Here are a large number of MCQs for practice to prepare for final exams. Note time taken and the accuracy of your work to score high in final exam.

1. Preference shareholders have:

a) Preferential right as to dividend only

b) Preferential right in the management

c) Preferential right as to repayment of capital at the time of liquidation of the company

d) Preferential right as to dividend and repayment of capital at the time of liquidation of the Company

2. Capital included in the Total of Balance Sheet of a Company is called:

a) Issued Capital

b) Subscribed Capital

c) Called up Capital

d) Authorised Capital

3. Which of the following statements is true:

a) Authorised Capital = Issued Capital

b) Authorised Capital > Issued Capital

c) Paid up Capital > Issued Capital

d) None of the above

4. A company cannot issue:

a) Redeemable Equity Shares

b) Redeemable Preference Shares

c) Redeemable Debentures

d) Fully Convertible Debentures

5. Shares issued by a company to its employees or directors in consideration of ‘Intellectual Property Rights’ are called:

a) Right Equity Shares

b) Private Equity Shares

c) Sweat Equity Shares

d) Bonus Equity Shares

6. Minimum subscription amount of 90% is related to which share capital:

a) Authorised Capital

b) Issued Capital

c) Paid up Capital

d) Reserve Capital

7. Share Application Account is in the nature of:

a) Real Account

b) Personal Account

c) Nominal Account

d) None of the above

8. As per SEBI Guidelines, Application money should not be less than ……………. of the issue price of each share:

a) 10%

b) 15%

c) 25%

d) 50%

9. 2,000 Equity Shares of ₹10 each were issued at 5% premium to the promoters of a company for their services. Which account will be debited:

a) Share Capital Account

b) Goodwill Account/Incorporation Cost Account

c) Securities Premium Reserve Account

d) Cash Account

10. Assertion - Under Section 62(1)(b) of the Companies Act, 2013, a Company may offer shares to its employees under a scheme of ‘Employees Stock Option’ which means the option (right) given to the whole-time directors, officers or permanent employees of a company to purchase or subscribe the securities offered by the company at a future date, at a pre-determined price, which is lower than the market price.

Reason - The company need not to pass a special resolution to this effect.

Alternatives:

a) Assertion is incorrect, but Reason is Correct

b) Assertion is correct, but Reason is incorrect

c) Both Assertion and Reason are Correct and Reason is the correct explanation of Assertion

d) Both Assertion and Reason are Correct, but Reason is not the correct explanation of Assertion

Class 12 Accountancy MCQs Share Capital

11. A company forfeited 3,000 shares of ₹10 each, on which only ₹5 per share (including ₹1 premium) has been paid. Out of these few shares were re-issued at a discount of ₹1 per share were and ₹6,000 were transferred to Capital Reserve. How many shares were re-issued?

a) 3,000 shares

b) 2,000 shares

c) 1,500 shares

d) 1,000 shares

12. Jeet Ltd. invited applications for 2,00,000 shares of ₹ 10 each payable ₹ 5 on application, ₹ 3 on allotment and ₹ 2 on call. Public has applied for 3,80,000 shares. Pro-rata allotment was made in the ratio 7:4. Determine the amount to be refunded by the company at the time of allotment of shares.

a) ₹3,00,000

b) ₹9,00,000

c) ₹1,50,000

d) ₹7,50,000

13. BTS Ltd. forfeited 700 shares of ₹ 10 each issued at a premium of 10% for non-payment of allotment money of ₹ 5 per share (including premium) and first and final call of ₹ 3 per share. On forfeiture of these shares, Share Forfeiture Account should be credited with:

a) ₹7,000

b) ₹1,400

c) ₹4,900

d) ₹2,100

14. Assertion - Interest on bearer debentures is paid to a person who produces the interest coupon attached to such debentures.

Reason - Bearer debentures are debentures which can be transferred by way of delivery and the company does not keep any record of the debenture holders.

