31st December 1998. Calculate the amount of discount to be written-off in 1998 to
2002.

Illustration 6
AB Co. Ltd. issues 500, 12% debentures of Rs.100 each at Rs.98 on 1st January 1993. Under the
terms of issue; (a) debentures interest is annually payable on 31st December every year; and (b)
1/5th of the Debentures are annually redeemable by drawings, the 1st redemption occurring on 31st
December 1994. Calculate the amount of discount to be written-off each year and also show the
Discount on Issue of Debentures Account.

Illustration 7
R Ltd. issued debentures at 94% for Rs.1,00,000 on 1st April 1993, repayable by 5 equal annual
drawings of Rs.20,000 each. The company closes its accounts on calendar year basis.

Indicate the amount of discount to be written-off in every accounting year, assuming that the
company decides to write-off the debentures discount during the life of the debentures.

Illustration 8
Show by means of Journal Entries how you will record the following issues. Also show they will
appear in the respective Balance Sheets:

(a) P Ltd. issues 5,000. 10% debentures of Rs.100 each at a discount of 5%. Redeemable at the
end of 5 years at par.
(b) Q Ltd. issues 5,000. 11% debentures of Rs.100 each at par, redeemable at the end of 5 years
at a premium of 5%.
(c) R Ltd. issues 5,000. 12% debentures of Rs.100 each at a discount of 5%. Redeemable at the
end of 5 years at a premium of 5%.
(d) S Ltd. issues 5,000. 13% debentures of Rs.100 each at a premium of 5% redeemable at the
end of 5 years at a premium of 5%.

Illustration 9
AB Co. Ltd. issues 500. 12% debentures of Rs.100 each at Rs.98 on 1st January 1995. Under the
terms of issue: (a) Debentures Interest is annually payable on 31st December every year, and (b)
1/5th of the debentures are annually redeemable by drawings, the 1st redemption occurring on 31st
December 1996.

Pass necessary Journal entries for 1995, 1996 and 1997 and also show:
(a) Debentures Account

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

(b) Debenture holders Account

(c) Debenture Interest Account for the relevant period assuming that:
(i) The company‟s accounting year ending on 31st December
(ii) All the terms of debentures issue are fully complied with
(iii) No sinking fund was created.

Illustration 10
XY Ltd. issued 2,00. 12% debentures of Rs.100 each at par on 1st January 1993. Debentures are
repayable at 5% premium in 5 equal annual installments by lottery, the 1st redemption occurring on
31st December 1993.

Show Debentures Account, Premium on Redemption of Debentures Account, Loss on Issue of

Debentures Account, Debenture holders Account for all the years assuming that:
(i) The company‟s accounting year ending on 31st December
(ii) All the terms of Debenture issue are duly complied with
(iii) No sinking fund was created.

Illustration 11
On 1st January 1997, HP Ltd. had 10,000. 12% Debentures of Rs.100 each. As per the provision of
the deed, the directors acquired in the open market the following debentures for immediate
cancellation; June 30, 2,000 debentures @ Rs.98: December 31, 4,000 debentures @ rs.96.
Debentures interest is payable half-yearly, on 30th June and 31st December.

Pass Journal Entries (Ignore Interest and Tax)

Illustration 12
On 1.3.1998, PQR Ltd. purchased its own 6% debentures, of Rs.10,000 @ Rs.96 Cum-interest and
cancels immediately, interest on debentures being payable on June 30 and December 31 each year.
Pass Journal Entries.

Illustration 13
On 1st January 1998, Nelco Ltd. Had outstanding in its books 1,000, 12% Debentures of Rs 100 each.
The interest is payable on 30th June and 31st December every year. In accordance with the power in
the deed, the directors acquired in the open market Debentures for immediate cancellation as
follows:

1998 March 1 Rs 10,000 @ R 98.00 (cum-interest); 1998 Aug. 1 Rs. 20,000 @ Rs 100.25 (cum-
interest); 1998 Nov. 1 Rs. 5,000 @ Rs 98.50 (ex-interest). Pass necessary Journal Entries in the
books of the company, ignoring income tax.

Illustration 14
On 1st January 1997, XY Ltd. had 5,000. 12% Debentures of Rs.100 each. The company purchased in
the open market 1,000 debentures @ Rs.96 each on 30th June 1997. Debentures interest is payable
half yearly, on 30th June and 31st December. The Company cancelled all the purchased debentures
on 31st December 1997.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

Pass Journal Entries (ignore income-tax)

Illustration 15
A Ltd. has issued 1,000. 6% Debentures of Rs.100 each. The company on 1st March, 1997 purchased
50 of its debentures at Rs.96 each cum-interest (interest payable on 30th June and 31st December).
These debentures are cancelled on 31st December, 1997, the date of year ending. Show the Journal
Entries to record the above transactions.

Illustration 16
Draft Journal entries in respect of the following since March 1, 1997: In 19991 XY Ltd had issued
5,000, 7.5% Debentures of Rs.100 each. On 1st March, 1997, the company purchased 500 of its own
7.5% Debentures at Rs.47,500 cum-interest.

The debentures were held as investment until 30th June, 1997 when it was decided to cancel them.
Interest is payable half yearly on 30th June and 31st December and the books are closed on 30th
June each year. Assume absence of sinking fund.

Illustration 17
On 1.1.1990 L.F. Industries Co. Ltd. issued 20,000, 10% Debentures of Rs.100 each at par. On
7.1.1990, application money of Rs.50 per debenture and after one month, the balance money were
received.

On 1.1.1992, the company purchased from open market 5,000 own debentures at Rs.102 and
cancelled them.

On 1.1.1993, the company redeemed 2,000 debentures at par by annual drawings.

On 1.1.1994, the company purchased 8,000 own debentures from open market @ Rs.98 and held
them as investment.

On 1.1.1995, the company cancelled its own debentures and redeemed the remaining debentures at a
premium of 5%.

The balance of Profit and Loss Account on that day was Rs.1,00,000. Show all Journal Entries from
issue to redemption.

Illustration 18
X Ltd. Has Rs 1,50,000. 6% Debentures on 1.1.1997. There is no sinking fund for redemption of
debentures. Interest is payable on 31st December each year.

On 1.4.97 Rs. 10,000 own debentures are purchased at Rs. 94 by X Ltd. And immediately cancelled.

On 1.6.97 Rs. 25,000 own debentures are purchased at Rs. 95 and held as investment.

On 1.10.97 Rs. 30,000 own debentures are purchased at Rs. 96 and held as investment.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

On 31.12.97 own debentures kept as investment are cancelled.

Show Journal Entries and the relevant Ledger Accounts in the books of the company. Date of
closing is 31st December.

Illustration 20
X Ltd issued on 1st January, 1993 debentures of the face value of Rs.7,500 at par, repayable at par
at the end of five years. In terms of the trust deed, a sinking fund was to be created for the
purpose of accumulating sufficient funds. Investments were made yielding 5% interest received at
the end of each year. All investments, including re-investments of interest received, were made at
the end of the year. You ar required to show for 5 years, the – (a) Sinking Fund Account (b)
Sinking Fund Investment Account.

Note: Rs.2.71462 invested at the end of each year at 5 percent compounded interest will amount to
Rs.15 at the end of 5 years.

Illustration 21
The following balance appeared in the books of Y Ltd. on 1.4.1994: (i) Sinking Fund Account –
Rs.50,000; (ii) Sinking Fund Investment Account – Rs.48,000; (10% Government Securities, nominal
value Rs.45,000); (iii) 12% Debentures at a premium of 10%. Show Debentures Account, Sinking
Fund Account and Sinking Fund Investment Account.

Illustration 22
The following balance appeared in the books of Royco Ltd. on 1.4.1996:
(1) Debenture Redemption Fund Rs.60,000 represented by investments of an equal amount
(nominal value of Rs.75,000).
(2) The 12% Debentures stood at Rs.90,000.

The company sold required amount of investments at 90% for redemption of Rs.30,000. Debentures
at a premium of 20% on the above date.

Show the
(i) 12% Debentures Account
(ii) Debenture Redemption Fund Account
(iii) Debenture Redemption Fund Investment Account, and
(iv) Debenture holders Account.

Illustration 23
The following balance appeared in the books of P. Ltd. on 1.1.1997:

12% Debentures – Rs.4,00,000‟ Sinking Fund Rs.3,00,000; Sinking Fund Investment Rs.3,00,000
(represented by 10% Rs.3,60,000 secured bonds of Government of India).

Annual contribution to the Sinking Fund was Rs.64,000 made on 31st December each year. On
31.12.1997,

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 Corporate & Mangement Accounting Issue & Redemption of Debentures.

balance at bank was Rs.2,00,000 after receipt of interest. The company sold the investments at
80% and debentures were paid off.

You are required to prepare the following accounts for the year 1997.
(a) Debenture Account (b) Sinking Fund Account
(c) Sinking Fund Investments Account (d) Bank Account.

Illustration 28
On 1st June Hindustan Computers Limited made a public issue of 10,000, 14% fully convertible
debentures of Rs.100 each for cash at par. The entire amounts is payable on application. Allotment
was made on 1st July, 1997.
The entire face value of Rs.100 of each debenture would be compulsory and automatically converted
into five equity shares of Rs.100 each in the company credited as fully paid-up at a premium of
Rs.10 per share on the expiry of six months from the date of allotment. On 31.12.1997 half-yearly
interest had accrued on debentures and paid on that date.

Pass necessary Journal Entries assuming that accounting year closing on 31st December every year.

Illustration 29
On 1.1.1996 Jamurki Ltd. issued 2,000. 15% Debentures of Rs.100 each at 6% discount. Holders of
these debentures have an option to convert their holdings into 18% Preference Shares of Rs.100
each at Rs.125 at any time within 3 years.

On 31.12.1993, yearly interest had accrued on the debentures and remained outstanding and a
holder of 50 debentures notified his decision to exercise his option. Pass the necessary Journal
Entries.

Illustration 30
Tata Press Limited made a public issue of 15% Partly Convertible Debentures (PCD) of Rs. 150 each
for cash at par aggregating Rs 300 lakhs.

Issue opened on 1st June, 1997; issue closed on 15th June. Allotment made on 1st July, 1997.
Principal terms of PCD:
1. Entire amount is payable on application.
2. Each PCD will have a face value of Rs. 150 and shall consist of two parts
Part A : Convertible portion of Rs. 50.
Part B : Non-convertible portion of Rs. 100.
3. Part A of each PCD will be automatically converted into 5 equity shares of Rs. 10 each at par on
31st December, 1997.
4. Part B of each PCD will be non-convertible.

Interest on all debentures were paid up to 31st December, 1997. You are required to pass necessary
Journal Entries assuming that the accounting year closes on 31st December, every year.

Illustration 31
The following balances appeared in the books of Royco Ltd. on 1.4.2001.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

(a) Debenture Redemption Fund Rs.60,000 represented by investments of an equal amount

(nominal value Rs.75,000).
(b) The 12% debentures stood at Rs.90,000.

The compound sold required amount of investments at 90% for redemption of Rs.30,000
debentures at a premium of 20% on the above date.
Show the:
(i) 12% Debenture Account.
(ii) Debenture Redemption Fund Account.
(iii) Debenture Redemption Fund Investments Account.
(iv) Debenture holders Account. CS (Inter) – Dec., 2002.

Illustration 32
The following balances appeared in the books of P. Ltd. on 1.1.2002;

12% Debentures – Rs.4,00,000; Sinking Fund – Rs.3,00,000; Sinking Fund Investment – Rs.3,00,000
(represented by 10% Rs.3,60,000 secured bonds of Government of India).

Annual contribution to the sinking Fund was Rs.64,000 made on 31 December each year. On
31.12.2002, balance
at bank was Rs.2,00,000 after receipt of interest. The company sold the investments at 80% and
debentures were paid off.

You are required to prepare the following accounts for the year 2002;
(a) Debenture Account.
(b) Sinking Fund Account.
(c) Sinking Fund Investment Account.
(d) Bank Account.
CS (Inter) – Dec., 2003.

Illustration 33
The following balances appeared in the books of Gomex Ltd. on 1.04.2008;
(i) Debenture Redemption Fund A/c – Rs.40,000 represented by investment at cost of an equal
amount (nominal value Rs.50,000).
(ii) The 12% Debentures stood at Rs.90,000.

The company sold Rs.30,000 investments at Rs.90 for the purpose of Redemption of Rs.25,000
Debentures at a
Premium of 2% during the year.

Show (a) 12% Debentures account, (b) Debenture Redemption Fund A/c, (c) Debenture Redemption
Fund investment A/c. for the year ending 31.2.2009.
Ignore interest and brokerage etc. CS (Inter) – Dec., 2009.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

1. Unless written off, the loss issue of debentures is shown:

(a) On the assets side of Balance Sheet.
(b) On the debit side of Profit and Loss Account.
(c) By way of deduction from the amount of debentures.
(d) On the liabilities side of Balance Sheet.

2. If debentures are issued as consideration for purchase of any fixed asset, the entry is:
(a) Debit Asset A/c ; Credit Vendor A/c
(b) Debit Asset A/c ; Credit Bank A/c
(c) Debit Asset A/c ; Credit Debentures A/c
(d) Debit Debenture A/c; Credit Asset A/c

3. When debentures are issued as collateral security, the final entry for recording the transaction
in the book is:
(a) Credit Debentures A/c and Debit Cash A/c
(b) Debit Debenture Suspense A/c and Credit Cash A/c
(c) Debit Debentures Suspense A/c and Credit Debenture A/c
(d) Debit Cash A/c and Credit the Loan A/c for which security is given.

4. Interest payable on debentures is:

(a) An appropriation of profits of the company.
(b) A charge against profit of the company.
(c) Transferred to sinking fund investment account.
(d) Transferred to general reserve.

5. A company issue 14%, debentures of ` 10,00,000 at a discount of 10%. The discount allowed will
be treated in the account book as:
(a) Capital Expenditure (b) Revenue Expenditure
(c) Deferred Revenue Expenditure (d) Capital Loss

6. Which of the following statements is false?

(a) At maturity, debenture holders get back their money.
(b) Debentures can be forfeited for non-payment of call money.
(c) In company‟s balance sheet, debentures are shown under the head Secured Loans.
(d) Interest on debentures is charged against profits.

7. Discount on issue of debentures is a:

(a) Revenue loss to be charged in the year of issue.
(b) Capital loss to be written off from capital reserve.
(c) Capital loss to be written off over the period of the debentures.
(d) Capital loss to be shown as goodwill.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

8. When debentures are issued at par and are redeemable at premium, the credit given to Premium
of Redemption of Debenture Account is in the nature of:
(a) Personal Account (b) Real Account
(c) Nominal Account - Expenses (d) Nominal Account – Income

9. Loss on issue of debentures is treated as:

(a) Intangible Asset (b) Non-current Asset
(b) Non-current Liability (d) Miscellaneous Expenditure

10. Which of the following is false?

(a) A company can issue redeemable debentures.
(b) A company can issue debentures with voting rights.
(c) A company can issue convertible debentures.
(d) A company can buy its own debentures and shares.

11. The following journal entry appears in the books of Pravin Ltd. Debentures have been issued at a
discount of:
(a) 15% (b) 5%
(c) 10% (d) 20%

12. X Co. Ltd. purchased assets worth ` 28,80,000. It issued debentures of ` 100 each at a
discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued
to the vendors of asset are:
(a) ` 30,000 (b) ` 28,000
(c) ` 32,000 (d) ` 35,000

13. How many debentures will a company be required to issue for satisfying the purchase
consideration of ` 28,80,000, if debentures of ` 100 are issued at a premium of ` 20 debenture?
(a) ` 24,000 (b) ` 28,000
(c) ` 36,000 (d) ` 32,000

14. F Ltd. purchased machinery from G company for a book value of ` 4,00,000. The consideration
was paid by issue of 10% debentures of ` 100 each at a discount of 20%. The debenture account will
be credited by:
(a) ` 4,00,000 (b) ` 5,00,000
(c) ` 3,20,000 (d) ` 4,80,000

15. T Ltd. has issued 15% Debentures of ` 20,00,000 at a discount of 10% on April 01, 2004 and the
company pays interest half-yearly on June 30 and December 31 every year. On March 31, 2006, the
amount shown as “interest accrued but not due” in the
balance sheet will be:
(a) ` 75,000 (b) ` 2,25,000
(c) ` 1,50,000 (d) ` 3,00,000

16. When debentures of 1,00,000 are issued as Collateral Security against a loan of 1,50,000, the
entry for issue of debentures will be:
(a) Credit Debentures ` 1,50,000 and debit cash A/c ` 1,50,000.

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

(b) Debit Debenture Suspense A/c ` 1,00,000 and Credit Cash A/c ` 1,00,000.
(c) Debit Debenture Suspense A/c ` 1,00,000 and Credit Debentures A/c ` 1,00,000.
(d) Debit Cash A/c ` 1,50,000 and Credit Bank A/c ` 1,50,900.

17. P Ltd. issued 10,000, 12% debentures of ` 100 each at a premium of 10%, which are redeemable
after 10 years at a premium of 20%. The amount of loss on redemption of debentures to be written
off every year will be:
(a) ` 1,60,000 (b) ` 80,000
(c) ` 20,000 (d) ` 16,000

18. On May 01, 2003, Y Ltd. issued 7%, 40,000 convertible debentures of ` 100 each at a premium
of 20%. Interest is payable on September 30 and March 31, every year. Assuming that the interest
runs from the date of issue, the amount of interest expenditure debited to profit and loss account
for the year ended March 31, 2004 is:
(a) ` 2,80,000 (b) ` 2,33,333
(c) ` 3,36,000 (d) ` 2,56,667

19. Shyam Limited issued 20,000, 8% debentures of ` 10 each at par which are redeemable after 5
years at a premium of 20%. The amount of loss on redemption of debentures to be written off
every year is:
(a) ` 40,000 (b) ` 10,000
(c) ` 20,000 (d) ` 8,000

20. Which of the following statements is false?

(a) Debenture is a form of public borrowing.
(b) It is customary to prefix debentures with the agreed rate of interest.
(c) Debenture interest is a charge against profits.
(d) The issue price and redemption value of debentures cannot differ.

21. Which of the following is not a characteristic of Bearer Debentures?

(a) They are treated as negotiable instruments.
(b) Their transfer requires a deed of transfer.
(c) They are transferable by mere delivery.
(d) The interest on it is paid to the holder irrespective of identity.

