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Sources of Business Finance Test - 35

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Sources of Business Finance Test - 35
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Weekly Quiz Competition
  • Question 1
    1 / -0
    The premium on issue of shares must be credited to a separate account 
    called ________________.
    Solution
    Securities Premium Account:-
    When shares are issued at an amount more than the nominal value or par value, it is called shares issued at premium. The premium amount thus received is credited to a separate account called ‘Securities Premium Account’ and is shown on the liabilities side of the company’s balance sheet under the head ‘Reserves and Surpluses’.
  • Question 2
    1 / -0
    __________ have the right to vote on any resolution placed before the company or general meeting.
    Solution
    Equity shares is the most important source of raising long term capital by a company. Equity shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. Hence, being the owners of the company, equity shareholders have the right to vote on any resolution placed before the company or general meeting.
  • Question 3
    1 / -0
    If a company receives excess application money and the application money equal to shares issued transferred to Share Capital A/c and application money received on excess shares-some money is adjusted and against allotment and remaining was refunded, then which of the following entry is correct?
    Solution
    • Sometimes a company may receive applications for a large number of shares than offered to public by it for subscription and this situation is termed as over-subscription.
    • Therefore, such surplus (applications received > offered to public) is to be adjusted.
    • Generally, it is stated in the given question that surplus money received on applications will be adjusted either on:

    a)      Share allotment only or

    b)      Share allotment and on subsequent calls

     But if question does not specify treatment then it is to be adjusted against allotment and surplus money is refunded by cash or cheque.

    • For example:-

    Question- A Company invited for 30000 equity shares of ₹ 10 each, payable ₹ 2 on application,₹ 3 on allotment and balance on call. Total applications money received at ₹ 2 per share was ₹ 72000. Application money should be adjusted against allotment and excess money is to be refunded by bank.

    Solution- Total application money received is ₹ 72000

                       Number of applications received = Total application money received ÷ Rate of application money

                                                                               = ₹ 72000 ÷ ₹2  = 36000 shares

                       Number of shares to be issued    = 30000 shares

    Number of application is more than shares to be issued hence, it is over- subscription. As given in question, company decides to allot 30000 shares in full and refund the excess money received on application by bank for 6000 shares at ₹ 2 per share.

  • Question 4
    1 / -0
    If face value of debentures is more than issue price, then the debentures are said to be issued at a _________.
    Solution
    Issue of Debentures at Discount:

    When debentures are issued by company at a price less than its nominal value (face value) it is said to be issued at discount. It is important to note that the Companies Act has not put any restriction on the maximum limit of discount. For example, if a debenture of Rs. 1,000 is offered to public at Rs. 950, it is issue at a discount. Here Rs. 50 on each debenture is loss to the company. As a principle of equity, it is desirable to write off this loss.

    Disclosure of Discount in Balance Sheet:
    It is a capital loss and until it is written off-completely, it is shown on the asset side of balance sheet, under the heading ‘Miscellaneous Expenditure’, as a fictitious asset. Discount on issue of debentures account is supposed to be allowed on allotment, unless, otherwise, mentioned.

    Accounting Treatment:
    The requisite entries to be passed are as follows:
    (a) When allotment money becomes due

    Debenture allotment a/c
    Discount on issue of debenture a/c
    To Debentures a/c

    (b) When allotment money is received
    Bank a/c
    To Debenture allotment a/c

    (c) To Write off Discount
    Profit & Loss A/c
    To Discount on Issue of Debenture A/c.
  • Question 5
    1 / -0
    If the debentures are issued at a price higher than the nominal value of the debentures, the premium should be credited to ______________.
    Solution

    Securities Premium Account-

    ·  When debenture is issued at a price more than its face value, they are said to be issued at a premium.

    ·  For example: if a debenture of ₹10 is issued at ₹12; ₹2 will be called as premium on that debenture.

    ·  The amount of premium on debenture is a capital profit so it is credited to a separate account called “Securities Premium Account” or “Securities Premium Reserve” and it is shown in Balance sheet under the head “Reserved and Surplus”.

    · Though there is no legal restriction on issue of debenture at premium but there is restriction on utilization of securities premium a/c.

    ·  Utilization of securities premium a/c is restricted to following purposes:

           a.  Writing off preliminary expenses

           b.  Writing off expenses, discount allowed on issue of shares/debentures or commission paid on issue of debentures/shares (underwriting commission)

           c.  Issue of fully paid bonus shares to equity shareholders

           d.  Providing for payment of premium payable on redemption of preference shares or debenture

           e.  For buy back of its own shares.