Select the correct answer from the following:

a) Assertion is correct, but Reason is wrong.

b) Both Assertion and Reason are correct, but Reason is not the correct explanation of Assertion.

c) Both Assertion and Reason are correct, and Reason is the correct explanation of Assertion.

d) Both Assertion and Reason are wrong.

15. Which of the following statements does not relate to ‘Reserve Capital’:

a) It is part of uncalled capital of a company.

b) It cannot be used during the lifetime of a company.

c) It can be used for writing off capital losses.

d) It is part of subscribed capital.

16. If PQR ltd. is issued fully paid shares of ₹2,25,000 in consideration of machinery of ₹2,50,000, the balance of ₹25,000 will be credited to:

a) Statement of Profit & Loss

b) Goodwill Account

c) Security Premium Reserve Account

d) Capital Reserve Account

17. Which of the following is not a capital profit:

a) Profit prior to incorporation of the company

b) Profit from the sale of fixed assets

c) Premium on issue of shares

d) Compensation received from insurance company

18. Maximum limit of Premium on shares is:

a) 5%

b) 10%

c) No Limit

d) 100%

19. When a company issue shares at a premium, the amount of premium should be received by the company:

a) Along with application money

b) A long with allotment money

c) Along with calls

d) Along with any of the above

20. For what purpose securities premium reserve account cannot be utilized:

a) Amortization of preliminary expenses

b) Distribution of dividend

c) Issue of fully paid bonus shares

d) Buy Back of own shares

Class 12 Accountancy MCQs Share Capital

21. A Company issued 20,000 shares of ₹50 each at 5% premium. ₹20 were payable on application and balance on allotment. What will be the allotment amount:

a) ₹5,00,000

b) ₹4,75,000

c) ₹6,50,000

d) ₹5,25,000

22. As per Table F, the Company is required to pay interest on the amount of calls in advance at:

a) 12% p.a.

b) 5% p.a.

c) 10% p.a.

d) 6% p.a.

23. Following amounts were payable on issue of shares by a Company- ₹3 on application, ₹3 on allotment. ₹2 on first call and ₹2 on final call. Mona holding 600 shares paid only application and allotment money whereas Shona holding 400 shares did not pay final call. Amount of calls in arrear will be:

a) ₹3,200

b) ₹2,800

c) ₹1,800

d) ₹6,200

24. The subscribed capital of a company is ₹60,00,000 and the nominal value of the share is ₹100 each. There were no calls in arrear till the final call was made. The final call was made and was paid on 57,500 shares only. The balance in the calls in arrear amounted to ₹62,500. Calculate the final call on share.

a) ₹7

b) ₹20

c) ₹22

d) ₹25

25. From which account, expenses on issue of shares will be written off first of all:

a) Statement of Profit and Loss

b) Miscellaneous Expenditure Account

c) Share Issue Expenses Account

d) Securities Premium Reserve Account

26. CT Ltd. invited applications for 1,00,000 shares and it received applications for 1,50,000 shares. Applications for 30,000 shares were rejected and the remaining were allotted shares on pro-rata basis. How many shares an applicant for 6,000 shares will be allotted:

a) 2,500 Shares

b) 3,600 Shares

c) 4,500 Shares

d) 5,000 Shares

27. PT Ltd. had allotted 10,000 shares to the applicants of 14,000 shares on pro-rata basis. The amount payable on application was ₹3. Anand applied for 420 shares. The number of shares allotted to Anand will be:

a) 60 shares

b) 340 shares

c) 320 shares

d) 300 shares

28. If applicants for 75,000 shares were allotted 50,000 shares on pro-rata basis, the shareholder who was allotted 1,000 shares must have applied for:

a) 900 Shares

b) 3,600 Shares

c) 1,500 Shares

d) 4,800 Shares

29. A Company offered 50,000 shares of ₹10 each at par, payable as ₹3 on applications, ₹5 on allotment and the balance on final call. Applications were received for 70,000 shares and the allotment was made pro-rata. The excess application money was to be adjusted on allotment and call. How much amount will be adjusted from Share Application with Share Allotment?