22. The debentures which are secured by a charge upon some or all assets of the company are
known as:
(a) First mortgage debenture (b) Second mortgage debenture
(c) Bearer debenture (d) Secured debenture

23. When debentures are to be redeemed at premium an extra entry has to be made at the time of
issue of debentures, which A/c should be credited in this entry?
(a) Loss on issue of debentures A/c (b) Debenture redemption premium A/c
(c) Bank A/c (d) Debenture holder‟s A/c

24. When debentures are issued at par and are redeemable at premium, the credit given to premium
on redemption of debentures account is in nature of:

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

(a) Personal A/c (b) Real A/c

(c) Nominal A/c (d) None of these

25. When debentures are issued at a discount, it is prudent to write off the discount:
(a) In the year of the issue of debentures
(b) During the life of the debentures if it is treated as deferred revenue expenditure.
(c) Within 3 years of the issue of debentures.
(d) In the year of redemption of debentures.

26. Ansh Ltd. issued 5,000 Debentures of ` 10 each of subscription. 4,000 Debentures were
subscribed by the public by paying ` 3 as application money. Number of debentures allotted to
public by Ansh Ltd. will be:
(a) 5,000 shares (b) 4,000 shares
(c) 3,000 shares (d) 1,000 shares

27. Interest received on debenture redemption fund investment is:

(a) Capital reserve A/c (b) General reserve A/c
(c) Debenture redemption fund A/c (d) None of the above

28. Paresh Ltd. issued 10,000 12% Debentures of ` 100 each at a discount of 10% payable in full on
application by 31st March, 2007. Application were received for 12,000 debentures. Debentures
were allotted on 9th June, 2007. The amount of excess money refunded on the same date will be:
(a) ` 1,80,000 (b) ` 1,00,000
(c) ` 1,10,000 (d) ` 1,50,000

29. “Non-convertible” debenture is inferred as:

(a) Owner‟s capital (b) Loan capital
(c) Short term debts (d) None of these

30. Tahil Ltd. has issued 14% Debentures of ` 20,00,000 at a discount of 10% on April 01, 2005 and
the company pays interest half-yearly on June 30, and December 31 every year. On march 31, 2007,
the amount shown as “interest accrued but not due” in the balance sheet will be:
(a) ` 70,000 shown along with Debentures.
(b) ` 2,10,000 under current liabilities.
(c) ` 1,40,000 shown along with Debentures.
(d) ` 2,80,000 under current liabilities.

31. XYZ Ltd. purchased a machinery for ` 10,00,000 from Mohan Ltd. and the consideration wash
paid by the issue of 18% debentures of ` 100 each at a discount of 20%. Calculate the number of
debentures to be issued:
(a) 12,500 (b) 10,000
(c) 9,333 (d) none the of above

32. Yadav Ltd. purchased a building from Gandhi Ltd. for ` 50,00,000 and the consideration was
paid by the issue of debentures of ` 100 each at a premium of ` 25 each. Calculate the number of
debentures to be issued to Gandhi Ltd.
(a) 50,000 (b) 40,000

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

(c) 66,667 (d) None of the above

33. Debenture holders are called the …… of a company.

(a) Banker (b) Owner
(c) Creditor (d) Debtor

34. ABC Ltd. purchased a machinery from Micro Ltd. for ` 50,00,000 and the consideration was
paid by issuing debentures of ` 100 each at a discount of 20%. Calculate the amount to be credited
to the debenture account:
(a) ` 50,00,000 (b) ` 43,00,000
(c) ` 75,00,000 (d) ` 62,50,000

35. Ram Ltd. purchased a car from Harish Ltd. for ` 10,00,000 and the consideration was paid by
issuing debentures of ` 10 each at a premium of ` 2.5 each. Calculate the amount to be credited to
Debentures Account:
(a) ` 8,00,000 (b) ` 13,33,000
(c) ` 12,50,000 (d) None of these

36. Morseny Ltd. issued 2,000, 15% debentures of ` 100 each at a premium of 10% which are
redeemable after 10 years at a premium of 20%. The discount of loss on redemption of debentures
to be written off every year is:
(a) ` 20,000 (b) ` 10,000
(c) ` 40,000 (d) None of these

37. ABC Ltd. issued 1,000, 9% debentures of ` 100 each at a discount of 10%, which will be
redeemed after 5 years at a premium of 10%. Calculate the discount on loss of issue of debentures
to be written off each year.
(a) ` 40,000 (b) ` 20,000
(c) ` 10,000 (d) ` 5,000

38. When the debentures are issued as a collateral security then what entry will be passed?
(a) No entry
(b) Debit Debenture Suspense A/c and Credit Debentures A/c
(c) Both (a) & (b)
(d) Neither (a) nor (b)

39. Which of the following statement is NOT true?

(a) On maturity the debenture holders get back their money.
(b) Debentures can be forfeited for non-payment of call money.
(c) In the balance sheet, debentures are shown under secured loan.
(d) Interest on debentures is payable even in case of loss.

40. Interest on debentures issued as a collateral security is paid on:

(a) Nominal value of debentures (b) No interest is paid
(c) Face value of debentures (d) Paid up value of debentures

41. A debenture holder is entitled to:

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

(a) Fixed dividend (b) Share in profits

(c) Voting rights in the company (d) Interest at the fixed rates

42. If the debentures allotted for consideration other than cash are more than the agreed
purchase price, the difference shall be debited to:
(a) Goodwill Account (b) P & L A/c
(c) Securities Premium A/c (d) Debentures A/c

43. If the debentures allotted for consideration other than cash are less than the agreed purchase
price, the difference is credited to:
(a) Goodwill A/c (b) Capital Reserve A/c
(c) P & L A/c (d) None of these

44. Shares may be issued:

(a) For cash (b) For consideration other than cash
(c) For both (a) and (b) (d) None of the above

45. 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 A/c
(d) Debit Machinery A/c , Credit Cash A/c

46. 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

47. On issue of debentures as a collateral security, which account is credited?

(a) Debentures Account (b) Bank Loan Account
(c) Debenture holding Account (d) Debenture Suspense Account

48. G Ltd. purchased land and building from H Ltd. at a book value of ` 2,00,000. The consideration
was paid issue of 12% debentures of ` 100 each at a discount of 20%. For this transaction, the
debentures account would be credited with:
(a) ` 2,60,000 (b) ` 2,50,000
(c) ` 2,40,000 (d) ` 1,60,000

49. Limited company issued a prospectus inviting application for 2,000 shares of ` 10 each at
premium of ` 2 per share payable as follows:
On application `2
On allotment ` 5 (including premium) On 1st call ` 3 on 2nd final call ` 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?

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

(a) 52 (b) 50
(c) 42 (d) 48

50. T Ltd. has issued 14% Debentures of 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) ` 70,000 (b) ` 2,80,000
(c) ` 1,40,000 (d) ` 2,10,000

51. T Ltd. has issued 14% Debentures of 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) ` 1,40,000 (b) ` 2,10,000
(c) ` 2,80,000 (d) ` 70,000

52. The holder of debentures issued as collateral security to a loan is entitled to interest on:
(a) The amount of loan only (b) on the face value of debentures
(c) Neither loan nor debenture (d) Both the loan amount and debentures.

53. K Ltd. issued ` 15,000, 12% Debentures of ` 50/- each at premium of 10% payable as ` 20/- on
application and balance on allotment Debentures are redeemable at per after 6 years. All the money
due on, allotment was called up and revised. The amount of premium will be:
(a) ` 3,00,000 (b) ` 2,25,000
(c) ` 75,000 (d) ` 5,25,000

54. Debentures is issued as a collateral security to a loan, interest will be given on:
(a) On debentures only (b) Both loan & debentures
(c) On loan but not on debentures (d) None of the following

55. Which of the following statement is true?

(a) A Debenture holder is an owner of the company.
(b) A Debenture is issued at a discount and can be redeemed at a premium.
(c) A Debenture Holder can get his money back only on liquidation.
(d) A Debenture Holder receives interest only in the event of profit.

56. Match list I with list II and select the correct answer using the codes given below the list:
A B C D
(a) 2 4 1 3
(b) 4 2 3 1
(c) 2 4 3 1
(d) 4 2 1 3

57. If shares are reissued then they are issued at:

(a) Par (b) Premium
(c) Discount (d)All of the above

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

58. On redemption of Debentures, the amount lying in Debenture Redemption Reserve, which is no
longer necessary to be retained, should be transferred to:
(a) Revaluation Reserve (b) Securities Premium Reserve
(b) Capital Reserve (d) General Reserve

59. Debenture Redemption Premium A/c is:

(a) Assets (b) Liability
(c) Expenses (d) Revenue

60. If debentures of ` 1,000 are purchased for ` 980 by the company, the difference of ` 20 will
be assumed to be:
(a) Profit on redemption of debenture (b) Loss on redemption of debenture
(c) Goodwill (d) None of the above

61. ` 4,25,000 debentures are issued against the purchase of assets of 4,50,000 in this case `
25,000 will be supposed to be:
(a) Goodwill (b) Capital Reserve
(c) Profit (d) Loss

62. The interest on Debenture Redemption Fund Investments is credited to:

(a) Debenture A/c (b) Debenture Redemption Found A/c
(c) Debenture Redemption Found Investment A/c (d) None of the above

63. The balance of debenture sinking fund is finally transferred to:

(a) Profit and Loss A/c (b) DRF Investment A/c
(c) General Reserve (d) Capital Reserve

64. Debentures which are transferable by mere delivery are:

(a) Registered Debentures (b) First Debentures
(c) Second Debentures (d) Bearer Debentures

65. Debenture holders are the:

(a) Owners of the Company (b) Creditors of the Company
(c) Directors of the Company (d) Customers of the Company

66. Discount on issue of debentures is:

(a) Current Assets (b) Fixed Assets
(c) Fictitious Assets (d) Personal Assets

67. X Co. Ltd. purchased assets worth ` 28,80,000. It issued debentures of ` 100 each at a
discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued
to vendor is:
(a) 30,000 (b) 28,800
(c) 32,000 (d) None of the above

68. Premium on Redemption of debenture account is:

(a) Asset (b) Liability

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

(c) Expenses (d) Revenue

69. Debentures of ` 4,25,000 are issued against the purchase of assets of 4,25,000 in this case `
25,000 will be supposed to be:
(a) Goodwill (b) Capital Reserve
(c) Profit (d) Loss

70. If Debentures of ` 1000 purchased for ` 980 by the Company, the difference of ` 20 will be
assumed to be:
(a) Profit on redemption of debenture (b) Loss of redemption of debenture
(c) Goodwill (d) None of the above

71. Debenture is the part of:

(a) Share capital (b) Loan
(c) Owner Capital (d) All the above

72. The interest on Debentures is:

(a) 6% (b) 12%
(c) 20% (d) Fired Rate

73. The consideration of Debentures is:

(a) Profit (b) Dividend
(c) Capital Receipts (d) Interest

74. A Co. issued 1,00,000, 12% Debentures of ` 100 each. The interest on Debentures is:
(a) ` 12,000 (b) ` 1,20,000
(c) ` 12,00,000 (d) None of these

75. According to SEBI guidelines by what percentage of amount of debentures the debentures
redemption fund will be raised before redemption?
(a) 40% (b) 50%
(c) 60% (d) 100%

76. The Premium on redemption of debentures is:

(a) Personal Account (b) Real Account
(c) Normal Account (d) None of these

77. Sinking Fund investment always shows:

(a) Debit Balance (b) Credit Balance
(c) Both (d) None of these

78. The interest on sinking fund investments is credited in:

(a) Profit & Loss Account (b) Sinking Fund Account
(c) General Reserve Account (d) Sinking Fund investment

79. Debentures represent:

(a) Long term debt of company (b) Investment of equity shareholders

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Corporate & Mangement Accounting Issue & Redemption of Debentures.

(c) Shares of directors in company (d) None of these

80. Debenture holders are:

(a) Owners of company (b) Customers of company
(c) Creditors of company (d) None of these

81. Discount on issue of debenture is:

(a) Fixed asset (b) Current asset
(c) Real asset (d) Unreal asset

82. Loss on issue of debenture A/c is:

(a) A liability (b) an asset
(c) An expenses (d) A gain

83. The discount on debentures which is not written off is shown in final account of company:
(a) On liabilities side of balance sheet (b) On assets side of balance sheet
(c) On debit side of profit and loss A/c (d) On credit side of profit and loss A/c

84. The journal entry for debentures issued at par and are also redeemable at par:
(a) Dr. Bank, Cr. Debentures A/c (b) Dr. Debentures A/c, Cr. Bank A/c
(c) Dr. Capital A/c, Bank A/c (d) None of these

85. If debentures of ` 3,00,000 are issued at par but redeemable at 5% premium due will be
debited to:
(a) Securities premium account (b) Debenture Redemption Premium A/c
(c) Loss on Issue of debentures A/c (d) None of these

86. If vendor‟ s debentures of ` 8,00,000 is issued to vendor in purchase consideration of net

assets of ` 8,00,000, then ` 2,00,000 will be credited to:
(a) Profit and Loss A/c (b) Goodwill Account
(c) General Reserve Account (d) Capital Reserve Account

87. Issue of debentures as collateral security will be debited to:

(a) Bank account (b) Debenture suspense account
(c) Debentures Account (d) None of these

88. Debenture which transfer by mere delivery are:

(a) Registered Debentures (b) First Debentures
(c) Second Debentures (d) Bearer Debentures

89. X Co. Ltd. purchased assets worth ` 28,80,000. It issued debentures of ` 100 each at a
discount of 4% in full satisfaction of the purchase consideration. The minimum number of
debenture issued to vendor is:
(a) 30,000 (b) 32,000
(c) 28,800 (d) None of these

90. In the Companies Act, 2013 description of Debentures is given in the:

Unique Academy 9.32 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Issue & Redemption of Debentures.

(a) Section 2(10) (b) Section 2(30)

(c) Section 3(1) (d) Section 4A

91. When debentures are redeemed by sinking fund method, after redemption of debentures, the
balance of debenture redemption fund A/c should be transferred to:
(a) Debenture Redemption Fund Investment A/c (b) General Reserve
(c) Debentures A/c (d) None of these

92. Following is not a characteristic of debentures:

(a) It is like a certificate.
(b) It is an acknowledgement of loan taken by company.
(c) It can be transferred.
(d) Debenture holder possess voting right in the meetings.

93. Discount on issue of debentures is a:

(a) Revenue profit (b) Revenue loss
(c) Capital profit (d) Capital loss

Unique Academy 9.33 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Bonus Shares

Chapter 10 - Bonus Shares

Whenever any company gives its shares/call advantage without consideration, such shares/call
advantages is called Bonus Shares.
Bonus can be of two types:- Bonus shares & Bonus call (call advantages)
Bonus shares are fully paid issued shares to existing shareholder without consideration. These are
given only to Equity Shareholder. Bonus shares are allowed only if existing shares are fully paid.
Bonus call means paid up amount of partly paid shares, without consideration & allotted to existing
partly paid shares. Bonus call is just like payment of equity dividend.

Journal entries
1) For Bonus Call
Profit & Loss A/c Dr.
General Reserve A/c Dr.
To Bonus Call A/c
[Being bonus call announced]
Bonus Share A/c Dr
To Share Capital A/c
[Being bonus allotted]
Note:- Bonus of 5:2 means 5 bonus share will be allotted for 2 equity shares held.

Self-Practice Question 1
The Balance Sheet of A Ltd. as at 31-03-1995 is as follows:
Balance Sheet as at 31-03-1995
Equity and Liabilities Rs.
Shareholders Funds
Authorized Share Capital 1,50.000 Equity Shares of Rs 10 each 15,00,000
Issued, Subscribed and Paid-up 80.000 Equity Shares of 7.50 each called up
and paid-up 6,00,000
Reserves:
Capital Redemption Reserve 1,50,000
Plant Revaluation Reserve 20,000
Share Premium Account 1,50,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
General Reserve 3,00,000
17,00,000
Non Current Assets Rs.
Sundry Assets 17,00,000
17,00,000

Unique Academy 10.1 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Bonus Shares

The company wanted to issue bonus shares to its shareholders at the rate of one share for every two
shares held. Necessary resolutions were passed: requisite legal requirements were complied with:
(a) You are required to give effect to the proposal by passing journal entries in the books of A Ltd.
(b) Show the amended Balance Sheet.

Comments
Issue of bonus shares — Most candidates failed to show separately in the amended balance sheet,
sources used for issue of bonus shares. Most candidates debited bank account instead of general
reserve account in order to make partly paid shares fully paid up.

Self-Practice Question 2
Bee Ltd. had the following Balance on 31-03-1999:

Particulars Rs.
6% Preference Shares of Rs.25 each fully paid 2,00,000
Equity Shares of Rs.100 each fully paid 10,00,000
Share Premium Account 2,00,000
Capital Redemption Reserve Account 1,00,000
General Reserve 3,00,000
Profit and Loss Account 80,000

On the date. Land and Building which stood at Rs. 5,00.000 in the books were revalued at Rs. 8.00,000.
It was decided to:

(i) Consolidate the preference shares into shares of Rs. 100 each;
(ii) Subdivide the equity shares of Rs. 1 each:
(iii) Adopt the revaluation of Land and Building; and
(iv) Issue fully paid up bonus shares to equity shareholders equal to 50% of the present Equity Share
Capital. revenue reserve and profit being used only if necessary for the purpose.

Self-Practice Question 3
Following is the extract of the Balance Sheet of Beltex Ltd. as at 31st March, 2000.
Equity and Liabilities Rs.
Shareholders Funds
Authorized Capital
10,000 12% Preference shares of Rs. 10 each 1,00,000
1,00,000 Equity shares of Rs 10 each 10,00,000
11,00,000
Issued and Subscribed Capital:
8,000 12% Preference shares of Rs. 10 each fully paid 80,000
90,000 Equity shares of Rs. 10 each, Rs. 8 paid up 7,20,000
Unique Academy 10.2 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Bonus Shares
Reserves and Surplus:
General Reserve 1,20,000
Capital Reserve 75,000
Securities Premium 25,000
Profit and Loss Account 2,00,000
Non Current Liabilities
12% Partly Convertible Debentures @ Z 100 each 5,00,000

On 1st April. 2000 the Company has made final call @ Rs.2 each on 90,000 equity shares. The call
money
was received by 20th April, 2000. Thereafter the company decided to capitalize its reserves by way of
bonus at the rate of one share for every four shares held. Share premium of Rs. 25,000 includes a
premium of Rs. 5,000 for shares issued to vendors pursuant to a scheme of amalgamation. Capital
reserves include Rs. 40,000, being profit on sale of plant and machinery. 20% of 12% debentures are
convertible into equity shares of Rs. 10 each fully paid on 1st July, 2000.

Show necessary entries in the books of the company and prepare the extract of the Balance Sheet
immediately after bonus issue but before conversion of debentures. Are the convertible debenture
holders entitled to bonus shares?