  • Question 6
    1 / -0
    In the company's balance sheet, debentures are shown under the head _____________.
    Solution

    Noncurrent liabilities are those obligations not due for settlement within within one year. These liabilities are separately classified in an entity's balance sheet, away from current liabilities. Examples of noncurrent liabilities are:

    • Long-term portion of debt payable

    • Long-term portion of bonds payable

    The aggregate amount of noncurrent liabilities is routinely compared to the cash flows of a business, to see if it has the financial resources to fulfill its obligations over the long term. If not, creditors will be less likely to do business with the organization, and investors will not be inclined to invest in it. A factor to be considered in this evaluation is the stability of an organization's cash flows, since stable flows can support a higher debt load with a reduced risk of default.

  • Question 7
    1 / -0
    The forfeited shares may be re-issued:-
    (I) At par only
    (II) At  par or premium only
    (III) At par or at discount only
    (IV) At or par at premium or at discount 
    The correct answer is :
    Solution
    Reissue of Forfeited Shares:-
    Reissue of forfeited shares is not the allotment of shares, but it is only a re-sale. A company can reissue forfeited shares in accordance with the provisions contained in the articles. The forfeited shares can be reissued at a discount, but the maximum discount should not exceed the amount available in the share forfeiture account.
    • If the shares re issued at discount
    When shares are reissued at a loss, then such a loss should be debited to the share forfeiture account. If the loss on reissue is less than the amount forfeited, then the excess should be transferred to the capital reserve account.
    • If the shares re issued at premium
    If the shares are reissued at a price more than face value, then the excess should be credited to the securities premium account.
    When only a portion of shares is reissued, only the profit made on the reissue of such shares must be transferred to the capital reserve account.
    • If the shares are re issued at par
    When the shares re issued at the same value as the face value then they are issued at  par.
  • Question 8
    1 / -0
    Balance of share forfeiture account remaining after reissue is transferred to ________________.
    Solution
     Meaning Of Capital Reserve:

    A reserve which is created out of the capital profit is known as capital reserve. It is not created out of the profit earned in normal course of the business. Capital reserve is created out of the profit earned from some specific transactions of capital nature. Capital reserve is not available for the distribution to the shareholders. The examples of capital profit from which capital reserve is created are as follows:

    * Profit on sale of fixed assets
    * Profit on sale of investment
    * Profit on revaluation of assets and liabilities
    * Premium on issue of shares and debentures
    * Profit on re-issue of forfeited shares
    * Discount on redemption of debentures
    * Profit on purchase of an existing business

    Objectives And Advantages Of Capital Reserve
    The following are the objectives and advantages of capital reserves
    * Capital reserve helps in making the organization financially strong.
    * Capital reserve helps in writing off the capital losses arising from the sale of fixed assets, shares and debentures.
    * Capital reserve helps in the issue of fully paid bonus shares to the existing shareholders.

    Disadvantages Of Capital Reserve
    The following are the disadvantages of capital reserve
    * Capital reserve is not available for the distribution to shareholders.
    * Capital reserve does not give any indication of operating efficiency of the business.
    * Capital reserve does not help in making the management responsible to sale old assets at satisfactory price.
  • Question 9
    1 / -0
    Shares forfeited account is to be shown in the balance sheet by way of ____________ to the paid up share capital on the liabilities side until the concerned shares are re-issued.
    Solution
    Share forfeited account:-
    If a shareholder fails to pay allotment money or a call or a part thereof by the last date fixed for payment, the Board of Directors, if Articles of Association of the company empower it to do so, proceed to forfeit the shares on which allotment money or call has become in arrear.The Articles of Association lay down the procedure. A notice has to be served on the defaulter requiring him to pay the unpaid amount together with interest accrued by a certain date.

    The notice also must state that in the event of non-payment on or before the date so named, the shares in respect of which the notice has been served will be liable to be forfeited. When shares are forfeited, the shareholder’s name is removed from the register of members and the amount already paid by him on shares is forfeited to the capital. It is a capital gain and is credited to Forfeited Shares Account. A forfeited share may be reissued even at a loss. But the loss on reissue cannot exceed the gain on forfeiture of the share reissued.
  • Question 10
    1 / -0
    Which of the following security cannot be forfeited for non-payment of allotment or call money?
    Solution
    Generally total face value of debenture is demanded by company in installments I.e. Debenture application, Debenture allotment and Debentures calls accounts. It is usual that some of the debenture-holders fail to pay the amount of different installments when these are demanded by company. Such unpaid calls (installments) are called ‘Calls in arrears’. Under the provisions of Companies Act, 1956 debentures cannot be forfeited by company.

    Because under section 122 of the Companies Act 1956 a contract with a company to take up and pay for any debenture may be enforced by a decree for specific performance. For the realisation of calls in arrears on debentures the company can only file a suit in the court. Company can charge interest on calls-in-arrears as provided in prospectus.

    Sometimes, certain debenture-holders pay money against those calls also which have not yet en demanded by company. In such cases the amount received is credited to calls in advance account. If provided in prospectus, the company pays interest on this amount to debenture-holders at a specified rate. Interest is always calculated for the period, the advance has been received.
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