a) ₹1,80,000

b) ₹30,000

c) ₹60,000

d) ₹50,000

30. RL Limited has offered to issue 10,000 Equity shares to its wholetime directors and employees at a concessional price. These shares are:

a) Bonus shares

b) Redeemable Preference shares

c) Equity shares

d) Sweat equity shares

Class 12 Accountancy MCQs Share Capital

31. CAE Ltd. offered 6,00,000 equity shares of ₹10 each, ₹8 called-up. Applications were received for 5,00,000 shares, all amounts were duly received except from Adesh holding 4,000 shares, who didn't pay after application money of ₹2 per share and from Umesh who holds 1,000 shares has paid only ₹6 per share. Adesh's shares were forfeited. The amount of subscribed capital to be shown in the Balance Sheet is:

a) ₹39,74,000

b) ₹39,96,000

c) ₹49,96,000

d) ₹49,74,000

32. CAE Ltd. forfeited 300 Equity Shares of ₹10 each, fully called-up, held by Karam for non-payment of allotment money of ₹3 per share and first and final call of ₹4 per share. Out of these, few shares were re-issued at a discount of ₹2 per share and ₹250 was transferred to Capital Reserve as gain on re-issue. Number of shares re-issued were:

a) 100 shares

b) 200 shares

c) 250 shares

d) 150 shares

33. Assertion - Securities Premium Account is not debited at the time of forfeiture if premium has been received in respect of the forfeited shares.

Reason - The Section 52(2) of Companies Act, 2013 restricts the use of Securities Premium received and credited to Securities Premium Account. In the context of above two statements, which of the following is correct:

a) Assertion is correct but Reason is incorrect

b) Both Assertion and Reason are incorrect

c) Both Assertion and Reason are correct, and Reason is the correct explanation of Assertion

d) Both Assertion and Reason are correct, but Reason is not the correct explanation of Assertion

34. CAE Ltd. forfeited 1,000 shares of ₹10 each (₹8 called-up) for the non-payment of the allotment money of ₹5 per share including ₹2 as premium. Out of these, few shares were reissued to Naresh at ₹7 per share as ₹8 called up and ₹3,200 were transferred to Capital Reserve. Number of shares reissued were:

a) 500 Shares

b) 600 shares

c) 700 shares

d) 800 shares

35. Assertion -TP Ltd. is registered with an authorised capital of 50,000 Equity Shares of ₹100 each of which 20,000 Equity Shares were issued and subscribed. All the money had been called-up except ₹25 per share which was declared as 'Reserve Capital', Share capital shown in Balance Sheet as 'Subscribed and Fully paid-up' will be nil. Reason - Reserve capital can be used only at the time of winding up. In the context of above two statements, which of the following is correct:

a) Both Assertion and Reason are correct, and Reason is the correct explanation of Assertion

b) Both Assertion and Reason are correct, but Reason is not the correct explanation of Assertion

c) Both Assertion and Reason are incorrect

d) Assertion is correct, but Reason is incorrect

36. TP Ltd. forfeited 600 shares of ₹10 each issued at a premium of 10% for non-payment of first and final call money of ₹3 (Including premium). Out of these 400 shares were reissued to Mohan as ₹10 paid-up for ₹11 per share. The minimum amount that company should collect at the time of reissue of the remaining 200 shares is:

a) ₹800

b) ₹400

c) ₹600

d) ₹200

37. If 10,000 shares of ₹10 each were forfeited for non-payment of final call money of ₹3 per share and only 7,000 of these shares were re-issued @₹ 11 per share as fully paid up, then what is the minimum amount that company must collect at the time of re-issue of the remaining 3,000 shares:

a) ₹21,000

b) ₹9,000

c) ₹16,000

d) ₹30,000

38. Assertion - A Company is Registered with an Authorised Capital of 5,00,000 Equity Shares of ₹10 each of which 2,00,000 Equity shares were issued and subscribed. All the money had been called up except ₹2 per share which was declared as ‘Reserve Capital’. The Share Capital reflected in balance sheet as ‘Subscribed and Fully paid up’ will be Zero.