Self-Practice Question 4
A Company issued bonus shares to the shareholders — one share to holders of 10 shares.
The following are the details, pass journal entries:
Particulars `
Equity Capital 10,000 shares of Rs. 100 each 10,00,000
Preference Capital 6,000 shares of Rs. 100 each 6,00,000
General Reserve 5,00,000

Self-Practice Question 5
X Ltd. has resolved to utilise Rs. 3,00,000 out of the general reserve balance to declare bonus to
the shareholders in the form of payment of final call @ 73 per share on 1,00.000 equity shares of no
each. Along with this, the company further decided to utilise the balance of share premium account to
issue fully paid-up bonus shares in the ratio of one equity share for every five equity shares held.
Show
journal entries in the books of X Ltd.
Ans. Share Premium Account is utilized to the extent of Rs. 2,00,000

Self-Practice Question 6
The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 2012:

Particulars ` in Lac
(1) Share Capital

Unique Academy 10.3 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Bonus Shares
Authorised:
20 Crore Shares of Rs. 10 Each 20,000
Issued and Subscribed:
10 Crore Equity Shares of Rs. 10 Each 10,000
2 Crore 11% Cumulative Preference Shares of Rs.10 each 2,000
Total 12,000
Called and Paid Up
10 Crore Equity Shares of Rs.10 each. Rs. 8 per share Called and Paid Up 8,000
2 Crore 11% Cumulative Preference Shares of Rs. 10 each. Fully Called and Paid Up 2,000
Total 10,000
(2) Reserves and Surplus:
Capital Reserve 485
Capital Redemption Reserve 1,000
Securities Premium 2,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss (Appropriation) Account 273
Total 4,798

On 2nd April, 2012 the company made the final call on equity shares @ Rs. 2 per share. The entire
money was received in the month of April, 2012.

On 1st June, 2012 the company decided to issue to equity shareholders bonus shares at the rate of 2
shares for every 5 shares held and for this purpose. it decided to utilize the capital reserves to the
maximum possible extent.

Pass journal entries for all the above mentioned transactions. Also prepare the notes on Share Capital
and Reserves and Surplus relevant to the Balance Sheet of the company immediately after me issue of
bonus snares.

1. Before issue of bonus shares?

a) The partly paid up shares,if any are to be forfeited.
b) The partly paid up shares,if any, are to be made fully paid up.
c) The partly paid up shares,if any, will be converted into fully paid up without receiving any cash.
d) The partly paid up shares,if any, will be shown in the balance sheet without any change.

2. The bonus issue should be made out of free reserves and

a) It does not include securities premium.
b) It includes all securities premium received in cash or kind.
Unique Academy 10.4 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Bonus Shares
c) It includes securities premium received in kind only.
d) it includes securities premium received in cash only.

3. The company shall implement the bonus issue?

a) Within 45 days from the date of approval of the issue by its board of directors
b) Within 30 days from the date of approval of the issue by its board of directors
c) Within 15 days from the date of approval of the issue by its board of directors
d) Within 7 days from the date of approval of the issue by its board of directors

4. In a rights issue?
a) Normal prospectus is issued
b) Red-herring prospectus is issued
c) No prospectus is issued
d) Red-herring prospectus is issued before final prospectus

5. Stock split is the process of ?

a) Consolidating the face value of the shares of the company
b) Reducing the capital of the company.
c) Restructuring the capital of the company
d) Reducing face value of shares of the company by dividing one share into two or more parts

6. A company makes a bonus issue of shares. What is the effect on the net assets and the balance
sheet?
Net Assets Reserves
A) Increase Decrease
B) Increase Unchanged
C) Unchanged Decrease
D) Unchanged Increase

7. What will result in an increase in cash funds to a business?

a) Bonus issue of shares
b) Increase in authorized share capital
c) Revaluation of fixed assets
d) Rights issue of shares

8. Which statement about bonus shares is true?

a) They may be issued as repayment of debenture.
b) They may be issued at a premium
c) They may be issued to the holders of preference shares
d) They may be issued using the premium received from an issue of preference shares.

9. A company share capital consists of 1,50,000 equity shares of Rs.5 each. Its makes a rights issue of
1 equity for every 3 already held at Rs.12 per share. It then makes a bonus issue of 1 equity for every
5 held. Which amount will be shown in the balance for share capital?
Unique Academy 10.5 Prof. Ashish Parikh - 8007978700
Corporate & Mangement Accounting Bonus Shares
a) Rs.12,00,000 b) Rs.14,50,000
c) Rs.13,50,000 d) Rs.16,50,000

10. A company. Balance sheet as at 31.12.2014 includes

Equity share of Rs.5 each, fully paid -> Rs.32,00,000
Cash at bank -> Rs.10,00,000
The following then took place

2015
February :- A one for two rights issue of equity shares of Rs.5 each at Rs.11. The issue was fully
subscribed.
April:-A bonus issue was one-for-four equity shares of Rs.5 each.
Assume no other transactions took place between 31.12.2014 and 30.04.2015. What were the balances
of the equity
Share capital and bank accounts on 30.04.2015 ?
Equity share Capital (Rs.) Bank (Rs.)
a) 60,00,000 45,20,000
b) 60,00,000 57,20,000
c) 84,00,000 45,20,000
d) 84,00,000 62,00,000

Unique Academy 10.6 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Audit Committee

Chapter 11 – Audit Committee

Audit Committee is one of the main pillars of the corporate governance mechanism in any company.
The Committee is charged with the principal oversight of financial reporting and disclosure.
The constitution of Audit Committee is mandated under the Companies Act, 2013 and SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015.
Audit Committee Provisions in Companies Act (Section 177 of the Companies Act, 2013)

Constitution of Audit Committee: As per the provisions of the Companies Act, 2013, the following companies are
required to constitute an Audit Committee:
1. Every Listed Public Companies or
2. Unlisted public companies having:
(a) Paid-up capital of Rs.10 crore or more;
(b) Turnover of Rs.100 crore or more;
(c) Aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 crore or
more.
Note: The calculation of above paid-up share capital or turnover or outstanding loans etc. shall be based on the last
audited Financial Statements. The Companies Act, 2013 provides 1 year from the date of its enforcement for
reconstitution of the Audit Committee.

Members: The Audit Committee shall comprise of minimum 3 directors with majority of the directors being
Independent Directors.
The majority of members of audit committee should be financial literate.
Chairman: The Chairman of the Audit Committee should be financially literate.

Unique Academy 11.1 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Audit Committee
Special Note: The requirement of Independent directors forming a majority is not applicable to Section 8
companies

Role of Audit Committee:

(a) The recommendation for appointment, remuneration and terms of appointment of auditors;
(b) Review and monitor the auditors' independence and performance, and effectiveness of audit process;
(c) Examination of the financial statement and the auditors' report thereon;
(d) Approval or any subsequent modification of transactions of the company with related parties;
(e) Scrutiny of inter-corporate loans and investments;
(f) Valuation of undertakings or assets of the company, wherever it is necessary;
(g) Evaluation of internal financial controls and risk management systems;
(h) Monitoring the end use of funds raised through public offers and related matters.

Establishment of Internal Control Systems: The Audit Committee recommends the establishments of Internal Control
Systems (relating to financial) and may also call the auditors for comments relating to internal control systems, the
scope of audit etc.
Investigation: The audit committee can start investigation in the matter or referred by the Board and also have the
authority to obtain advice from external sources and have full access to records of the company.
Disclosure in Board's Report: Section 177(8) of the Act provides that the board's report shall disclose
• Composition of an Audit Committee
• Where the Board had not accepted any recommendation of the Audit Committee, the same shall be
disclosed in the report along with the reasons therefore.
Establishments of vigil Mechanism: Every listed company and the companies belonging to the following class or
classes shall establish a vigil mechanism for their directors and employees to report genuine concerns or grievances:
(1) The companies which accept deposits from the public;
(2) The companies which have borrowed money from banks and public financial institutions in excess of Rs.50
crores.
Note: In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the
director nominated to play the role of audit committee may take suitable action against the concerned director or
employee including reprimand.
Audit Committee Provisions in SEBI (Listing Obligation Disclosure Requirements), 2015
Every listed entity shall constitute a qualified and independent audit committee Members:
The audit committee shall have minimum three directors as members.
- Two-thirds of the members of audit committee shall be independent directors;
- All members of audit committee shall be financially literate and at least one member shall have accounting
or related financial management expertise;
Chairman: The Chairman of the Audit Committee shall be an Independent director and shall be present at Annual
General Meeting to answer Shareholder's queries;
Secretary: The Company Secretary shall act as the secretary to the committee.
Invitees: The audit committee may invite such of the executives, as it considers appropriate to be present at the
meetings of the committee.
The finance director, head of internal audit and a representative of the statutory auditor may be present as invitees
for the meetings of the audit committee.

Unique Academy 11.2 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Audit Committee
Note: Financially literate means the ability to read and understand basic financial statements i.e. balance sheet,
profit and loss account, and statement of cash flows. A person will be treated to have accounting or related
financial management expertise if he or she possesses experience in finance or accounting, or requisite
professional certification in accounting, or any other comparable experience.

Number of Meetings: The audit committee should meet at least 4 times in a year and the maximum gap between
two meetings shall not exceed 120 days.
Quorum: The quorum shall be either 2 members or 1/3 of the members of audit committee whichever is greater
subject to minimum of 2 independent members present in the meeting.
Additional Role of Audit Committee in LODR:
The role of the audit committee includes the following:
• Oversight of company's financial reporting process & disclosure of financial information.
• Recommending to the Board appointment, re-appointment and the replacement or removal of the statutory
auditor and the fixation of audit fees.
• Approval of payment to statutory auditors for any other services rendered.
• Reviewing, with the management, the annual or quarterly financial statements before submission to the
board for approvA1.
• Reviewing, with the management, performance of statutory and internal auditors, and adequacy of the
internal control systems.
• Reviewing the adequacy of internal audit function.
• Scrutiny of inter-corporate loans and investments;
• Valuation of undertakings or assets of the listed entity, wherever it is necessary;
• Evaluation of internal financial controls and risk management systems;
• Discussion with internal auditors of any significant findings and follow up;
• Discussion with statutory auditors before the audit commences, about the nature and scope of audit.
Compliance: A listed entity is required to comply both with the Companies Act, 2013 as well as SEBI (LODR)
Regulations, 2015.
Whereas, other entities who need to constitute Audit Committee will comply with Companies Act, 2013.

Comparison of Audit Committee under Companies Act. 2013 and SEBI (LODR) Regulations, 2015
1. LODR requires that all members of audit committee shall be financially literate and at least one member
shall have accounting or related financial management expertise whereas the Companies Act, 2013 provides
for majority of members of Audit Committee including its Chairperson shall be persons with ability to read
and understand, the financial statement.
2. The Regulations require 2/3rd of members of the Audit Committee to be independent whereas Companies
Act, 2013 requires majority of members to Audit Committee to be Independent.
3. The role of Audit Committee under the Regulations is wider.
4. The Companies Act, 2013 does not prescribe that the chairman shall be an independent Director.
5. The Companies Act, 2013 does not provide for frequency of meeting of the audit Committee.
6. The Companies Act, 2013 does not provide for quorum for Audit committee meeting.
AUDIT COMMITTEE
Audit Committee is one of the main pillars of the corporate governance mechanism in any company.
The Committee is charged with the principal oversight of financial reporting and disclosure.
The constitution of Audit Committee is mandated under the Companies Act, 2013 and SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015.
Audit Committee Provisions in Companies Act (Section 177 of the Companies Act, 2013)

Unique Academy 11.3 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Audit Committee

Constitution of Audit Committee: As per the provisions of the Companies Act, 2013, the following companies are
required to constitute an Audit Committee:
1. Every Listed Public Companies or
2. Unlisted public companies having:
(a) Paid-up capital of Rs.10 crore or more;
(b) Turnover of Rs.100 crore or more;
(c) Aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 crore or
more.
Note: The calculation of above paid-up share capital or turnover or outstanding loans etc. shall be based on the last
audited Financial Statements. The Companies Act, 2013 provides 1 year from the date of its enforcement for
reconstitution of the Audit Committee.

Members: The Audit Committee shall comprise of minimum 3 directors with majority of the directors being
Independent Directors.
The majority of members of audit committee should be financial literate.
Chairman: The Chairman of the Audit Committee should be financially literate.

Special Note: The requirement of Independent directors forming a majority is not applicable to Section 8
companies

Role of Audit Committee:

(a) The recommendation for appointment, remuneration and terms of appointment of auditors;
(b) Review and monitor the auditors' independence and performance, and effectiveness of audit process;
(c) Examination of the financial statement and the auditors' report thereon;
(d) Approval or any subsequent modification of transactions of the company with related parties;
(e) Scrutiny of inter-corporate loans and investments;
(f) Valuation of undertakings or assets of the company, wherever it is necessary;

Unique Academy 11.4 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Audit Committee
(g) Evaluation of internal financial controls and risk management systems;
(h) Monitoring the end use of funds raised through public offers and related matters.

Establishment of Internal Control Systems: The Audit Committee recommends the establishments of Internal Control
Systems (relating to financial) and may also call the auditors for comments relating to internal control systems, the
scope of audit etc.
Investigation: The audit committee can start investigation in the matter or referred by the Board and also have the
authority to obtain advice from external sources and have full access to records of the company.
Disclosure in Board's Report: Section 177(8) of the Act provides that the board's report shall disclose
• Composition of an Audit Committee
• Where the Board had not accepted any recommendation of the Audit Committee, the same shall be
disclosed in the report along with the reasons therefore.
Establishments of vigil Mechanism: Every listed company and the companies belonging to the following class or
classes shall establish a vigil mechanism for their directors and employees to report genuine concerns or grievances:
(1) The companies which accept deposits from the public;
(2) The companies which have borrowed money from banks and public financial institutions in excess of Rs.50
crores.
Note: In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the
director nominated to play the role of audit committee may take suitable action against the concerned director or
employee including reprimand.
Audit Committee Provisions in SEBI (Listing Obligation Disclosure Requirements), 2015
Every listed entity shall constitute a qualified and independent audit committee Members:
The audit committee shall have minimum three directors as members.
- Two-thirds of the members of audit committee shall be independent directors;
- All members of audit committee shall be financially literate and at least one member shall have accounting
or related financial management expertise;
Chairman: The Chairman of the Audit Committee shall be an Independent director and shall be present at Annual
General Meeting to answer Shareholder's queries;
Secretary: The Company Secretary shall act as the secretary to the committee.
Invitees: The audit committee may invite such of the executives, as it considers appropriate to be present at the
meetings of the committee.
The finance director, head of internal audit and a representative of the statutory auditor may be present as invitees
for the meetings of the audit committee.

Note: Financially literate means the ability to read and understand basic financial statements i.e. balance sheet,
profit and loss account, and statement of cash flows. A person will be treated to have accounting or related
financial management expertise if he or she possesses experience in finance or accounting, or requisite
professional certification in accounting, or any other comparable experience.

Number of Meetings: The audit committee should meet at least 4 times in a year and the maximum gap between
two meetings shall not exceed 120 days.
Quorum: The quorum shall be either 2 members or 1/3 of the members of audit committee whichever is greater
subject to minimum of 2 independent members present in the meeting.
Additional Role of Audit Committee in LODR:
The role of the audit committee includes the following:
• Oversight of company's financial reporting process & disclosure of financial information.
• Recommending to the Board appointment, re-appointment and the replacement or removal of the statutory
auditor and the fixation of audit fees.

Unique Academy 11.5 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Audit Committee
• Approval of payment to statutory auditors for any other services rendered.
• Reviewing, with the management, the annual or quarterly financial statements before submission to the
board for approvA1.
• Reviewing, with the management, performance of statutory and internal auditors, and adequacy of the
internal control systems.
• Reviewing the adequacy of internal audit function.
• Scrutiny of inter-corporate loans and investments;
• Valuation of undertakings or assets of the listed entity, wherever it is necessary;
• Evaluation of internal financial controls and risk management systems;
• Discussion with internal auditors of any significant findings and follow up;
• Discussion with statutory auditors before the audit commences, about the nature and scope of audit.
Compliance: A listed entity is required to comply both with the Companies Act, 2013 as well as SEBI (LODR)
Regulations, 2015.
Whereas, other entities who need to constitute Audit Committee will comply with Companies Act, 2013.

Comparison of Audit Committee under Companies Act. 2013 and SEBI (LODR) Regulations, 2015
1. LODR requires that all members of audit committee shall be financially literate and at least one member
shall have accounting or related financial management expertise whereas the Companies Act, 2013 provides
for majority of members of Audit Committee including its Chairperson shall be persons with ability to read
and understand, the financial statement.
2. The Regulations require 2/3rd of members of the Audit Committee to be independent whereas Companies
Act, 2013 requires majority of members to Audit Committee to be Independent.
3. The role of Audit Committee under the Regulations is wider.
4. The Companies Act, 2013 does not prescribe that the chairman shall be an independent Director.
5. The Companies Act, 2013 does not provide for frequency of meeting of the audit Committee.
6. The Companies Act, 2013 does not provide for quorum for Audit committee meeting.

BOARD'S REPORTS AND ITS DISCLOSURES- Section 134

The financial statement including consolidated financial statement should be approved by the Board of
Directors before they are signed and submitted to auditors for audit report.
The Board's Report shall be attached to every copy of financial statement laid before the company in the
Annual General Meeting.
The following documents shall be attached with every financial statement of the Company which shall be
laid before an Annual General Meeting, a report by its Board of Directors, which shall include:
Content of the Board's Report
1. Extract of Annual return:
Extract of the annual return in Form MGT 9 to be attached with the Board's Report including:
(a) Number of meetings of the Board.
(b) Directors' Responsibility Statement.
(c) A statement on declaration given by independent directors.
(d) Company's policy on directors' appointment and remuneration including criteria for
determining qualifications, positive attributes of independence of a director and any other
matter.

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Corporate & Mangement Accounting Audit Committee
(e) Explanations by the Board on every qualification, reservation or adverse remark made by the
auditors or by practicing company secretary in his secretarial audit report.
(f) Particulars of loans, guarantees or investments.
(g) Related parties transactions.
(h) The state of the company's affairs.
(i) The amount, if any, which it recommends should be paid by way of dividend.
(j) Material changes and commitments, if any.
(k) The conservation of energy, technology absorption, foreign exchange earnings and outgo.
(L) A statement indicating development and implementation of a risk management policy for the
company including identification of elements of risk.

2. The Directors' Responsibility Statement

The Director's responsibility Statement includes the statement about:
(a) The applicable accounting standards had been complied with along with proper explanation
relating to material departures;
(b) The directors had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view of
the state of affairs of the company at the end of the financial year and of the profit and loss of
the company for that period;
(c) The directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this Act for safeguarding the assets
of the company and for preventing and detecting fraud and other irregularities;
(d) The directors had prepared the annual accounts on a going concern basis; and
(e) The directors, in the case of a listed company, had laid down internal financial controls to be
followed by the company and that such internal financial controls are adequate and were
operating effectively.
Note: Internal financial controls as the policies and procedures adopted by the company for ensuring the
orderly and efficient conduct of its business, including adherence to company's policies, the safeguarding of
its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting
records, and the timely preparation of reliable financial information.
3. Independent Director:
An Independent Director is a person who is not related to the promoters or the other members of the
company.
An independent director shall hold office for a term up to 5 consecutive years on the Board of a
company, but shall be eligible for reappointment on passing of a special resolution by the company
and disclosure of such appointment in the Board's report.
4. Audit Committee:
Board's Report shall disclose the composition of audit committee and also discloses the
recommendation of the audit committee which is not accepted by the Board along with reason
thereof.
5. Vigil Mechanism:
It is the whistleblower provision which is a mandatory requirement.
This mechanism would enable a company to evolve a process to encourage ethical corporate
behavior.
Every listed company shall establish a Vigil mechanism for their Directors and Employees to report
their genuine concern or grievances.
1. Nomination and Remuneration committee:

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Corporate & Mangement Accounting Audit Committee
The Board's Report shall disclose the composition of Nomination and Remuneration Committee and
also discloses the recommendation of the Nomination and Remuneration Committee.
2. Secretarial Audit for Bigger Companies:
Every listed company and other prescribed companies shall annex the secretarial audit report given
by a Company Secretary in practice with Board's Report.
The Board in its report shall explain any qualification or other remarks made by the Company
Secretary in Practice.
3. Disclosures about CSR Policy:
The disclosure of contents of Corporate Social Responsibility Policy in the Board's report and on the
company's website.
9. Conservation of energy, technology absorption, foreign exchange earnings and outgo: Details of
steps taken by the Company for energy & technology absorption and foreign exchange earnings and
spending during the financial year to be disclosed in such manner as may be prescribed.
10. Statement of affairs of Company:
The profit or loss earned during the year.
11. Dividend:
The dividend proposed if any for the financial year should be disclosed in the Board's Report.
12. Reserve:
Transfer if any to the Reserve during the financial year should be disclosed in the Board's Report.
13. Explanations or comments by the Board on every Qualification, reservation or adverse remark
or disclaimer made by Auditor and Secretarial Auditor:
The Board should give explanation to any qualification reservation or adverse marks given by the
auditor in his auditor's report and by Secretarial Auditor in his secretarial report.
14. Particulars of loans, guarantees or investments under section 186:
Details about loans given or guarantee security given by the Company or any investment done by the
Company shall be disclosed in the Auditor's Report.
15. Related party Contracts:
Any contracts entered by the Company which are covered under Section 188 of the Companies Act
should be disclosed.
16. Disclosure about issue of Sweat Equity Shares:
The Board of Directors shall, inter alia, disclose in the Directors' Report for the year in which such
shares are issued, the following details of issue of sweat equity shares, namely:
(a) the class of director or employee to whom sweat equity shares were issued.
(b) the class of shares issued as Sweat Equity Shares.
(c) the number of sweat equity shares issued to the directors, KMP or employees showing
separately the number of such shares issued to them.
(d) the reasons or justification for the issue.
(e) the principal terms and conditions for issue of sweat equity shares, including pricing formula.
17. Disclosure about issue of shares under ESOP and ESPS:
The Board of Directors shall disclose the following details about ESOP & ESPS in the Directors'
Report for each year:
(a) options granted;
(b) options vested;
(c) options exercised;
(d) the total number of shares arising as a result of exercise of option;
(e) options lapsed;
(f) the exercise price;
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Corporate & Mangement Accounting Audit Committee
(g) variation of terms of options;
(h) money realized by exercise of options;
(i) total number of options in force;
(j) employee wise details of options granted to—
(a) key managerial personnel;
(b) any other employee who receives a grant of options in any 1 year of option amounting
to 5% or more of options granted during that year.
(c) identified employees who were granted option, during any 1 year, equal to or
exceeding 1% of the issued capital (excluding outstanding warrants and conversions)
of the company at the time of grant.
18. Disclosure of shares issued with differential rights:
If the Company has issued any equity shares with differential rights during the financial year, the
details of the same should be mentioned in the Report.
Signing and Dating of Board's Report
The Board's report and its annexure shall be signed by its Chairperson of the company if he is authorised by
the Board and where he is not so authorised, shall be signed by at least 2 directors, one of whom shall be a
managing director (MD), or by the director where there is one director.
A signed copy of every financial statement, including consolidated financial statement, if any, shall be
issued, circulated or published along with a copy each of:
(a) any notes annexed to or forming part of such financial statement;
(b) the auditor's report; and
(c) the Board's report.

Filing of copy of Financial Statement along with Board's Report

After the financial statement has been laid before the company at an AGM, a copy of the financial statement,
including consolidated financial statement, if any, along with all documents required to be annexed or
attached, should be filed with the ROC within 30 days from the date of AGM.
BOARD'S REPORTS AND ITS DISCLOSURES- Section 134 of the Companies Act, 2013
The financial statement including consolidated financial statement should be approved by the Board of
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Corporate & Mangement Accounting Audit Committee
Directors before they are signed and submitted to auditors for audit report.
The Board's Report shall be attached to every copy of financial statement laid before the company in the
Annual General Meeting.
The following documents shall be attached with every financial statement of the Company which shall be
laid before an Annual General Meeting, a report by its Board of Directors, which shall include:
Content of the Board's Report
1. Extract of Annual return:
Extract of the annual return in Form MGT 9 to be attached with the Board's Report including:
(a) Number of meetings of the Board.
(b) Directors' Responsibility Statement.
(c) A statement on declaration given by independent directors.
(d) Company's policy on directors' appointment and remuneration including criteria for
determining qualifications, positive attributes of independence of a director and any other
matter.
(e) Explanations by the Board on every qualification, reservation or adverse remark made by the
auditors or by practicing company secretary in his secretarial audit report.
(f) Particulars of loans, guarantees or investments.
(g) Related parties transactions.
(h) The state of the company's affairs.
(i) The amount, if any, which it recommends should be paid by way of dividend.
(j) Material changes and commitments, if any.
(k) The conservation of energy, technology absorption, foreign exchange earnings and outgo.
(L) A statement indicating development and implementation of a risk management policy for the
company including identification of elements of risk.

2. The Directors' Responsibility Statement

The Director's responsibility Statement includes the statement about:
(a) The applicable accounting standards had been complied with along with proper explanation
relating to material departures;
(b) The directors had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view of
the state of affairs of the company at the end of the financial year and of the profit and loss of
the company for that period;
(c) The directors had taken proper and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of this Act for safeguarding the assets
of the company and for preventing and detecting fraud and other irregularities;
(d) The directors had prepared the annual accounts on a going concern basis; and
(e) The directors, in the case of a listed company, had laid down internal financial controls to be
followed by the company and that such internal financial controls are adequate and were
operating effectively.
Note: Internal financial controls as the policies and procedures adopted by the company for ensuring the
orderly and efficient conduct of its business, including adherence to company's policies, the safeguarding of
its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting
records, and the timely preparation of reliable financial information.
3. Independent Director:
An Independent Director is a person who is not related to the promoters or the other members of the
company.
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Corporate & Mangement Accounting Audit Committee
An independent director shall hold office for a term up to 5 consecutive years on the Board of a
company, but shall be eligible for reappointment on passing of a special resolution by the company
and disclosure of such appointment in the Board's report.
4. Audit Committee:
Board's Report shall disclose the composition of audit committee and also discloses the
recommendation of the audit committee which is not accepted by the Board along with reason
thereof.
5. Vigil Mechanism:
It is the whistleblower provision which is a mandatory requirement.
This mechanism would enable a company to evolve a process to encourage ethical corporate
behavior.
Every listed company shall establish a Vigil mechanism for their Directors and Employees to report
their genuine concern or grievances.
4. Nomination and Remuneration committee:
The Board's Report shall disclose the composition of Nomination and Remuneration Committee and
also discloses the recommendation of the Nomination and Remuneration Committee.
5. Secretarial Audit for Bigger Companies:
Every listed company and other prescribed companies shall annex the secretarial audit report given
by a Company Secretary in practice with Board's Report.
The Board in its report shall explain any qualification or other remarks made by the Company
Secretary in Practice.
6. Disclosures about CSR Policy:
The disclosure of contents of Corporate Social Responsibility Policy in the Board's report and on the
company's website.
9. Conservation of energy, technology absorption, foreign exchange earnings and outgo: Details of
steps taken by the Company for energy & technology absorption and foreign exchange earnings and
spending during the financial year to be disclosed in such manner as may be prescribed.
10. Statement of affairs of Company:
The profit or loss earned during the year.
11. Dividend:
The dividend proposed if any for the financial year should be disclosed in the Board's Report.
12. Reserve:
Transfer if any to the Reserve during the financial year should be disclosed in the Board's Report.
13. Explanations or comments by the Board on every Qualification, reservation or adverse remark
or disclaimer made by Auditor and Secretarial Auditor:
The Board should give explanation to any qualification reservation or adverse marks given by the
auditor in his auditor's report and by Secretarial Auditor in his secretarial report.
14. Particulars of loans, guarantees or investments under section 186:
Details about loans given or guarantee security given by the Company or any investment done by the
Company shall be disclosed in the Auditor's Report.
15. Related party Contracts:
Any contracts entered by the Company which are covered under Section 188 of the Companies Act
should be disclosed.
16. Disclosure about issue of Sweat Equity Shares:
The Board of Directors shall, inter alia, disclose in the Directors' Report for the year in which such
shares are issued, the following details of issue of sweat equity shares, namely:
(a) the class of director or employee to whom sweat equity shares were issued.
(b) the class of shares issued as Sweat Equity Shares.
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Corporate & Mangement Accounting Audit Committee
(c) the number of sweat equity shares issued to the directors, KMP or employees showing
separately the number of such shares issued to them.
(d) the reasons or justification for the issue.
(e) the principal terms and conditions for issue of sweat equity shares, including pricing formula.
17. Disclosure about issue of shares under ESOP and ESPS:
The Board of Directors shall disclose the following details about ESOP & ESPS in the Directors'
Report for each year:
(a) options granted;
(b) options vested;
(c) options exercised;
(d) the total number of shares arising as a result of exercise of option;
(e) options lapsed;
(f) the exercise price;
(g) variation of terms of options;
(h) money realized by exercise of options;
(i) total number of options in force;
(j) employee wise details of options granted to—
(a) key managerial personnel;
(b) any other employee who receives a grant of options in any 1 year of option amounting
to 5% or more of options granted during that year.
(c) identified employees who were granted option, during any 1 year, equal to or
exceeding 1% of the issued capital (excluding outstanding warrants and conversions)
of the company at the time of grant.
18. Disclosure of shares issued with differential rights:
If the Company has issued any equity shares with differential rights during the financial year, the
details of the same should be mentioned in the Report.
Signing and Dating of Board's Report
The Board's report and its annexure shall be signed by its Chairperson of the company if he is authorised by
the Board and where he is not so authorised, shall be signed by at least 2 directors, one of whom shall be a
managing director (MD), or by the director where there is one director.
A signed copy of every financial statement, including consolidated financial statement, if any, shall be
issued, circulated or published along with a copy each of:
(a) any notes annexed to or forming part of such financial statement;
(b) the auditor's report; and
(c) the Board's report.

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Corporate & Mangement Accounting Audit Committee

Filing of copy of Financial Statement along with Board's Report

After the financial statement has been laid before the company at an AGM, a copy of the financial statement,
including consolidated financial statement, if any, along with all documents required to be annexed or
attached, should be filed with the ROC within 30 days from the date of AGM.

MCQ’s

(1) Which audit report shows the end results of the audit report ?

(a) Secretarial report

(b) Auditors report
(c) Financial statements
(d) Annual return Ans. B

(2) The report should be issued by being ……. And objectives in discharging the functions

(a) Biased
(b) True and fair
(c) Unbiased
(d) None of the above Ans. C

(3) Who appoints the auditor for government company ?

(a) Directors of the company

(b) Members of the company
(c) 1st by directors & 2nd by members
(d) Comptroller & audit general of India Ans. D
.
(4) The C& AG of India shall within 60 days from the date of receipt of the audit report have a
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Corporate & Mangement Accounting Audit Committee
right to ……

(a) Conduct a supplementary audit of financial statement of company

(b) Comment upon or supplement such audit report
(c) Only A
(d) Both (a) & (b) Ans. D

(5) CARO 2016 is not applicable to …….

(a) Not a holding company or subsidiary company of a public

(b) Paid up capital + reserves less than or equal to Rs. 1 cr. As at reporting date
(c) Borrowings less than or equal to Rs. 1 cr. At any time during the year
(d) All of the above Ans. D

(6) Corporate governance is how a corporation is …….. or controlled

(a) Administered
(b) Managed
(c) Conducted
(d) None of the above Ans. A

(7) There is global consensus about the objective of good corporate governance maximizing …….t

(a) Market value

(b) Long term shareholder value
(c) Short term shareholder value
(d) All of the above Ans. B

(8) The objectives corporate governance include…….

(a) To create social responsibility

(b) To create a transparent working system
(c) To protect & promote the interest of shareholders
(d) All of the above Ans. D

(9) The strength of number of independent director for the prescribed companies is given under
……..

(a) Section 149

(b) Section 151
(c) Section 149(4)
(d) Section 147 Ans. C

(10) Public companies having turnover of …….. or more requires at least 2 indeoendent
directors

(a) 200 crores

(b) 100 crores
(c) 300 crores
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Corporate & Mangement Accounting Audit Committee
(d) 500 crores Ans. B

(11) Public companies having paid up capital of ………. Requires at least 2 independent
director

(a) 5 crores or more

(b) 15 crores or more
(c) 10 crores or more
(d) 20crores or more Ans. C

(12) Companies to have at least one woman director ……..

(a) Non-listed public companies- paid up share capital 100 crores or more
(b) All listed companies
(c) Non-listed public companies having turnover 300 crores or more
(d) All of the above Ans. D

(13) The audit committee shall consist of a minimum ……. With independent directors
forming majority

(a) 1 director
(b) 2 directors
(c) 3 directors
(d) 5 directors Ans. C

(14) Audit committee shall be applicable to listed or non-listed public companies having paid
up share capital of …….., turnover ………, aggregate outstanding loan of ……..

(a) 20 crores; 100 crores; 50 crores

(b) 10 crores; 200 crores; 40 crores
(c) 30 crores; 500 crores; 200 crores
(d) 10 crores; 100 crores; 50 crores Ans. D

(15) Section 178(1) of Companies Act prescribes appointment of ……..

(a) Nomination and Remuneration Committee

(b) Audit committee
(c) Internal auditor
(d) Woman director Ans. A

(16) Companies Act 2013 has mandated the internal audit for certain classes of companies
under ……

(a) Section 146

(b) Section 151
(c) Section 138
(d) Section 186 Ans. C

(17) Which non-listed companies has internal audit compulsory ?

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Corporate & Mangement Accounting Audit Committee
(a) Paid up share capital 50 cr. Or more; Turnover 200 cr. Or more; O/s loans & borrowings 100 cr. Or more
(b) Paid up share capital 10 cr. Or more; Turnover 100 cr. Or more; O/s loans & borrowings 200 cr. Or more
(c) Paid up share capital 20 cr. Or more; Turnover 150 cr. Or more; O/s loans & borrowings 250 cr. Or more
(d) Paid up share capital 30 cr. Or more; Turnover 200 cr. Or more; O/s loans & borrowings 300 cr. Or more
Ans. A

(18) CARO does not apply on private company if during a financial turnover does not
exceeding ……..

(a) 3 crores
(b) 5 crores
(c) 7 crores
(d) 10 crores Ans. B

(19) CARO does not apply to ……

(a) Banking companies

(b) Not for profit companies
(c) Both (a) & (b)
(d) None of the above Ans. B

(20) Scope of certificate issued by a practitioner is ……

(a) Narrow and restricted to subject matter only

(b) Wide and generally covers an opinion on complete set of financial statements
(c) Narrow and restricted to financial elements only
(d) Wide and covers an opinion on general as well as special purpose financial statements Ans. A

(21) In which of the following following companies auditor is required to report on matters
specified under CARO, 2016 ……

(a) One person company

(b) Small company
(c) Foreign company
(d) None of the above Ans. C

(22) A private limited company in order to be covered under CARO, 2016 must satisfy
which of the following conditions ……..

(a) Total borrowings exceeding Rs. 10 crores from any bank or financial statements at any point of time during
the financial year
(b) Total borrowings exceeding Rs. 1 crore from any bank or financial institution as on the balance sheet
(c) Total borrowings exceeding Rs. 10 crores from any bank or financial institution as on balance sheet
(d) Total borrowings exceeding Rs. 1 crore from any bank or financial institution at any point of time during the
financial year Ans. D

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 Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

Chapter 12 – Shares & Share Capital Buy Back & Reduction

BUY-BACK OF SECURITIES
Buy-back of share means purchase of its own shares by the company. In short, buy-back is a process when a company
makes an offer to buy-back its own issued shares.
Objectives of Buy-Back
(a) To return the surplus cash to shareholders
(b) To increase the current Market price of the Company
(c) To discourage unwelcome takeover bids
(d) To increase promoters' shareholding

Section 67:A company limited by shares or guarantee having a share capital cannot buy its own shares and this
restriction is applicable on all types of the Companies.
Section 68: This section allows a company to purchase its own shares or securities subject to certain conditions.

Methods of Buy-Back: The buy-back may be:

(a) From the existing shareholders
(b) From the open market
(c) By purchasing the securities from employee which have been issued under ESOP or Sweat Equity
Authorisation & Approvals.

Authorisation in the AOA: Buy-Back must be authorised by the articles of association of the company.
In case, there is no such provision, the company has to first alter the articles of association to authorise buyback.
Buy-back can be made with the approval of the Board of Directors or shareholders (by passing a special resolution) in a
general meeting, depending on the quantum of buy-back.
Approval by Board of Directors: The Board of Directors can buy-back up to 10% of the total paid-up equity capital and
free reserves of the company by passing a board resolution.
Approval by Shareholders: The Shareholders can buy-back up to 25% of the total paid-up capital and free reserves of the
company by passing a special resolution in respect of any financial year.
Note: In case of a listed company, approval of shareholders shall be obtained only by postal ballot.