Reason - Reserve Capital can be called up only at the time of winding up of the company:

a) Both Assertion and Reason are Correct, but Reason is not the correct explanation of Assertion

b) Both Assertion and Reason are Correct and Reason is the correct explanation of Assertion

c) Assertion is incorrect, but Reason is Correct.

d) Assertion is correct, but Reason is incorrect

39. A company forfeited 3,000 shares of ₹10 each, on which only ₹5 per share (including ₹1 premium) has been paid. Out of these few shares were re-issued at a discount of ₹1 per share were and ₹6,000 were transferred to Capital Reserve. How many shares were re-issued:

a) 3,000 shares

b) 1,000 shares

c) 2,000 shares

d) 1,500 shares

Class 12 Accountancy MCQs Share Capital - Answers

1. d) Preferential right as to dividend and repayment of capital at the time of liquidation of the Company
2. b) Subscribed Capital
3. b) Authorised Capital > Issued Capital
4. a) Redeemable Equity Shares
5. c) Sweat Equity Shares
6. b) Issued Capital
7. b) Personal Account
8. c) 25%
9. b) Goodwill Account/Incorporation Cost Account
10. c) Both Assertion and Reason are Correct and Reason is the correct explanation of Assertion
11. b) 2,000 shares
12. c) ₹1,50,000
13. d) ₹2,100
14. c) Both Assertion and Reason are correct, and Reason is the correct explanation of Assertion.
15. d) It is part of subscribed capital.
16. d) Capital Reserve Account
17. d) Compensation received from insurance company
18. c) No Limit
19. d) Along with any of the above
20. b) Distribution of dividend
21. c) ₹6,50,000
22. a) 12% p.a.
23. a) ₹3,200
24. d) ₹25
25. d) Securities Premium Reserve Account
26. d) 5,000 Shares
27. d) 300 shares
28. c) 1,500 Shares
29. c) ₹60,000
30. d) Sweat equity shares
31. a) ₹39,74,000
32. c) 250 shares
33. c) Both Assertion and Reason are correct, and Reason is the correct explanation of Assertion
34. d) 800 shares
35. b) Both Assertion and Reason are correct, but Reason is not the correct explanation of Assertion
36. b) ₹400
37. b) ₹9,000
38. b) Both Assertion and Reason are Correct and Reason is the correct explanation of Assertion
39. c) 2,000 shares

Class 12 Accountancy MCQs Debentures

Class 12 Accountancy MCQs Dissolution of Partnership Firm

MCQs on Company Accounts Class 12

Learning Games and Activities in Accountancy – Class 12

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ESOP (Employees Stock Option Pan) is a plan for issue of shares to directors and employees of a company at a discount (price lower than its Fair/Market value) as per agreement between the company and its employees.

It is an option granted by the company but not an obligation to be fulfilled by the employees by accepting this option or offer.

The Companies Act, 2013 (Section 53) prohibits issue of shares at a discount. But, through Section 54, it permits issue of ESOPs at a discount.

Main conditions of issuing shares under ESOP:

1) Shares are of the same class as already issued.

2) It is authorised by special resolution passed by the company.

3) This resolution must specify all the details of such shares, market price prevailing at that time, employees etc.

4)At least one year has elapsed since the commencement of the business by the company.

5)Listed shares must be issued according to the SEBI guidelines.

Main Terms relating to ESOP

Grant Date

It is the date on which agreement is entered into between the Enterprise and Employees for grant of ESOPs.