Sources to Buy-Back: A company may purchase its own shares or other specified securities out of:
(a) Its free reserves; or
(b) The securities premium account; or
(c) The proceeds of any shares or other specified securities.
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 Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

Note: No buy-back of any kind of shares or other specified securities can be made out of the proceeds of an earlier issue
of the same kind of shares or same kind of other specified securities. The Company can buy-back its own shares at any
time provided that the Company has sufficient balance in any one or more of these accounts to accommodate the total
value of the buy-back.

Conditions for Buy-Back

(a) The buy-back shall be authorized by the articles of associations.

(b) The buy-back either approved by the Board of Directors or the shareholders.
(c) Debt-Equity Ratio: Ratio of debt owed by the company is not more than twice (i.e.2:l) the capital and its free reserves
after such buy-back:
Explanation: For the purposes of this clause, the expression "debt" includes all amounts of unsecured and secured debts;
(d) Fully Paid-up shares: All shares or other specified securities for buy-back are fully paid-up.
(e) Compliance with SEBI Guidelines: The buy-back of the shares or other specified securities listed on any recognized
stock exchange is in accordance with the regulations made by the SEBI in this regard;
(f) Passing of special resolution, if any:
The Notice of General Meeting shall be annexed with the explanatory statement and shall have the following details:
(a) A full and complete disclosure of all material facts;
(b) The necessity for the buy-back;
(c) The class of security intended to be purchased under the buy-back;
(d) The amount to be invested under the buy-back;
(e) The time limit for completion of buy-back.
(g) Letter of Offer to be filed with Registrar of Companies before Buy-Back: The

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 Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

Company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar
of Companies a letter of offer in Form No. SH. 8.
(h) Dispatch of letter of offer to shareholders: The letter of offer shall be dispatched to the shareholders or security
holders immediately after filing the same with the Registrar of Companies but not later than 21 days from its filing with
the Registrar of Companies.
(i) Period of offer for buy back: The offer for buy-back shall remain open for a period of not less than 15 days and not
exceeding 30 days from the date of dispatch of the letter of offer.
(j) Completion of Buy-Back: The buy-back operations should be completed within 1 year of the date of passing of the
special resolution or a resolution passed by the Board.
(k) Time gap between two buy-backs: No offer of buy-back under Section 68(2) shall be made within a period of one year
reckoned from the date of the closure of the preceding offer of buy-back, if any.
(L)Declaration of Solvency: When a company proposes to buy-back its own securities, shall file with ROC and SEBI (in
case of listed companies), a declaration of solvency signed by at least two directors of the company, one of whom shall
be the managing director, if any, in Form No. SH.9 before making buy-back.
(m) Extinguishment of Securities: After completion of buy-back operation the securities must be extinguished and
physically destroyed within 7 days of the last date of completion of buyback.
(n) No further issue: After completion of buy-back, the company shall not make a further issue of shares or other
specified securities for a period of 6 months except by way of bonus issue or in discharge of subsisting obligations such
as conversion of options/obligations given.
(o) Buy-Back return: A company shall file a return of buy-back in Form No. SH.15 within 30 days from the date of
completion of buy-back. Such form must be signed by two directors of the company including the managing director, if
any, certifying that the buy-back of securities has been made in compliance with the provisions of the Companies Act,
2013 and its rules.
(p) Register for Buy-Back: The Company has to maintain a register of the securities so bought, the consideration paid for
the securities bought-back, the date of cancellation of securities, the date of extinguishing and physically destroying of
securities and such other particulars as may be prescribed.

Prohibition for buv-back:

Section 70 the Companies Act, 2013

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 Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

A company cannot buy-back shares or other specified securities, directly or indirectly—

(a)through any subsidiary company including its own subsidiaries; or
(b) through investment or group of investment companies; or
(c) when the company has defaulted in the repayment of deposit or interest thereon, redemption of debentures or
preference shares or payment of dividend or repayment of any term loan or interest thereon to any financial institution
or bank.
(d) Company has defaulted in:
(i) Filing of Annual Return (section 92)
(ii) Declaration of dividend (section 123)
(iii) Punishment for failure to distribute dividend (section 127)

Special Note: A Company cannot buy-back its own shares in cases of any default regarding filing of the annual return,
failure to distribute dividend and fails to give true & fair view on financial statement.

(iv) Giving financial statement (section 129)

 Transfer of certain sums to Capital Redemption Reserve account:

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 Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

Transfer to CRR (Section 69 of the Companies Act, 2013): When a company buys-back shares out of free reserves or out
of security premium account, then an amount equal to the nominal value of the shares needs to be transferred to the
Capital Redemption Reserve Account (CRR).
The details of such transferred amount to CRR should be in balance sheet.
Utilization of CRR amount: CRR amount may be utilized for paying un-issued shares of the Company to the members as
fully paid bonus shares.

REDUCTION OF SHARE CAPITAL (Section 66 of the Companies Act, 2013)

Reduction of capital means reduction of issued, subscribed and paid-up capital of the company by way of reduction of
the liability of its shares in respect of share capital not paid-up or cancellation of paid-up share capital which is lost, or
Payment of any paid-up share capital which is in excess of the wants of the Company.

Reduction of Share Cap. .

To reduce the liabilities of To reduce paid-up Pay-off the Paid- up

share share capital share capital

A Company may by passing a special resolution subject to the approval of tribunal (NCLT), can reduce the share capital in
following ways:
(a) Extinguish or reduce the liability with regard to any shares which is not fully paid-up; or
(b) Either with or without extinguishing or reducing liability on any of its shares:
(i) Cancel any paid-up share capital which is lost or is unrepresented by available assets; or
(ii)Pay off any paid-up share capital which is in excess of the wants of the company,
(iii) Alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

Procedure for reduction of share capital

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 Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

(a) Pass a special resolution

(b)Apply to the tribunal (NCLT)
(c)The tribunal shall give notice to CG, ROC and SEBI in case of listed companies, and the creditors of the company.
(d) NCLT shall take into consideration the representations, if any, made by the Government, ROC, the SEBI and the
creditors within 3 months from the date of receipt of the notice.
(e) The NCLT may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or
determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on
such terms and conditions as it deems fit.
(f) The order of NCLT regarding the reduction of share capital shall be published by the company.
(g) The company shall deliver to ROC a certified copy of the order of the NCLT and of a minute approved by the NCLT
showing:
(a) The amount of share capital;
(b) The number of shares into which it is to be divided;
(c) The amount of each share; and Reduction of share capital;
(d) The amount, if any, at the date of registration deemed to be paid-up on each share.
A certified true copy of order passed by NCLT shall be filed with ROC within 30 days from date of receipt of NCLT's order,
who shall register the same and issue a certificate to that effect.
Note: A member shall not be liable to contribute in excess of the difference amount between the amount paid on the
share or reduced amount. The order of confirmation of the reduction of share capital by the NCLT shall be published by
the company in such manner as directed by the NCLT.

• Liability of Members in respect of Reduced Share Capital

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 Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

On the reduction of share capital, the extent of the liability of any past or present member on any call or contribution
shall not exceed the difference between the amount already paid on the share, or the reduced amount, if any, which is
deemed to have been paid thereon by the member, and the amount of the shares fixed by the scheme of the reduction.
Example: Suppose the value of the share is Rs.100 and the member has paid only Rs.50. Subsequently on reduction, the
share value reduced to Rs.75. In such case the liability remains of Rs.25.

CASE LAWS ON REDUCTION OF SHARE CAPITAL ON SELECTIVE BASIS

Case Law: SIEL Ltd. (2008)
Facts: the view was that reduction of the share capital of a company is a domestic concern of the company and the
decision of the majority would prevail. If the majority by special resolution decides to reduce the share capital of the
company, it has the right to decide to reduce the share capital of the company and it has the right to decide how this
reduction should be effected. While reducing the share capital, the company can decide to extinguish some of its shares
without dealing in the same manner with all other shares of the same class.
Judgment: A selective reduction is permissible within the frame work of law for any company limited by shares.
Case Law: ELPRO INTERNATIONAL Ltd. (2009)
Facts: A company proposed to extinguish and cancel 8,89,169 shares held by shareholders constituting 25% of the issued
and paid-up share capital and return capital to such shareholders at Rs.183 per equity share of Rs.10 each so cancelled
and extinguished in accordance with Section 100 of the Act (corresponds to section 66 of the Companies Act, 2013).
According to the scheme as approved by the shareholders, the reducing of 25% of the issued and paid-up capital was to
take place from amongst 3,835 shareholders which included 112 shareholders who voted for the resolution, and 3,723
shareholders who did not object to the resolution.
Judgment: In this case, the court held that a selective reduction of share capital is legally permissible. The shareholders
who did not cast their votes were those who had abstained from voting at the meeting. Moreover, there was no
objection from any of the shareholders to the proposed reduction.

Reduction of Share Capital without sanction of NCLT

The following are cases which amount to reduction of share capital and where no confirmation by the Tribunal is
necessary:
(i) Surrender of Shares: It is a voluntary initiative by a registered shareholder for surrender of shares to the Company for
any reason including for settlement of a dispute.
It will have the same effect as a transfer in favour of the company and amounts to a reduction of capitA1. The surrender
of shares shall be treated as valid only when Articles of Association provide for the same and—
(a) Where forfeiture of such shares is justified; or
(b) When shares are surrendered in exchange for new shares of same nominal value.
(ii) Forfe iture of Shares: A company may if authorised by its articles, forfeit shares for nonpayment of calls and the same
will not require confirmation of the Court.
Diminution of Share Capital is not Reduction of Share Capital

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 Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

Diminution of capital is the cancellation of the unsubscribed part of the issued capital. It can be affected by an ordinary
resolution provided articles of the company authorise to do so. It does not need any confirmation of Court.
Reduction of share capital v. Diminution of Share Capital
Reduction of Share Capital Diminution of Share Capital
■ Reduction may involve reduction inter alia of issued ■ Diminution may be in respect of authorised capital
& paid-up share capital but not of issued & paid-up share capital
■ Reduction needs confirmation by the Court ■ Diminution needs no confirmation by the Court
■ Reduction which also needs authorisation by ■ If the articles authorise the procedure, diminution
articles, can be effected only by a special resolution. can be effected by an ordinary resolution.
■ In the case of reduction more detailed procedure ■ In case of diminution, notice is to be given to the
regarding notice to the ROC, though there is no such ROC within 30 days from date of cancellation.
time limit as aforesaid (i.e. 30 days).
■ Where a company is ordered to add to its name the ■ Such a provision does not exist in the case of
words "and reduced" these words shall exist until the diminution of the share capital as envisaged.
expiry of the period specified in the order.

Conclusiveness of certificate for reduction of capital

Where the Registrar have issued his certificate confirming the reduction, the same shall be held conclusive, even if it is
later discovered that company have no authority under its article to reduce capital or special resolution passed is invalid.

MCQ’s
(1) ……. Is kind of corporate financial strategy and is an imperative mode of capital restructuring

(a) Issue of preference shares

(b) Issue of equity shares
(c) Reduction
(d) Buy back of shares. Ans. D

(2) Buy back is an alternative way of ……… of share capital

(a) Increase in share capital

(b) Reduction
(c) Decrease in its shareholders
(d) Increase in shareholding. Ans. B

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(3) A company may purchase its own shares or other specified securities out of ………

(a) Security premium account

(b) Free reserves
(c) Proceeds of the issue of any shares or other securities
(d) Both (a) & (b). Ans. D

(4) Buy back of any kind of shares or other specified securities shall be made out of the proceeds of an
earlier issue of the ………… of shares

(a) Same kind

(b) Different kind
(c) Debentures
(d) None of the above. Ans. A

(5) The buy-back is ……… of the total paid up equity capital and free reserves of the company

(a) 25% or less

(b) 10% or higher amount
(c) 10% or less
(d) More than 25%. Ans. C

(6) What is debt equity ratio ?

(a) 3:1
(b) 1:1
(c) 3:2
(d) 2:1. Ans. D

(7) What is the minimum time period after buy back company cannot make another buy-back ?

(a) 2 year
(b) 1 year
(c) 3 year
(d) None of the above. Ans. B

(8) Buy back was approved including information of number of shares acquired the …….. of acquisition

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Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

(a) Price of buy back

(b) Date of buy back
(c) Types of shares
(d) Both (a) & (b). Ans. D

(9) Audited accounts in the basis of which calculation with reference to buy back is done not more than
……… months old from date

(a) 1 year
(b) 2 months
(c) 6 months
(d) 3 years. Ans. C

(10) Buy back cam done through ……….

(a) From open market

(b) From employees (Issued under ESOP)
(c) From open market
(d) All of the above. Ans. D

(11) Before buy back filed registration of declaration of solvency is signed by ……….

(a) Two director

(b) One MD
(c) One director
(d) Company Secretary. Ans. B

(12) In how many days company have to destroy the shares purchased in buy-back ?

(a) 1 week
(b) 3 days
(c) 7 days
(d) 2 days. Ans. C

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Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

(13) Company shall not make further issue of same kind including allotment if new shares for the
period of 6 months by way of …………

(a) Issue if bonus

(b) Discharging of subsisting obligations
(c) Conversion of preference shares , stock option scheme
(d) All of the above. Ans. D

(14) In which form company shall maintain a register of buy back ?

(a) Form SH-10

(b) Form SH- 4
(c) Form SH-7
(d) Form SH- 8. Ans. A

(15) Form SH-11 containing such particulars relating to the buy back within ………. Such completion

(a) 45 days
(b) 60 days
(c) 30 days
(d) 90 days. Ans. C

(16) What is the period for buy back after dare of dispatch of letter if offer ?

(a) Min. 10 days , Max. 15 days

(b) Min. 3 days , Max. 10 days
(c) Min. 15 days, Max. 20 days
(d) Min. 15 days, Max. 30 days. Ans. C

(17) ……… of securities is a very important tool for companies that wants to reduce their share
capital

(a) Issue of new securities

(b) Issue of debt security
(c) Redemption of securities
(d) Buy back. Ans. D

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Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

(18) The buy-back is ....... or less of the total paid up equity and free reserves of the company

(a) 10%
(b) 5%
(c) 15%
(d) 25% Ans. A

(19) The buy-back is ……….. or less of the aggregate of the paid up capital and free reserves of the
company

(a) 15%
(b) 10%
(c) 25%
(d) 5% Ans. C

(20) Company shall give no defaults confirmation regarding ……….

(a) Repayment if deposits

(b) Interest payment on debentures
(c) Redemption of debentures
(d) All of the above Ans. D

(21) Audited accounts on the basis of which calculation with reference to buy back is done is not
more than …….. old from the date of offer document

(a) 12 months
(b) 6 months
(c) 3 months
(d) 1 month Ans. B

(22) Form ……. May be prescribed and verified by BOD has made a full inquiry into the affairs of
the company

(a) SH-9
(b) SH-7
(c) SH-2
(d) SH-8 Ans. A

(23) Company shall extinguish and physically destroy the shared or securities bought back within

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Corporate & Mangement Accounting Shares & Shares Capital, Buy Back & Reduction

………. Of completion of the buy back

(a) 30 days
(b) 3 days
(c) 7 days
(d) 45 days Ans. C

(24) Company shall not make further issue of the same kind of shares or other securities including
allotment of new shares within period of six months except by way of …….

(a) Bonus issue

(b) Obligations of conversion of warrants
(c) Stock option scheme
(d) All of the above Ans. D

(25) Company shall file with the registrar a return in form …….. containing such particulars relating
to buy back within …….

(a) SH-10 ; 45 days

(b) SH-4 ; 15 days
(c) SH-7 ; 30 days
(d) SH-11 ; 30 days Ans. D

(26) Certifying that the buy-back of securities has been made in compliance with the provision of
the act should be file in which form ?

(a) SH-7
(b) SH-15
(c) SH-4
(d) SH-11 Ans. D

(27) What is the penalty if company makes default in complying provisions of buy back ?

(a) 1 lakh ; 3 lakhs

(b) 3 lakhs ; 10 lakhs
(c) 1 lakh ; 5 lakhs
(d) 2 lakhs ; 5 lakhs Ans. A

(28) A company purchases its own share out of free reserves or securities premium account a sum
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equal to the nominal value of the shares shall be transferred to the ………..

(a) Share capital account

(b) Debt capital account
(c) Capital redemption reserves
(d) None of the above Ans. C

(29) No company shall directly or indirectly purchase its own or other specified securities through

(a) Any subsidiary company

(b) Any investment company
(c) Repayment of deposits & Interest on debentures
(d) All of the above Ans. D

(30) No offer of buy back for ……….. or more of the paid up capital and free reserves of the
company shall be made from the open market

(a) 10%
(b) 15%
(c) 25%
(d) 5% Ans. B

(31) Which documents company is required to file after the public announcement ?

(a) Draft letter of offer & soft copy

(b) Prescribed fees
(c) Declaration of solvency
(d) All of the above Ans. D

(32) SEBI may provide its comments on draft letter of offer within ……….. from the receipt of draft
letter of offer

(a) 3 working days

(b) 2 working days
(c) 7 working days
(d) 8 working days Ans. C

(33) Company cannot buy back its share or other specified securities if ………

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(a) Delist its shares from stock exchange

(b) Any person through negotiated deals
(c) None of the above
(d) Both (a) & (b) Ans. D

(34) When company is required payable consideration from the ESCROW account ?

(a) Not exceed 100 crores ; 25%

(b) Exceeds 100 crores ; 10%
(c) Exceeds 50 crores ; 25%
(d) Not exceeds 25 crores ; 50% Ans. A

(35) What are the regulations of ESCROW account ?

(a) Cash deposited with scheduled commercial bank

(b) Bank guarantee in favour of merchant banker
(c) Deposit of acceptable securities with appropriate margin
(d) All of the above Ans. D

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Corporate & Mangement Accounting Debentures & Underwriting

Chapter 13 – Debentures & Underwriting

Debenture [Section 2(30)] includes debenture stock, bonds or any other instrument of a company evidencing a debt,
whether constituting a charge on the assets of the company or not.
But it shall not include
(a) The instruments referred to in Chapter lll-D of the Reserve Bank of India Act, 1934 (Example: Derivatives
and money market instruments); and
(b) Such other instrument, as may be prescribed by the Central Government in consultation with the Reserve
Bank of India, issued by a company
It is evident from the above definition that the term of debentures covers both types of secured and unsecured
debentures. A debenture certificate is a document given by a company under its seal as an evidence of a debt to the
holder usually arising out of a loan and most commonly (not necessarily) secured by a charge. In short, Debenture is a
document which creates a debt.

• Characteristics of Debentures
The usual features of a debenture are as follows:
(i) A debenture is usually in the form of a certificate (like a share certificate) issued under the common seal of the
company.
(ii) The certificate is an acknowledgement by the company of its indebtedness to a holder.
(iii) Debenture usually provides for payment of a specified principal sum at a specified date. A company may issue
perpetual or irredeemable debentures with no undertaking to pay.
(iv) A debenture usually provides for payment of interest until the principal sum is paid back.
(v) A debenture is, as a rule, one of a series, although a single debenture is not uncommon. There may be a single
debenture issued to one person.
(vi) A debenture generally contains a charge on an undertaking of the company, or on some class of its assets or
on some part of its profits.
(vii) The debentures carry no voting rights at any meeting of the company.
(viii) Fixed deposit is not debenture: MCA has clarified that a fixed deposit receipt may be regarded as a security
but not as a debenture.

• Issue of Debentures
The debentures can be issued in the same manner as shares in a company.
But unlike shares, they can be issued at a discount without any restriction, if articles so authorise, the reason being that
they do not form part of the capital of the Company.
They can also be issued at a premium.
There is no ceiling, minimum or maximum, for the rate of interest payable on debentures.

• Pari Passu Clause in case of Debentures

Debentures are usually issued in a series with a pari passu clause and it follows that they would be on an equal footing
as to security and should the security be enforced, the amount realised shall be divided pro-rata, i.e. they are to be
discharged ratably.
The expression 'pari passu' implies with equal step, equally treated, at the same rate, or at par with. When it is said that
existing debentures shall be issued pari passu clause, it implies that no difference will be made between the old and
new debentures.
• Kinds of Debentures
Debentures are generally classified into different categories on the basis of:

> Convertibility, Debentures may be classified into following categories:

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(i) Non-Convertible Debentures (NCD): These instruments retain the debt character and cannot be converted into
equity shares.
(ii) Partly Convertible Debentures (PCD): A part of these instruments is converted into Equity shares in the future at
notice of the issuer.
The issuer decides the ratio for conversion.
This is normally decided at the time of subscription.
(iii) Fully Convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice.
The ratio of conversion is decided by the issuer.
Upon conversion the investors enjoy the same status as ordinary shareholders of the company.
(iv) Optionally Convertible Debentures (OCD):
The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at
the time of issue.

> Redeemabilitv, debentures are classified into:

(i) Redeemable Debentures: It refers to the debentures which are issued with a condition that the debentures will
be redeemed at a fixed date or upon demand, or after notice, or under a system of periodical drawings.
(ii) Perpetual or Irredeemable Debentures: A Debenture, in which no time is fixed for the company to pay back
the money, is an irredeemable debenture.
But all debentures, whether redeemable or irredeemable become payable on the company going into liquidation. No
more in existence as per the Companies Act, 2013

> Security, debentures are classified into:

(i) Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company.
(ii) Unsecured Debentures: These instruments are unsecured in the sense that if the issuer defaults on payment of
the interest or principal amount, the investor has to be along with other unsecured creditors of the company, they
are also said to be naked debentures.
> Registration, debentures may be classified into:
(i) Registered Debentures: Registered debentures are made out in the name of a particular person, whose name
appears on the debenture certificate and who is registered by the company as holder on the Register of debenture
holders.
Such debentures are transferable in the same manner as shares.
(ii) Bearer debentures: Bearer debentures on the other hand, are made out to bearer, and are negotiable
instruments, and so transferable by mere delivery like share warrants.
The person to whom a bearer debenture is transferred becomes a "holder in due course" and unless contrary is shown,
is entitled to receive and recover the principal and the interest accrued thereon.

MCQ’s

(1) Company can issue partly or fully convertible debenture by passing ……… at s general meeting

(a) Ordinary resolution

(b) Special resolution
(c) Unanimous resolution
(d) Board resolution Ans. B

(2) No company can issue any debenture with ……

(a) Voting rights

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(b) Creation of charge

(c) Low interest rate
(d) None of the above Ans. A

(3) Which a/c is utilized for redemption of debenture ?

(a) CRR A/c

(b) Profit & loss A/c
(c) DRR A/c
(d) Reserves & surplus A/c Ans. C

(4) Company cannot issue a prospectus or make an offer or invitation to more than ……. Persons

(a) 200
(b) 300
(c) 400
(d) 500 Ans. D

(5) If a company wants to issue prospectus to public then company shall appoint …….

(a) SSD
(b) CS
(c) Debenture trustee
(d) CA Ans. C

(6) Debentures can issued at …….

(a) Par
(b) Discount
(c) Premium
(d) All of the above Ans. D

(7) Company cannot issue …….. debentures

(a) Convertible
(b) Redeemable
(c) Irredeemable
(d) None of the above Ans. C

(8) Debenture holders get interest at ……..

(a) Fixed
(b) Fluctuating
(c) Low rate
(d) Same as preference shareholders Ans. A

(9) Interest paid to debenture holders is ………. Of the company

(a) Charge against assets

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(b) Charge against the profits

(c) Because they are creditors
(d) None of the above Ans. B

(10) Discount on issue of debentures being a capital loss can be written of against ……..

(a) Profit and loss A/c

(b) Reserves and surplus
(c) CRR A/c
(d) Capital profit Ans. D

(11) Every company is required to create ……. Shall on or before the 30 th day of april in each
year invest or deposit

(a) DRR A/c

(b) CRR A/c
(c) Both (a) & (b)
(d) None of the above Ans. A

(12) A sum which shall not be less than ……. Of the amount of its debenture

(a) 10%
(b) 20%
(c) 15%
(d) 5% Ans. C

(13) For NBFC registered with RBI the adequacy of DRR will be …….. of the value of outstanding
debentures

(a) 20%
(b) 25%
(c) 15%
(d) 10% Ans. B

(14) Underwriters are the ……. Or ……. Underwriting public issue of shares or debentures

(a) Institution
(b) Individual
(c) None of the above
(d) Both (a) & (b) Ans. D

(15) In case where only part of shares or debentures issue of a company is underwritten is
called as …….

(a) Full underwriting

(b) Partial underwriting
(c) Underwriting for only unsold part
(d) None of the above Ans. B

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(16) The rate of commission paid or agreed to be paid to underwriters ……… or rate authorized
by articles whichever is lower

(a) 2.5%
(b) 5%
(c) 10%
(d) 20% Ans. B

(17) Interest payable on debentures is …..

(a) An appropriation of profit

(b) A charge against profit
(c) Transferred to sinking fund investment A/c
(d) Transferred to general reserve Ans. B

(18) Which of the following statements is not true ?

(a) At maturity debenture holders get back their money

(b) Debentures can be forfeited for non-payment of call money
(c) In company’s balance sheet debentures are shown under the head secured loans
(d) Interest on debentures is charged against profits Ans. B

(19) Discount on issue of debenture is a ……

(a) Revenue loss to be charged in the year of issue

(b) Capital loss to be written off from the capital reserve
(c) Capital loss to be written off over the period of the debenture
(d) Capital loss to be shown as goodwill Ans. C

(20) Which of the following is not true ?

(a) Debenture is a form of public borrowing

(b) It is a customary to prefix debentures with the agreed rate of interest
(c) Debenture interest is charge against profits
(d) The issue price and redemption value of debentures cannot differ Ans. D

(21) The debentures which are secured by a charge upon some or all assets of the company are
known as ……

(a) First mortgage debenture

(b) Second mortgage debenture
(c) Bearer debenture
(d) Secured debenture Ans. D

(22) When debentures are issued at a discount it is prudent to write off the discount ……..

(a) In the year of the issue off debentures

(b) During the life of the debentures if it is treated as deferred revenue expenditure

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(c) Within 3 years of the issue of the debentures

(d) In the year of redemption of debentures Ans. B

(23) Interest on debentures issued as a collateral security is paid on ……

(a) Nominal value of debentures

(b) Face value of debentures
(c) No interest is paid
(d) Paid up value of debentures Ans. C

(24) A debenture holder is entitled to ………

(a) Interest at the fixed rates

(b) Fixed dividend
(c) Share in profits
(d) Voting rights in the company Ans. A

(25) Debenture of the company can be issued …….

(a) For cash

(b) For consideration other than cash
(c) As a collateral security
(d) Any of the above Ans. D

(26) Debentures which are transferable by mere delivery are ……..

(a) Registered debenture

(b) First debenture
(c) Second debenture
(d) Bearer debenture Ans. D

(27) The interest on debenture is ……..

(a) 6%
(b) Fixed rate
(c) 20%
(d) 12% Ans. B

(28) The consideration of debentures is ………

(a) Profit
(b) Dividend
(c) Capital receipts
(d) Interest Ans. D

(29) According to SEBI guidelines by what percentage of amount of debenture redemption

fund will be raised before redemption ?

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Corporate & Mangement Accounting Debentures & Underwriting

(a) 40%
(b) 50%
(c) 60%
(d) 100% Ans. B

(30) Debentures represents …….

(a) Long term debt of funds
(b) Investment of equity shareholders
(c) Share of directors in company
(d) None of the above Ans. A

(31) In the companies act 2013 description of debentures is given in the ……..

(a) Section 2(10)

(b) Section 3(1)
(c) Section 2(30)
(d) Section 4A Ans. C

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Corporate & Mangement Accounting Employee Stock Option

Chapter 12 – Shares & Share Capital Buy Back & Reduction

Chapter 14 – Employee Stock Option
Employees Stock Option (Section 2(37)) means the option given to the directors, officers or employees of a company
or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or
employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-
determined price.
Section 62(l)(b) provides that a company may issue further shares to its employees under a scheme of employees'
stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.
In case of private company special resolution has been substituted by ordinary resolution.
Rule 12 of Companies (Share Capital and Debentures) Rules, 2014
Every company other than listed company is required to comply with the following requirements:
 Approval of Share Holders: The issue of Employees Stock Option Scheme has been approved by the
shareho
lders of
Special Note: In case of Private Company, Ordinary Resolution is required in place of Special Resolution. the
compan
y by passing a Special Resolution.

 Who are eligible for an ESOP Scheme?

(a) a permanent employee of the company who has been working in India or outside India; or
(b) a director of the company, whether a whole time director or not but excluding an independent director; or
(c) an employee or director of a subsidiary, in India or outside India, or of a holding company of the company or of an
associate company
 Who are not eligible for an ESOP Scheme?
(a) Promoter-cum-Employee, an employee who is a promoter or a person belonging to the promoter group; or
(b) Director-cum-Employee\ a director who either himself or through his relative or through anybody corporate,
directly or indirectly, holds more than 10% of the outstanding equity shares of the company.
Disclosures in explanatory statement of Notice for passing Special Resolution
(a) total number of stock options to be granted;
(b) identification of classes of employees entitled to participate in the ESOP Scheme;
(c) the appraisal process for determining the eligibility of employees to the ESOP Scheme;
(d) the requirements of vesting and period of vesting;
(e) the maximum period within which the options shall be vested;
(f) the exercise price or the formula for arriving at the same;
(g) the exercise period and process of exercise;
(h) the Lock-in period, if any;
(i) the maximum number of options to be granted per employee and in aggregate;
(j) the conditions under which option vested in employees may lapse e.g. in case of termination of employment for
misconduct;
(k) the specified time period within which the employee shall exercise the vested options in the event of a proposed
termination of employment or resignation of employee; and
(L) a statement regarding the company shall comply with the applicable accounting standards.
(m) free pricing in conformity with accounting policies.

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Corporate & Mangement Accounting Employee Stock Option

Varying the terms of ESOP requires special resolution: The company may by special resolution, vary the terms of
Employees Stock Option Scheme not yet exercised by the employees provided such variation is not prejudicial to the
interests of the option holders.
The notice for passing special resolution for variation of terms of Employees Stock Option Scheme shall disclose full
of the variation, the rationale therefore, and the details of the employees who are beneficiaries of such variation.
Minimum one year vesting period: There shall be a minimum period of 1 year gap between the grant of options and
vesting of option. In a case where options are granted by a company under its Employees Stock Option Scheme in
lieu of options held by the same person under an Employees Stock Option Scheme in another company, which has
merged or amalgamated with the first mentioned company, the period during which the options granted by the
merging or amalgamating company were held by him shall be adjusted against the minimum vesting period
required.
Company has freedom to specify lock-in period: The Company shall have the freedom to specify the lock-in period
for the shares issued pursuant to exercise of option.
No right of dividend or voting till exercise of option: The Employees shall not have right to receive any dividend or to
vote or in any manner enjoy the benefits of a shareholder in respect of option granted to them, till shares are issued
on exercise of option.
Forfeiture/refund: The amount, if any, payable by the employees, at the time of grant of option:
(a) may be forfeited by the company if the option is not exercised by the employees within the exercise period; or
(b) the amount may be refunded to the employees if the options are not vested due to non- fulfilment of conditions
relating to vesting of option as per the Employees Stock Option Scheme.
Note:
(a) The option granted to employees shall not be transferable to any other person.
(b) The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered
or alienated in any other manner.
(c) No person other than the employees to whom the option is granted shall be entitled to exercise the option.
Status of ESOP option in cases of Death/permanent disability/resignation of employees
(a) Death of Employee: In the event of the death of employee while in employment, all the options granted to him
till such date shall vest in the legal heirs or nominees of the deceased employee.
(b) Permanent incapacity: In case the employee suffers a permanent incapacity while in employment, all the options
granted to him as on the date of permanent incapacitation, shall vest in him on that day.
(c) Resignation of Employment: In the event of resignation or termination of employment, all options not vested in
the employee as on that day shall expire.

Disclosure in the Board's Report: The Board of Directors shall disclose the details in the Director's Report in a
particular year of the ESOP Scheme i.e. options granted, options vested, options exercised, the total number of
shares arising as a result of exercise of option, options lapsed, the exercise price, variation of terms of options,
money realized by exercise of options, total number of options in force, employee wise details of options granted.

Procedure of ESOP

Draft an ESOP Scheme

Convene the Board Meeting and pass the scheme. And call GM to take shareholder's approval

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Corporate & Mangement Accounting Employee Stock Option

Approve the ESOP Scheme by passing a special resolution (ordinary resolution in case of Private Company)

File Special Resolution with ROC in form MGT 14 within 30 days of passing SR passed.

After approval of ESOP scheme, grant options to the eligible employees

Vesting of Options- Minimum vesting period of 1 year.

Exercise of Options by the employee

Allotment of shares and filing of PAS-3 form within 30 days of allotment.

If shares held in Dematerialized form, inform depositories about allotment.

Maintain a Register of Employee Stock Options in form SH-6.

Issue share certificates if shares issued in physical form.

BONUS SHARES (Section 63 of the Companies Act, 2013)

Bonus shares mean shares issued by the company to its existing shareholders at free of cost.
A Company may capitalize its profits by issuing fully-paid bonus shares provided the company has provisions in this
regard.
When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits
into capital and divides the capital among the existing members in proportion to their entitlements.
Advantages
(a) Fund flow is not affected adversely.
(b) Market value of the Company's shares comes down to their nominal value by issue of bonus shares.
(c) Market value of the members' shareholdings increases with the increase in number of shares in the company.
(d) Bonus shares are not an income. Hence it is not a taxable income.
(e) Paid-up share capital increases with the issue of bonus shares.
Sources
A company may issue fully paid-up bonus shares to its members by utilizing the following sources:
(a) free reserves;
(b) the securities premium account; or

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Corporate & Mangement Accounting Employee Stock Option

(c) the capital redemption reserve account.

Note: No bonus shares shall be issued by capitalising reserves created by the revaluation of fixed assets.
Conditions: No company shall capitalize its profits or reserves for the purpose of issuing fully paid-up bonus shares,
unless—
(a) It is authorised by its articles;
(b) It has, on the recommendation of the Board, been authorised in the general meeting of the company;
(c) It has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
(d) It has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to
provident fund, gratuity and bonus;
(e) The partly paid-up shares, if any on the date of allotment, are made fully paid-up;

Special Note: As per the Companies (Share Capital and Debentures) Rules, 2014, the company which has once
announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.
Note: No Bonous shares in lieu of dividend.

Procedure for Bonus Share Issue

Check authority in Articles of Association. If no authority in AOA, first amend it.

Convene the Board Meeting to issue notice to call GM to take shareholder's approval

Ensure that all the partly paid shares are converted into fully paid

Ensure that source of issue of bonus shares is from the permitted sources

No default in payment of interest, principal, statutory dues, etc.

Bonus issue is not made in lieu of payment of dividend.

Pass an Ordinary resolution or a Special Resolution at GM (See note below)

If Special Resolution is passed file it with ROC in form MGT 14 within 30 days of passing SR

Allotment of shares and filing of PAS-3 form within 30 days of allotment.

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Corporate & Mangement Accounting Employee Stock Option

If shares held in Dematerialized form, inform depositories about allotment.

Update members register.

Issue share certificates if shares issued in physical form.

Note: Though the section read with the rules nowhere requires that the resolution will be a special resolution but
surprisingly PAS-3 states that special resolution be attached to the form in case of Bonus Issue.
So if the Company passes Special Resolution, filing of MGT- 14 is mandatory.

MCQ’s
(1) Company may issue fully paid up bonus shares to its members out of ………..

(a) Securities premium account

(b) Capital redemption reserve
(c) Security premium account
(d) All of the above Ans. D

(2) The partly paid up shares if any outstanding on the dare of allotment of bonus shares are made only
to ………..

(a) Fully paid up

(b) Partly paid up
(c) Both (a) & (b)
(d) None of the above Ans. A

(3) Objective of issuing ESOP ………

(a) Provide incentives to draw, retain and reward employees

(b) Motivate employees to contribute to growth and profitability
(c) Both (a) & (b)
(d) Only A Ans. C

(4) ESOP is gives to such directors, officers or employees, the benefit or right to purchase or to
subscribe for shares of company at ………. at a ………..

(a) Current price ; Current date

(b) Less price ; Current date
(c) Future price ; Pre determined price
(d) Less price ; Pre determined price. Ans. C
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Corporate & Mangement Accounting Employee Stock Option

(5) Which resolution shall be passed by company for issuing ESOP ?

(a) Unanimous resolution

(b) Special resolution
(c) Ordinary resolution
(d) Board resolution. Ans. B

(6) ESOS will have the ……… to freedom determine the exercise price in conformity with the applicable
accounting policies

(a) Restricted
(b) Prohibited
(c) Partly restricted
(d) Freedom. Ans. D

(7) How much percentage can be grant by company under ESOP scheme ?

(a) 1 percent
(b) 5 percent
(c) 2 percent
(d) 4 percent. Ans. A

(8) Under ESOP what is the vesting period between grant if option and exercise the option ?