Vesting Period

It is the period between the Grant Date and the date on which all the specified conditions of Employees Stock Option Plan (ESOP) should be satisfied.

Vesting Date

It is the date on which conditions of granting ESOPs are met.

Exercise

It means exercising the right to subscribe the options granted to the employees.

Exercise Period

It is the period after vesting date given to an employee to exercise the options given under the Plan.

Exercise Price

It is the price payable by the employee for exercising the right for option granted.

Value of option =No. of shares issued X (Market Price - Exercise Price)

Amount to be amortized each year = Value of option / No. of years in vesting period

Illustration

A company grants 1250 options under stock option scheme on 1st April 2012 at ₹80 when the market price is ₹200, and the face value is ₹10.The vesting period is 3 years. The maximum exercise period is one year.

a) Calculate the value of options.

b) Calculate the amount of Employee Compensation Expense to be amortized each year.

Solution:

a) Value of option =No. of shares issued X (Market Price - Exercise Price)

                                =1250 X (₹200 - ₹80) = ₹150000

b) Amount to be amortized each year = ₹150000/3 = ₹50000

Accounting Treatment

The difference between Market Value and Issue Price is borne by the company as It is an expense for the company. Following Journal entry is passed:

Employees Compensation Expense A/c        Dr.

          To Shares Options Outstanding A/c

Employees Compensation Expense A/c is shown under ‘Employees Benefit Expenses’ in the Statement of Profit and Loss.

Shares Options Outstanding Account is shown as Reserves and Surplus under Shareholders’ Funds.

When the Vesting Period has Elapsed

When all Options are Exercised by the Employees

Alternative Journal Entry (Combining the above two journal entries) :

When All Options are not Exercised

Alternative Journal Entry (Combining the mentioned two journal entries) :

Illustration

A company granted option to subscribe 30 shares of ₹ 10 each at a price of ₹ 60 per share to each of its 100 employees on completion of service for 3 years. Fair (Market) price of each share as on the grant date was ₹ 90. The employees were to exercise the option within three years of the Vesting Date. All the employees exercised the option by the exercise date. Pass the necessary journal entries.

Solution:

Illustration

A company granted option to subscribe 50 shares of ₹ 10 each at a price of ₹ 60 per share to each of its 100 employees on completion of service for 3 years. Fair (Market) price of each share as on the grant date was ₹ 90. The employees were to exercise the option within three years of the Vesting Date. All the employees except 10 employees exercised the option by the exercise date. Pass the necessary journal entries.

Solution:

Terms of Issue of Shares – At Par and At Premium

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Authorized Capital

Authorized capital is the maximum amount of share capital a company is authorized to issue by its Memorandum of Association. It is also called Nominal or Registered capital.

Issued Capital

It is the part of authorized capital, actually issued to the public for subscription including the shares allotted to vendors and the signatories to the company’s memorandum.

Unissued Capital

Unissued Capital is the part of authorized capital, not offered for public subscription.

Subscribed Capital

It is the part of issued capital, actually subscribed for by the public.

Subscribed and Fully Paid Capital

This is the part of subscribed capital in respect of which the whole amount has been called up and received by the company.

Subscribed but not Fully Paid Capital

This is the part of subscribed capital in respect of which the either the whole amount has not been called up or the part of called up capital remains unpaid by the shareholders.

Called-up Capital

It is that part of the subscribed capital which has been called up on the shares. The company may decide to call the entire amount or part of the face value of the shares.

Paid-up Capital

It is the portion of called up capital actually received from the shareholders.

Calls in arrears

It is the amount due from shareholders which remains unpaid in respect of allotment or any of the calls.

Paid-up capital =Called-up capital - Call-in-arrears.

Uncalled Capital

The portion of subscribed capital that has not yet been called-up.

Reserve Capital

It is the portion of uncalled capital reserved by the company to be called only in the event of winding up of the company.

Concepts of Share Capital

These concepts can be expressed in terms of following equations

Authorized Share Capital = Issued Capital + Unissued Capital

Issued Capital = Subscribed Capital + Unsubscribed Capital

Subscribed Capital = Subscribed and Fully Paid+ Subscribed but not Fully Paid

(Subscribed Capital = Called-up Capital+ Uncalled Capital)

Called-up Capital = Paid-up Capital+ Calls-in-Arrears (Unpaid capital)

Uncalled Capital = Unreserved Capital+ Reserved Capital

Issue of Shares at Premium

Self-Learning Activities in Accountancy Class 12

Test Your Understanding - Share Capital 1

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As per Section 43 of The Companies Act, 2013, a company can issue:

(1) Preference shares.

(2) Equity shares (ordinary shares).

Preference Shares

According to Section 43 of The Companies Act, 2013, a preference share is one, which fulfils the following conditions:

a) That it carries a preferential right to dividend, as a fixed amount or at a fixed rate before any dividend is paid to the equity shareholders.

b) On the winding-up of the company, the preferential right to the repayment of capital before anything is paid to equity shareholders.

Types of Preference Shares

1. Cumulative and Non-Cumulative Preference Shares

The preference shares enjoying the right to accumulate unpaid dividends in the future years are known as cumulative preference shares. On non-cumulative shares, dividend is not accumulated if it is not paid in a particular year.

2. Participating and Non-Participating Preference Shares

Preference shares which have a right to participate in the surplus profits of a company after the payment of equity dividend at a certain rate are called participating preference shares. The non-participating preference shares do not enjoy such rights.

3. Convertible and Non-Convertible Preference Shares

Preference shares that can be converted into equity shares within a specified period of time are known as convertible preference shares. Non-convertible shares are such, which cannot be converted into equity shares.

Equity Shares

According to Section 43 of The Companies Act, 2013, an equity share is a share which is not a preference share, it means shares which do not enjoy any preferential right in the payment of dividend or repayment of capital, are termed as equity shares.

Minimum Subscription

It is the minimum amount that must be raised for:

-the price of any property purchased.

-preliminary expenses and any commission on the issue of shares.

-the repayment of any money borrowed by the company for the above two matters.

-working capital.

-any other expenditure for the normal conduct of business operations.

As per SEBI guidelines, Minimum subscription of capital cannot be less than 90% of the issued capital.

If not received, the company shall refund the entire subscription amount received within 15 days from the date of closure of subscription list.

Terms of Issue of Shares – At Par and At Premium

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Shares can be issued at Par or at a Premium

1. Shares Issued at Par

When the issue price is exactly equal to the nominal value (face value), e.g. when a share of the nominal value of 100 is issued at ₹ 100, it is said to have been issued at par.

2. Shares Issued at Premium

When shares are issued at a price more than its nominal value (face value) shares are said to have been issued at premium, and the excess amount is called premium e.g. when a share of the nominal value of ₹ 100 is issued at ₹  105, it is said to have been issued at a premium of 5 per cent.

(Shares Issued at Discount) 

When the shares are issued at a price less than the nominal value (face value) of the share e.g. when a share of the nominal value of ₹ 100 is issued at ₹ 97, it is said to have been issued at a discount of three per cent. (Not in CBSE syllabus now)

(Section 53 of the Companies Act,2013 prohibits the issue of Shares at discount except when Sweat Equity Shares are issued)

How is money collected?

Share capital of a company is collected in installments to be paid at different stages namely: Share Application, Share Allotment, and Share Call or in Lumpsum.

Terms of Issue of Shares

Journal Entries in respect of the issue of shares can be shown as under:

Share Application and Allotment Account

Sometimes a combined account for share application and share allotment called ‘Share Application and Allotment Account’ is opened in the books of a company. When a combined account is maintained, journal entries are recorded in the following manner:

Terms of Issue of Shares

Two points are important regarding the calls on shares:

1. The amount on any call should not exceed 25% of the face value of shares.

2. There must be an interval of at least one month between the making of two calls unless otherwise provided by the articles of association of the company.