(a) 2 years
(b) 5 years
(c) 1 year
(d) 3 years. Ans. C

(9) Employees in ESOP scheme shall not get any corporate benefit and voting rights till ……… of option

(a) Vesting
(b) Exercise
(c) Both (a) & (b)
(d) None of the above. Ans. B

(10) Under ESOP, company ……… the shares issued under ESOP is not exercised by employee

(a) Forfeit
(b) Refund the amount
(c) Transfer to any other employee
(d) Both (a) & (b). Ans. A

(11) The option granted to employees shall …………. under ESOP

(a) Transferable
(b) Transferable only to employees
(c) Non transferable
(d) Can transfer to any other person. Ans. C

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Corporate & Mangement Accounting Employee Stock Option

(12) In case of death of employees while employment all options shall vest in ………… of deceased
employee

(a) Legal representative

(b) Legal heir
(c) Nominee
(d) Spouse. Ans. B

(13) In case of permanent incapacity while in employment all options granted to him as on date of
………… shall vest in him

(a) Permanent incapacitation

(b) Exercise
(c) Allotment
(d) Maturity. Ans. A

(14) Company maintain register of ESOP in form ……….

(a) SH-7
(b) SH-8
(c) SH-1
(d) SH-6. Ans. D

(15) Bonus shares can be issued if the ……..

(a) Articles of Association

(b) Proposal is approved by the shareholders in the GM
(c) Issue is made out of the free reserves
(d) All of the above Ans. D

(16) A company may issue bonus …… out of ………

(a) Bonus, Free reserves

(b) Securities, Securities Premium A/c
(c) Shares, Capital Redemption Reserves A/c
(d) Shares, All of the above Ans. D

(17) Bonus shares are issued by the companies because ?

(a) Surplus cash is available

(b) There are heavy accumulated general reserve
(c) There are heavy competition from similar companies
(d) They have high gross profit ratio Ans. B

(18) Bonus shares cannot be issued out of …

(a) Capital redemption reserves A/c

(b) General reserve
(c) Balance of Profit & Loss A/c
(d) Dividend Equalization Ans. D

(19) The issuing of ESOS has been approved by the shareholders of the company by passing ……..
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Corporate & Mangement Accounting Employee Stock Option

(a) Board Resolution

(b) Special Resolution
(c) Ordinary Resolution
(d) Unanimous Resolution Ans. B

(20) There shall be a minimum period of ……… between the grant of options and vesting of options in
ESOP

(a) 3 years
(b) 2 years
(c) 1 year
(d) 5 years Ans. C

(21) The employees shall not have right to receive any dividend, or to vote, or in any manner enjoy
benefits of shareholder in request of option granted to them till shares are issued on …….

(a) Exercise of option

(b) Vesting of period
(c) None of the above
(d) Both (a) & (b) Ans. A

(22) The option granted to employees shall …… to any other person in ESOP

(a) Transferable
(b) Sell
(c) Not sell except to other employees
(d) Not transferable Ans. D

(23) Identified employees who were granted the ESOP during any year equal to or exceeding …….

(a) 2%
(b) 5%
(c) 1%
(d) 10% Ans. C

(24) The company shall maintain a register of ESOP in form ……..

(a) SH-4
(b) SH-6
(c) SH-2
(d) SH-3 Ans. B

(25) ESOP means a scheme under which the company grants option to an employee to apply for
shares of the company at a ………

(a) Market price

(b) Predetermined price
(c) Face value
(d) None of the above Ans. B

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Corporate & Mangement Accounting Holding Company

Chapter 15 – Holding Company

MCQ’s
(1) Holding company defined under ……..

(a) Section 2(46)

(b) Section 2(11)
(c) Section 2(45)
(d) Section 2(54) Ans. A

(2) ………… in a relation one or more other companies means a company of which such companies are
subsidiary company

(a) Associate company

(b) Holding company
(c) All of the above
(d) None of the above Ans. B

(3) Subsidiary company defined under ……..

(a) Section 2(55)

(b) Section 2(11)
(c) Section 2(87)
(d) Section 2(46) Ans. C

(4) An Indian company in which more than ……… shares are held by a foreign body corporate will be
a subsidiary company

(a) 35%
(b) 40%
(c) 45%
(d) 50% Ans. D

(5) ………. In relation to any other company means a company which the holding company

(a) Subsidiary company

(b) Associate company
(c) Body corporate
(d) None of the above Ans. A

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Corporate & Mangement Accounting Holding Company

(6) A holding company is …….. for provident dues of a subsidiary company

(a) Liable
(b) Partly liable
(c) Not liable
(d) Can’t say Ans. B

(7) A holding company ……….. for violation of foreign exchange provisions of subsidiary company

(a) As per the provisions of FEMA

(b) As per the provisions of Companies Act
(c) Penalize
(d) Can’t be penalized Ans. D

(8) Holding and subsidiary companies are ………. Legal entities

(a) Dependent
(b) Depend upon each-others income
(c) Independent
(d) Separate Ans. C

(9) A subsidiary ……. Shares in its holding company

(a) Can’t hold

(b) Can hold
(c) Hold with few restrictions
(d) All of the above Ans. A

(10) Share allotment to subsidiary company is ………

(a) Valid
(b) Prohibited
(c) Restricted
(d) Void Ans. D

(11) Associate company means a company in which that other company has a ……… but which
is not a subsidiary of the company having such influence and includes a join venture

(a) Shareholding more than 30%

(b) Shareholding more than 20%
(c) Significant influence
(d) All of the above Ans. C

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Corporate & Mangement Accounting Holding Company

(12) Significant influence has been clarified in the explanation as control of at least ………. Of
the total share capital or of business decisions under an agreement

(a) 50%
(b) 20%
(c) 30%
(d) 25% Ans. B

(13) A company in which all the shares with ……… are owned by the holding company it is said
to be a wholly owned subsidiary company

(a) Preferential rights

(b) Management rights
(c) Voting rights
(d) All of the above Ans. C

(14) A company in which only the …….. are owned by the holding company it is said to be a
partly owned subsidiary

(a) More than 40%

(b) More than 45%
(c) More than 50%
(d) More than 20% Ans. C

(15) Small shareholders a shareholder who is holding shares of nominal value of INR …….. or
such other sum as may be prescribed

(a) 10,000
(b) 30,000
(c) 40,000
(d) 20,000 Ans. D

(16) Minority shareholder means a shareholder who has less than ….. ownership

(a) 20%
(b) 50%
(c) 40%
(d) 30% Ans. B

(17) The information attached to the balance sheet of a holding company in respect its
subsidiary company could not be more than ………

(a) 6 months
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Corporate & Mangement Accounting Holding Company

(b) 3 months
(c) 30 days
(d) 12 months Ans. A

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 Corporate & Mangement Accounting Managerial Remuneration of KMP

Chapter 16 – Managerial Remuneration of KMP

Managerial Remuneration

Overall Limit i.e. 11% Calculation of Schedule - V for loss

(Section 197) Net Profit (Section 198) making Co.

The provisions relating of the Managerial Personnel in the Companies Act, 2013 are as under:
(a) Section 197: Overall ceiling for Managerial Remuneration i.e. 11% of the Net Profit or Individual limit.
(b) Section 198: Calculation of Net Profit as required under section 197.
(c) Schedule V: Conditions for Appointments of KMPs and their remunerations in case of a Company having no
profit or inadequate profits.
Overall Limit Of Managerial Remuneration (Applicable in case of Adequate Profits) Section 197 of the Companies Act,
2013
The maximum ceiling for payment of managerial remuneration by a public company to its MD, WTD and which shall not
exceed 11% of the net profit of the company in a particular financial year.
Note: The calculation of net profit for the purpose of Managerial Remuneration shall be made in accordance with
section 198.

Special Note: A company may pay more than 11% of the Net Profit with authority of shareholders. (Prior to
Companies (Amendment) Act, 2017 approval of Central Government was also needed)

Non-Applicability: This section does not apply to

-A Private company.
-A Government Company
-IFSC (International Financial Services Centers) Public Company Individual limit of Managerial Remuneration to MD, WTD
or Manager
The remuneration payable to any one MD or WTD or Manager shall not exceed 5% of the net profits and if there are
more than one such directors and manager, remuneration shall not exceed 10% of the net profits.
Note: The Company may increase the above limit of Managerial Remuneration subject to the approval of shareholders
by Special Resolution in general meeting.
Individual Limit to Non-Executive directors other than MD & WTD or Manager
The remuneration payable to Non-Executive directors shall not exceed:
(a) 1% of the net profits, if there is a MD, WTD or Manager;
(b) 3% of the net profits in any other case.

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 Corporate & Mangement Accounting Managerial Remuneration of KMP

Note: The Company may increase the above limit of Managerial Remuneration subject to the approval of shareholders
by Special Resolution in general meeting.

Provisions relating to sitting fees

The above mentioned limit of managerial remuneration shall be exclusive of sitting fees payable to directors for
attending the board meetings/committees meetings.
The maximum sitting fees payable to each director for attending the Board Meeting or any committee meeting shall not
exceed Rs. 1 lakh per meeting.
Note: The Board may decide different sitting fee payable to independent and non-independent directors other than
whole-time directors. Any director can take sitting fees including MD or WTD. The siting fee of women director cannot
be less than other Directors)
Remuneration to Directors in other Capacity: The remuneration payable to the directors including MD, WTD or
Manager shall be inclusive of the remuneration payable for the services rendered by him in any other capacity except
the services of a professional nature and in the opinion of the Nomination and Remuneration Committee or the Board,
the director possesses the requisite qualification for the services of the professional nature.

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 Corporate & Mangement Accounting Managerial Remuneration of KMP

Other provisions relating to Remuneration to Director or Manager

(a) Permissible forms of Remuneration: A director or manager may be paid remuneration either by way of a
monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly
by the other.
(b) Commission or remuneration from holding or subsidiary company: Any director who is in receipt of any
commission from the company and who is a MD, WTD or Manager of the company shall not be disqualified from
receiving any remuneration or commission from any holding company or subsidiary company of such company
subject to its disclosure by the company in the Board's report.
(c) Independent directors are not entitled to stock options: An independent director shall not be entitled to any
stock option and may receive remuneration by way of fees, reimbursement of expenses for participation in the
Board and other meetings and profit related commission as may be approved by the members.
(d) Insurance Premium not part of Remuneration: Where any insurance is taken by a company on behalf of its MD,
WTD, Manager, CEO, CFO or CS for indemnifying against any liability in respect of any negligence, default, or
breach of trust for which they may be guilty in relation to the company, such insurance premium shall not be
treated managerial remuneration.
Note: If such KMP is proved to be guilty, the premium paid on such insurance shall be treated as part of the
remuneration.
Section-198: Calculation of Profit for purpose to pay managerial remuneration under section 197
Remuneration in case of Inadequate or No Profits (Schedule V- Part II- Section II)
In case of no or inadequate profits a Company can pay remuneration to directors only by complying Schedule V.
Where in any financial year, if a company has no profits or inadequate profits, it may pay the remuneration to the
managerial person not exceeding the limits as mentioned in Table A and Table B below:
Table - A
Effective Capital Remuneration (Annually)
Negative or less than 5 crores 60 Lakhs
More than 5 crores but less than 100 crores 84 Lakhs
More than 100 crores but less than 250 crores 84 Lakhs
250 crores and above 120 Lakh plus 0.01% of the effective capital in
excess of Rs.250 crores

Table - B
If the following conditions are satisfied then remuneration can be paid without any limits:
1. The managerial person functions in a professional capacity
2. He does not hold any share at any time in the Company, Holding or Subsidiary during 2 years preceding the
appointment.
- As on the date of appointment
After the date of appointment
Note: However, holding shares upto 0.5% of paid up share capital allotted under ESOP is permitted.

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 Corporate & Mangement Accounting Managerial Remuneration of KMP

3. He is not related to the Directors or promoters of the Company, Holding or Subsidiary during 2 years preceding
the appointment.

MCQ’s

(1) Managerial remuneration shall not include services rendering in ………

(a) Key managerial personnel

(b) Directors
(c) Professional capacity
(d) Executive director Ans. C

(2) Board of directors thereof which shall not exceed ……… per meeting of the board or committee

(a) Rs. 2 lakhs

(b) Rs. 5 lakhs
(c) Rs. 3 lakhs
(d) Rs. 1 lakhs Ans. D

(3) For independent directors and women directors the sitting fees shall not be ……… than the sitting
fees payable to directors

(a) Less
(b) More
(c) Equal
(d) As compared to executive director Ans. A

(4) If any person contravenes the provision of this section he shall punishable with fine which shall not
less than ……… but which extend to ……..

(a) 2 lakhs; 5 lakhs

(b) 1 lakhs; 5 lakhs
(c) 3 lakhs; 10 lakhs
(d) 5 lakhs; 15 lakhs Ans. B

(5) Which company requires CSR committee ?

(a) Net worth 500 cr. Or more, turnover 1000 cr. Or more, net profit 50 cr. Or more
(b) Turnover 500 cr. Or more, net worth 200 cr. Or more, net profit 50 cr. Or more

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Corporate & Mangement Accounting Managerial Remuneration of KMP

(c) Net worth 200 cr. Or more, net worth 100 cr. Or more, turnover 500 cr. Or more
(d) None of the above Ans. A

(6) The company shall spends in every financial year minimum …… of the average net profits made
during the 3 immediately preceding financial years as per CSR policy

(a) 1%
(b) 2%
(c) 5%
(d) 10% Ans. B

(7) What Is the limit of yearly remuneration payable where effective capital is 250 cr. And above ?

(a) Rs. 60 lakhs

(b) Rs. 1.20 lakhs
(c) Rs. 84 lakhs
(d) Rs. 1.20 lakhs + 0.01% of effective capital Ans. D

(8) What Is the effective capital if company is paying 84 lakhs yearly ?

(a) 100 cr. And above but less than 250 cr.
(b) 250 cr. And above
(c) 5 cr. And above but less than 100 cr.
(d) Negative or less than 5 cr. Ans. C

(9) A director or manager in a company may paid remuneration by way of ……..

(a) Monthly payment

(b) A specified percentage of the net profit of company
(c) Partly by monthly payment and partly at a specified percentage of net profits of company
(d) Any of the above Ans. D

(10) Corporate contributions for charitable and social responsibility purposes is called …….

(a) Corporate philanthropy

(b) Corporate charities
(c) Corporate donations
(d) Corporate discretionaries Ans. A

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Corporate & Mangement Accounting Managerial Remuneration of KMP

(11) CSR activity covers under ………. Of Companies Act, 2013

(a) Section 146

(b) Section 121
(c) Section 135
(d) Section 130 Ans. C

(12) Every company shall constitute CSR committee constituting of …….. or more directors with at
least 1 independent director

(a) 1
(b) 2
(c) 3
(d) 5 Ans. C

(13) Companies having net worth …… or more or turnover …… or more or net worth …… or more
during any financial year shall constitute CSR committee

(a) 5 cr.; 500 cr.; 1000 cr.

(b) 500 cr.; 1000 cr.; 5 cr.
(c) 100 cr.; 500 cr.; 10 cr.
(d) 200 cr.; 2000 cr.; 20 cr. Ans. B

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Corporate & Mangement Accounting Issue & Redemption of Preference Shares

Chapter 17 – Issue & Redemption of Preference Shares

Section 55 of the Companies Act, 2013: A Company Limited by shares may issue redeemable preference shares
subject to the provisions in the AOA, for a period not exceeding 20 years from the date of its issue.
Conditions for Issue of Preference shares
A company may issue preference shares subject to the fulfilment of the following conditions:
(a) The Preference Shares may be issued only after passing a special resolution;
(b) No default made in respect of redemption of preference shares or payment of dividend.

Special Note: In case a company engaged in the setting up and dealing with of infrastructural projects may issue
preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a
minimum 10% of such preference shares per year from the 21st year onwards or earlier, on proportionate basis,
at the option of the preference shareholders.

Self-Test: ABC Ltd. (An infrastructure company) issued Rs. 5000 Crores preference shares redeemable within 30
years from the date of its issue. The date of issue of preference shares was on 5 th June, 2014. Decide the last date
of final redemption of preference shares issued by the Company and from which date the company will start the
redemption of the preference shares and how much minimum funds are required to start redemption.

Timeline for Redemption of Preference shares

A company may redeem its preference shares only on the terms on which they were issued and the preference
shares may be redeemed:
(a) at a fixed time or on the happening of a particular event;
(b) any time at the company's option; or
(c) any time at the shareholder's option.

The explanatory statement to the Special Resolution must contain the following information:
(a) The size of the issue and number of preference shares to be issued and nominal value of each share;
(b) The nature of such shares i.e. cumulative or non-cumulative, convertible or non-convertible etc.;
(c) The objectives of the issue, the manner of issue of shares;
(d) The price at which such shares are proposed to be issued;
(e) The basis on which the price has been arrived at;
(f) The terms of issue, including terms and rate of dividend on each share, etc.;
(g) The terms of redemption, including the tenure of redemption, redemption of shares at premium and if the
preference shares are convertible, the terms of conversion;
(h) The manner and modes of redemption;
(i) The current shareholding pattern of the company;
(j) The expected dilution in equity share capital upon conversion of preference shares. Conditions for redemption
(i) Redemption out of profits or issue Proceeds: A Company can redeem preference shares in the following two ways:
i. Redemption of preference shares out of the profits which is available for dividend.
ii. Redemption of preference shares out of the proceeds of a fresh issue of shares made for the purposes of
such redemption.
Note: A Company can only redeem those Preference shares which are fully paid-up.
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Corporate & Mangement Accounting Issue & Redemption of Preference Shares

(k) Creation of Capital Redemption Reserve: A company which has issued redeemable preference shares, shall
transfer a sum equal to the nominal amount of the shares to be redeemed, to a "Capital Redemption Reserve
Account".
The capital redemption reserve account may 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.

Inability to redeem (Section 55(3) of the Companies Act. 2013)

In case, a company is not in a position to redeem any preference shares or to pay dividend on such shares as per the
terms of issue.
Under such circumstance, a company may with the consent of % preference shareholders in value subject to the
approval of the NCLT, issue further redeemable preference shares equal to the amount due, including the dividend
thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference
shares, the unredeemed preference shares shall be deemed to have been redeemed.
Note: The issue of further redeemable preference shares or the redemption of preference shares shall not be
deemed to be an increase or, a reduction, in the share capital of the company.

Procedure of Issue of Preference Shares

Check authority in AOA, if Articles do not authorize, first amend the AOA

No subsisting default in the payment of dividend and redemption of preference shares earlier

Check whether all the conditions relating to issue are met

Hold BM and Issue Notice to call GM along with Explanatory statement

Hold GM and pass Special Resolution at GM.

File the Special Resolution so passed with ROC in MGT 14 within 30 days of passing the SR

Allot the shares and file Return of allotment in PAS- 3 within 30 days of allotment.