Journal Entries in respect of Calls can be shown as:

Main points to be kept in mind while issuing Share Capital for public subscription:

1. The application money should be at least 5% of the face value of the share.

2. Calls are to be made as per the provisions of the articles of association.

3. Where there is no article of association of its own, the following provisions of Table A will apply:

(a) A period of one month must elapse between two calls.

(b) The amount of call should not exceed 25% of the face value of the share.

(c) A minimum of 14 days’ notice is given to the shareholders to pay the amount.

(d) Calls must be made on a uniform basis on all shares within the same class.

Note: The procedure for accounting for the issue of both equity and preference shares is the same but the words ‘Equity’ / ‘Preference’ is prefixed to each and every installment.

Issue of Shares at Premium

Share Capital - Theory MCQs

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Calls-in-Arrears

When any shareholder fails to pay the amount due on allotment or on any of the calls, such amount is known as ‘Calls-in-Arrears’/‘Unpaid Calls’. Interest at a rate 10% shall have to be paid on Calls-in-arrears for the period from the day fixed for payment and the time of actual payment thereon. If nothing is specified, there is no need to take the interest on calls-in-arrears account.

( Calculation of Interest on calls-in-arrears is not in syllabus now)

Journal entries in respect of Calls-in-arrears can be shown as:

Calls in Advance

Sometimes some shareholders pay a part or the whole of the amount of the calls not yet made. The amount so received from the shareholders is known as “Calls in Advance”. The amount received in advance is a liability of the company and should be credited to ‘Call-in-Advance Account.”

The amount received will be adjusted towards the payment of calls as and when they become due. Table A of the Companies Act provides for the payment of interest on calls in advance at a rate of 12% per annum.

( Calculation of Interest on calls-in-arrears is not in syllabus now)

Journal entries in respect of Calls in advance can be shown as:

Calls-in-Arrears and Calls-in-Advance

Forfeiture and Re-issue of Forfeited Shares

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Pro-rata Allotment of Shares

Subscription of shares can be more than the number of shares offered or less than that.

Under Subscription

It is a situation when number of shares applied for is less than the number for which applications have been invited for subscription.

The condition of Minimum Subscription must be fulfilled.

Over Subscription

Sometimes, in respect of share issues of well-managed and financially strong companies' applications are received for more shares than the number offered to the public for subscription, called a case of ‘Over Subscription’.

Three alternatives are available to the directors in case of over-subscription

(1) Accept some applications in full and totally reject the others.

(2) Make a pro-rata allotment to all.

(3) Adopt a combination of the above two alternatives (the most common).

(1) Accept some applications in full and totally reject the others.

When the directors decide to fully accept some applications and totally reject the others, the application money received from rejected applications is fully refunded.

The journal entries on application and allotment according to this alternative are as follows:

(2) When there is a pro-rata allotment to all

When the directors decide to make a proportionate allotment to all the applicants (called ‘pro-rata’ allotment), the excess application money received is normally adjusted towards the amount due on allotment and excess, if any, may either be refunded or credited to calls in advance (as mentioned in the question).

In this case, the journal entries on application and allotment can be shown as:

(3) When applications for some shares are rejected

When applications for some shares are rejected and pro-rata allotment is made to the remaining applicants, the money on rejected applications is fully refunded and the excess application money received from applicants to whom pro-rata allotment has been made is adjusted towards the amount due on the allotment of shares allotted.

The journal entries on application and allotment recorded can be shown as:

Forfeiture and Re-issue of Forfeited Shares

Test Your Understanding - Share Capital 2

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Premium is generally called with the amount due on allotment, sometimes with the Application money and rarely with the call money. The premium amount is credited to a separate account called ‘Securities Premium A/c’ and is shown in the company’s balance sheet under the heading ‘Reserves and Surpluses’.

Purposes for which Securities Premium Account can be used:

According to (Section 52(2) of The Companies Act, 2013):

(a) To issue fully paid bonus shares.

(b) To write-off preliminary expenses of the company.

(c) To write-off the expenses/commission/discount allowed on the issue of shares / debentures.

(d) To pay premium on the redemption of preference shares /debentures.

(e) To purchase its own shares (buy back of shares).

The Journal entries for shares are issued at a premium can be shown as:

Issue of Shares at Premium

(1) Premium amount called with Application money:

(2) Premium Amount called with Allotment Money:

Forfeiture and Re-issue of Forfeited Shares

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Forfeiture of Shares

Forfeiture means cancellation of shares due to non-payment of allotment money or call money, by the shareholders and retaining the amount already paid in respect those shares.

The main effect of forfeiture is that shareholder loses all his rights in those shares like right to receive dividend, to vote, etc. as his name is removed from the register of shareholders of the company.

Journal Entries to be passed in this case can be shown as:

Note: In case ‘Calls-in-Arrears’ A/c is not maintained by a company, ‘Share Allotment’ and/or ‘Share Call or Calls’ A/c will be used in place of ‘Calls-in-Arrears’.

Forfeiture of Shares issued at a Premium:

1. Where the premium amount has been called and fully realized:

Where shares were originally issued at a premium and the premium amount has been fully realized, the Accounting treatment of forfeiture would be same as in the case of shares issued at par. The premium is to be ignored all together.

2. If, the premium amount has not been called but received:

If, the premium amount has not been called but received, either wholly or partially, the Share Premium A/c will also be debited with the amount of premium not received along-with the Share Capital A/c at the time forfeiture.

Forfeiture and Re-issue of Forfeited Shares

The journal entry in this case can be shown as:

Note: In case ‘Calls-in-Arrears’ A/c is not maintained by a company, ‘Share Allotment’ and/or ‘Share Call or Calls’ A/c will be used in place of ‘Calls-in-Arrears’.

Re-issue of Forfeited Shares

Normally, the forfeited shares are reissued as fully paid and at a discount. The amount of discount allowed cannot exceed the amount that had been received on forfeited shares on their original issue and should be debited to the ‘Share Forfeited A/c’. The balance, if any, left in the Share Forfeited A/c, in respect of shares reissued, should be treated as capital profit and transferred to Capital Reserve A/c.

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Issue of Shares to Vendor

Sometimes, company purchases assets and makes the payment to the vendor, in the form of fully paid shares of the company. These shares can also be issued either at par, at premium or at discount, and the number of shares to be issued will depend upon the price at which the shares are issued and the amount payable to the vendor.

No. of shares to be issued to the vendor = Amount Payable/ Issue Price per share.

Issue Price per share =Face Value+ Premium

Journal Entries to be passed in this case can be shown as:

If the shares are issued to the promoters for their services, Goodwill account is to be debited instead of Assets account.

(Also refer to the following topic for Issue of Shares for consideration other than cash.)

Issue of Debentures

Shares Issued to Vendor and Buy-Back

Buy-Back of Shares

When a company purchased its own shares, it is called ‘Buy- Back of Shares’. The company can buy back its own shares either from the free reserves, securities premium or from the proceeds of any shares or other specified securities.

Conditions for buy-back of shares:

(a) Authorized by the Articles of the Association.

(b) A special resolution must be passed in the companies’ AGM meeting.

(c) The amount of buy-back does not exceed 25% of the paid-up capital and free reserves.

(d) The debt-equity ratio should not be more than a ratio of 2:1 after the buyback.

(e) All the shares of buy-back should be fully paid-up.

(f) The process should be completed within one year from the date of passing the SR.

(g) The company should file a solvency declaration with the Registrar and SEBI.

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