If shares held in Dematerialized form, inform depositories about allotment.

Update Member Register by making allotment entries. Issue Share Certificates

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Corporate & Mangement Accounting Issue & Redemption of Preference Shares

Procedure of Redemption of Preference Shares

The redemption should be as per the agreed terms at the time of issue and amended later.

Hold BM and pass Board Resolution for approval of Redemption of Preference Shares.

The notice of redemption to be filed by the company with the ROC in Form SH-7

RIGHT ISSUE OF SHARES

Rights offering (issue) is an issue of right to a company's existing shareholders to entitle them to buy additional
shares directly from the company in proportion to their existing holdings.
The objective is to raise fund and to ensure equal distribution of Rights.
The Company shall offer the shares to the persons who, at the date of the offer, are holders of equity shares of the
company in proportion to the paid-up share capital.
The offer shall be made by notice specifying the number of shares offered.
The offer shall be open not less than 15 days before and not exceeding 30 days from the date of the offer. If the
offer is not accepted within the period it shall be deemed to have been declined.

Special Note: In case of private limited company, time limit for acceptance of offer by existing shareholders may
be less than 15 days, if 90% of the members of the company have given their consent either in writing or through
electronic mode.

Note: After expiry of the offer or on receipt of decline of offer, the Board of Directors may dispose of such offered
shares in any manner which is not disadvantageous to the shareholders and the company. The notice of offer
shall be sent either by registered post or speed post or by electronic mode to all the existing shareholders at least
3 days before the opening of the issue.

The provisions regarding issue of further shares do not apply to:

(a) Increase of the subscribed capital: Increase of the subscribed capital of a company caused due to conversion of
convertible debentures issued or Convertible Preference shares into shares.
(b) Conversion of Govt. Loans: Conversion of part or whole of the debentures issued to or loans obtained from any
Government in shares of the company in pursuance of a direction issued by that Government in public interest on
such terms and conditions as appear to be fair and reasonable to the Government even if the terms of issue of such
debentures or loans do not contain a term providing for an option for such conversion.

EQUITY SHARES WITH DIFFERENTIAL RIGHTS

Section 43 of the Companies Act, 2013 & Rule 4 of Companies (Share Capital and Debentures) Rules, 2014

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Corporate & Mangement Accounting Issue & Redemption of Preference Shares

No company (whether unlisted or listed public company) shall issue equity shares with differential rights as
to dividend, voting or otherwise, unless it complies with the following conditions:
(a) Authorisation ind the Articles of Association (AQAI: The AOA of the company authorizes the issue of
shares with differential rights.
(b) Shareholder's Approval: The issue of shares is authorized by an ordinary resolution passed at a general
meeting of the shareholders.
Note: In case of listed companies, the issue of such shares shall be approved by the shareholders through
postal ballot.
(c) Maximum Limit: The shares with differential rights shall not exceed 26% of the total post- issued paid-
up equity share capital including equity shares with differential rights issued at any point of time.
(d) Distributable Profits: The Company having consistent track record of distributable profits for the last 3
years.
(e) No default in Statutory Filling: The Company has not defaulted in filing financial statements and annual
returns for 3 financial years immediately preceding the financial year in which it is decided to issue such
shares.
(f) No Default in the Payment of Dividend. Deposits or Debentures etc.
(g) The Company has no subsisting default in the payment of a declared dividend to its shareholders or
repayment of its matured deposits or redemption of its preference shares or debentures that have become
due for redemption or payment of interest on such deposits or debentures or payment of dividend.
(h) No Penalty: The Company has not been penalized by Court or NCLT during the last three years of any
offence under the RBI Act, 1934, the SEBI Act, 1992, the Securities Contracts Regulation Act, 1956, the
FEMA Act, 1999 or any other special Act.
Conversion of existing equity share capital into differential voting rights and vice-versa not possible
The company shall not convert its existing equity share capital with voting rights into equity share capital
carrying differential voting rights and vice versa.

Procedure of Issue of Equity Shares with differential rights

Check authority in AOA, if Articles do not authorize, first amend the AOA

Hold BM to call a GM and issue notice of GM.

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Corporate & Mangement Accounting Issue & Redemption of Preference Shares

Check whether all the conditions relating to issue are met

Listed Company shall inform the decision at BM to Stock Exchange (SE) within 15 minutes

Hold GM and pass Ordinary Resolution at GM.

Allot the shares and file Return of allotment in PAS- 3 within 30 days of allotment.

Listed Company shall send copy of proceedings of the GM to SE within 24 hours of event

If shares held in Dematerialized form, inform depositories about allotment.

Update Member Register by making allotment entries. Issue Share Certificates

ISSUE OF EQUITY SHARES WITH DIFFERENTIAL RIGHTS

Section 43 of the Companies Act, 2013 & Rule 4 of Companies (Share Capital and Debentures) Rules, 2014

No company (whether unlisted or listed public company) shall issue equity shares with differential rights as
to dividend, voting or otherwise, unless it complies with the following conditions:
(a) Authorisation ind the Articles of Association (AQAI: The AOA of the company authorizes the issue of
shares with differential rights.
(b) Shareholder's Approval: The issue of shares is authorized by an ordinary resolution passed at a general
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Corporate & Mangement Accounting Issue & Redemption of Preference Shares

meeting of the shareholders.

Note: In case of listed companies, the issue of such shares shall be approved by the shareholders through
postal ballot.
(c) Maximum Limit: The shares with differential rights shall not exceed 26% of the total post- issued paid-
up equity share capital including equity shares with differential rights issued at any point of time.
(d) Distributable Profits: The Company having consistent track record of distributable profits for the last 3
years.
(e) No default in Statutory Filling: The Company has not defaulted in filing financial statements and annual
returns for 3 financial years immediately preceding the financial year in which it is decided to issue such
shares.
(f) No Default in the Payment of Dividend. Deposits or Debentures etc.
(g) The Company has no subsisting default in the payment of a declared dividend to its shareholders or
repayment of its matured deposits or redemption of its preference shares or debentures that have become
due for redemption or payment of interest on such deposits or debentures or payment of dividend.
(h) No Penalty: The Company has not been penalized by Court or NCLT during the last three years of any
offence under the RBI Act, 1934, the SEBI Act, 1992, the Securities Contracts Regulation Act, 1956, the
FEMA Act, 1999 or any other special Act.
Conversion of existing equity share capital into differential voting rights and vice-versa not possible
The company shall not convert its existing equity share capital with voting rights into equity share capital
carrying differential voting rights and vice versa.

Procedure of Issue of Equity Shares with differential rights

Check authority in AOA, if Articles do not authorize, first amend the AOA

Hold BM to call a GM and issue notice of GM.

Check whether all the conditions relating to issue are met

Listed Company shall inform the decision at BM to Stock Exchange (SE) within 15 minutes

Hold GM and pass Ordinary Resolution at GM.

Allot the shares and file Return of allotment in PAS- 3 within 30 days of allotment.

Listed Company shall send copy of proceedings of the GM to SE within 24 hours of event

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Corporate & Mangement Accounting Issue & Redemption of Preference Shares

If shares held in Dematerialized form, inform depositories about allotment.

Update Member Register by making allotment entries. Issue Share Certificates

MCQ’s

(1) Right issue is given to ……..

(a) Existing shareholders

(b) General public
(c) Employees under ESOP
(d) All of the above Ans. A

(2) Right issue shall be open for min. ……… and max. ……. From date of offer

(a) 3 days; 10 days

(b) 15 days; 30 days
(c) 7 days; 15 days
(d) 3 days; 15 days Ans. B

(3) No company limited by shares shall issue ……….

(a) Redeemable preference shares

(b) Non-convertible preference shares
(c) Irredeemable preference shares
(d) Convertible preference shares Ans. C

(4) Other than infrastructure company can issue preference shares for period of not exceeding ……..

(a) 5 years
(b) 10 years
(c) 15 years
(d) 20 years Ans. D

(5) The preference shares can be redeemed only out of the ………

(a) Out of the profits of the company

(b) Out of the proceeds of fresh issue of shares
(c) Both (a) & (b)
(d) None of the above Ans. C

(6) Redemption of preference shares can not be done out of ……..

(a) Amount of sale of asset

(b) General reserve
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Corporate & Mangement Accounting Issue & Redemption of Preference Shares

(c) Balance of profit and loss A/c

(d) Development fund Ans. D

(7) Unless otherwise stated a preference shares is always deemed to be :

(a) Cumulative, Participating and non-convertible

(b) Non-cumulative, Non-participating and non-convertible
(c) Cumulative, Non-participating and Non-convertible
(d) Non-cumulative, Participating and Non-convertible Ans. D

(8) The following statements apply to equity/preference shareholders. Which one of them applies
only to preference shareholders

(a) Shareholders risk the loss of investment

(b) Shareholders bear the risk of no dividends in the event of losses
(c) Shareholders usually have the right to vote
(d) Dividends are usually given at a set amount in every financial year Ans. D

(9) If preference shares are redeemed at a premium such premium may be provided out of

(a) Share forfeited A/c

(b) Security premium A/c
(c) Proceeds of fresh issue of shares
(d) CRR A/c Ans. B

(10) Preference shares can be redeemed …….

(a) Even if they are partly paid

(b) After getting permission from the court
(c) Only if they are fully paid
(d) All of the above Ans. C

(11) The preference share which carry the right of participating in the surplus left after paying
the equity dividend are called …….

(a) Convertible preference shares

(b) Cumulative preference shares
(c) Participating preference shares
(d) All of the above Ans. C

(12) Preference shareholders are entitled to vote on every resolution placed before the
company at any meeting if the dividend due on such shares are in arrears for a period of …….. or
more

(a) 2 years
(b) 3 years
(c) 4 years
(d) 1 year Ans. A

(13) Section 43 of the Companies act, 2013 deals with equity shares with ……….

(a) Differential Voting Rights

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Corporate & Mangement Accounting Issue & Redemption of Preference Shares

(b) Equal Voting Rights

(c) Normal Voting Rights
(d) None of the above Ans. A

(14) The shares with differential rights shall not exceed ………. Of the post issue paid up equity
share capital including equity shares with differential rights issued at any point of time

(a) 22%
(b) 26%
(c) 25%
(d) 20% Ans. B

(15) The company has not defaulted in filing financial statement and annual returns for …….
Immediately preceding the financial year in which it is decided to issue differential rights

(a) 1 year
(b) 2 years
(c) 5 years
(d) 3 years Ans. D

Unique Academy 17.9 Prof. Ashish Parikh - 8007978700

Corporate & Mangement Accounting Sweat Equity Shares

Chapter 18 – Sweat Equity Share

Section 2(88) of the Companies Act, 2013:
Sweat Equity Shares means such equity shares as are issued by a company to its directors or employees at a discount or
for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.

Who shall be eligible for Sweat Equity Shares?

Employee includes

Permanent Employee Director excluding Employees of Holding

(Completed 1 Year) Independent Directors & Subsidiary

Employee means:
(a) Permanent Employees: A permanent employee of the company who has been working in India or Outside India, for
at least the last 1 year; or
(b) Directors: A director of the company whether a whole time director or not; or
(c) Employees of Holding & Subsidiary Companies: An employee or a director of a subsidiary or of a holding company of
the company whether in India or outside India.

Section 54 of the Companies Act, 2013:

A company may issue sweat equity shares of a class of shares already issued subject to the following conditions:
(a) The issue of Sweat Equity Shares must be authorised by a special resolution (SR).
(b) The SR carries the details like number of shares, current market price, consideration, and the class of directors or
employees to whom sweat equity shares are to be issued.
(c) In case of listed company, the sweat equity shares are issued in accordance with the regulations made by SEBI and in
case of unlisted company, the sweat equity shares are issued in accordance with the Companies Act and its rules.
(d) The holders of such shares shall rank pari-passu with other equity shareholders.

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Corporate & Mangement Accounting Sweat Equity Shares

Rule 8 of Companies (Share Capital and Debentures) Rules, 2014

Conditions of issue of Sweat

Equity

Pass a Spl. Validity (12 Maximum Limit Valuation by regd. Lock in period
Resolution Months) (25%) valuer (3yrs)

(a) Special Resolution: Issue of Sweat Equity Shares to be authorized by special resolution at a general meeting.
Explanatory Statement to the Special Resolution:
As mentioned above, special resolution shall be passed for the purpose of issue of sweat equity share, the explanatory
statement to be annexed to the Notice of the general meeting, shall contain the following details:
(a) The date of the Board meeting wherein the sweat equity shares proposal was approved.
(b) Reasons/justification for the issue of sweat equity shares.
(c) Total numbers of shares to be issued as sweat equity including the class of shares are intended to be issued.
(d) Class of directors or employees to whom such equity shares are to be issued.
(e) Principal terms and conditions on which sweat equity shares are to be issued.
(f) Time period of association of Directors or Employees with the company.
(g) The price at which the sweat equity shares are proposed to be issued.
(h) The consideration including consideration other than cash.
(i) Ceiling on managerial remuneration, if any.
(j) A statement to the effect that the company shall conform to the applicable accounting standards; and diluted
Earnings per Share pursuant to the issue of sweat equity securities, calculated in accordance with the applicable
accounting standards.
(b) Validity: The special resolution shall be valid only for 12 months for allotment of sweat equity shares.
(c)Maximum Limit: A company cannot issue sweat equity shares not more than 15% of the existing paid-up equity share
capital in a year or shares of the issue value of Rs.5 Crore, whichever is higher and 25% of the paid-up equity capital of
the Company at any time.
Note: The issuance of sweat equity shares in the Company shall not exceed 25% of the paid-up equity capital at all the
time.
(d) Valuation: The Sweat equity shares to be issued shall be valued at a price determined by a registered valuer, if the
shares to be issued for intellectual property rights (Know-how or any other value addition). A copy of the valuation
report obtained in both the above cases shall be sent to the shareholders along with the notice of the general meeting.
(e) Register of Sweat Equity Shares: The Company shall maintain a Register of Sweat Equity Shares in Form No. SH.3
(f) Lock in period: Sweat equity shares shall be non-transferable for three years from the date of allotment.

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Corporate & Mangement Accounting Sweat Equity Shares

Special Note: Lock-in period of Sweat Equity Shares

The sweat equity shares issued to directors or employees shall be locked-in (Non-transferable) for 3 years from the
date of allotment. The share certificates are under lock-in and the period of expiry of lock-in shall be stamped in bold
or in any other manner on the share certificate.

Additional Requirements for Sweat Equity

Part of managerial remuneration: The amount of sweat equity shares issued shall be treated as part of managerial
remuneration subject to the fulfilment of the following conditions:
(a) The sweat equity shares are issued to the director or manager; and
(b) They are issued for consideration other than cash.
Note: The sweat equity shares issued during an accounting period, the accounting value of sweat equity shares shall be
treated as a form of compensation to the employee or the director in the financial statements of the company.
Disclosure in Director's Report (Board Report): The Board of Directors shall disclose the following details in Director's
Report with regard to issue of sweat equity shares:
(a) Class of director/employee to whom sweat equity shares were issued;
(b) Class of shares issued as Sweat Equity Shares;
(c) The number of sweat equity shares issued to the directors, key managerial personnel (KMP) or other employees
showing separately the number of such shares issued to them, if any, for consideration other than cash and the
individual names of allotees holding one percent or more of the issued share capital;
(d) The reasons/justification for the issue;
(e) Principal terms and conditions for issue of sweat equity shares, including pricing formula;
(f) Total number of shares arising as a result of issue of sweat equity shares;
(g) Percentage of the sweat equity shares of the total post issued and paid-up share capital;
(h) Consideration including consideration other than cash received;
(i) Diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.
Note:
(a) Entries in respect of sweat equity shares in the register shall be authenticated by the Company Secretary or by any
other person authorized in this regard.
(b) Sweat equity shares may be issued to the employees and directors at a discount and even without the approval of
National Company Law Tribunal (NCLT).

MCQ’S

(1) Sweat equity shares are give to its employees and directors at discount or consideration other than
cash for providing …… , ……. , …….

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Corporate & Mangement Accounting Sweat Equity Shares

(a) Intellectual property rights

(b) Know –how
(c) None of the above
(d) Both (a) & (b) Ans. D

(2) What is the time period for issuing of sweat equity shares after passing special resolution ?
(a) 3 months
(b) 1 month
(c) 12 months
(d) 6 months Ans. C

(3) The sweat equity shares issued to directors or employees shall be lock in for the period of ……… from
the date of allotment

(a) 2 years
(b) 3 years
(c) 5 years
(d) 1 year Ans. B

(4) The company shall not issue sweat equity shares for more than …….. of the exiting paid up equity
share capital in a year or share of the issue value of rupees 5 crores whichever is higher

(a) 15%
(b) 10%
(c) 5%
(d) 20% Ans. A

(5) The issue of sweat equity shares in the company shall not exceed ……… of the paid up equity capital
of the company at any time

(a) 20%
(b) 25%
(c) 10%
(d) 15% Ans. B

(6) The sweat equity shares to be issued shall be valued at a price determined by a ……… as the fair price
giving of justification for such valuation

(a) Company Secretary

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(b) Chartered Accountant

(c) Cost & Management Accountant
(d) Registered Valuer Ans. D

(7) File form ……. Within …… of passing board resolution for allotting sweat equity shares

(a) PAS-2 ; 15 days

(b) PAS-1 ; 7 days
(c) PAS-3 ; 20 days
(d) PAS-3 ; 30 days Ans. D

(8) The company shall maintain a register of sweat equity shares in form ……..

(a) SH-1
(b) SH-4
(c) SH-3
(d) SH-2 Ans. C

(9) The amount of sweat equity shares issued shall be treated as part of ……….

(a) Salary
(b) Managerial Remuneration
(c) Consideration other than cash
(d) None of the above Ans. B

(10) Sweat equity shares allotted to employees shall be locked in for …….

(a) 6 months
(b) 2 years
(c) 1 year
(d) 3 years Ans. C

(11) Section 2 (88) provides the definition of ……..

(a) Sweat Equity Shares

(b) Subsidiary Company
(c) Shares
(d) Subscribed Capital Ans. A

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Corporate & Mangement Accounting Sweat Equity Shares

(12) Sweat equity shares shall not exceed ……… of the paid up equity share capital of the company
at any time

(a) 5%
(b) 15%
(c) 25%
(d) 20% Ans. C

(13) The company may issue sweat equity shares of max. ………. Of the paid up equity or Rs. ………..
whichever Is higher

(a) 25%; 10 Crore

(b) 15%; 5 Crore
(c) 10%; 2 Crore
(d) 25%; 25 Crore Ans. B

Unique Academy 18.6 Prof. Ashish Parikh - 8007978700