Class 12 Accountancy Chapter 5 Accounting for Share Capital

Key Concept: Complex Calculations, SEBI Guidelines

b) Refund the application money

[Solution Description]

The minimum subscription required as per SEBI guidelines is 90% of 100,000 shares. Hence, the company needs at least:

$$0.9 \times 100,000 = 90,000$$

As only 85,000 shares were subscribed, it does not fulfill the minimum requirement. Therefore, according to SEBI guidelines, the company must refund the entire application money.

Key Concept: Real-World Application, Comparative Analysis

c) Restriction on share transfer

[Solution Description] In a private company, the restriction on the transfer of shares is vital to maintaining control over ownership. This means that shareholders cannot freely sell or transfer their shares without approval, which helps prevent unwanted external influence and retains control within the existing shareholder group.

Key Concept: Legal Entity Rights

b) To sue and be sued

[Solution Description] A company, as a distinct legal entity, possesses the right to sue and be sued in its own name, allowing it to participate in legal processes independently of its shareholders.

Key Concept: General Rule

b) No

[Solution Description] Under normal circumstances, companies cannot issue shares at a discount except in specific cases like reissue of forfeited shares and sweat equity shares.

Key Concept: Journal Entry Analysis, Advanced ASBA Mechanics

c) Share Allotment A/c Dr. To Bank A/c

[Solution Description] To identify the incorrect journal entry, let’s analyze common entries during oversubscription and the ASBA process:

– Bank Account Dr. To Share Application Account: Correct; represents receipt of application money.

– Share Application A/c Dr. To Share Capital A/c: Correct for transferring funds to share capital.

– Share Allotment A/c Dr. To Bank A/c: Incorrect; this would mean reducing cash instead of recording receivable or refunding excess, which doesn’t align with ASBA mechanics.

– Share Application A/c Dr. To Bank A/c: Correct; represents a refund of excess or rejected application.

The incorrect entry here is relating it to reduction in bank balance without aligning proper ASBA refunds.

Key Concept: Calculation with Arrears

c) \$10,000

[Solution Description] Calls in arrears are calculated by multiplying the number of shares with unpaid calls by the amount unpaid per share. Here, we have 5,000 shares with \$2 unpaid per share:

$$\text{Total Calls in Arrears} = 5,000 \times 2 = \$10,000$$

So, the total calls in arrears amount to \$10,000.

Key Concept: Legal Features

c) Perpetual Succession

[Solution Description]

This question evaluates the understanding of the legal feature “Perpetual Succession,” which means a company continues to exist regardless of any changes in its membership. This feature assures the uninterrupted existence of the company despite changes in ownership or management.

Key Concept: Detailed Comparison

c) Preference shares get dividends before equity shares.

[Solution Description] Preference shares give holders preferential rights to receive dividends before any can be distributed to equity shareholders. Equity shares do not have such preferential rights related to dividends.

Key Concept: Comparative Analysis

b) OPC requires only 1 member, private company requires at least 2

[Solution Description]

An OPC requires only one member who is a natural person, while a private company must have at least two members according to the Companies Act, 2013. This difference highlights the simplified structure of OPCs meant for single entrepreneurs.

Key Concept: Share Issue Process

b) To allocate specific numbers of shares to subscribing applicants

[Solution Description] The allotment stage follows the application phase and involves allocating shares to applicants based on the number of shares applied for. This step confirms which applicants will receive shares and how many, finalizing the distribution before calls for unpaid amounts.

Key Concept: Journal Entry Basics

d) Bank A/c

[Solution Description] When share application money is received, the Bank account is credited because it represents an inflow of funds into the company. The journal entry would typically involve debiting the Share Application Account and crediting the Bank Account.

In this case, correct option is “Bank A/c”.

Key Concept: Complex Pro-rata Scenario, Advanced Calculation

c) \$3.5

[Solution Description]

For every share allotted, there are $$\frac{7,50,000}{5,00,000} = 1.5$$ applications received. Thus, the excess application money for each allotted share is $$1.5 \times \$3 – \$3 = \$1.5$$.

Since the total allotment due per share is \$5, the amount still payable on allotment will be \$5 – \$1.5 = \$3.5.

Correct answer: \$3.5

Key Concept: Critical Evaluation, Advanced Reasoning

c) It provides continuity and stability, unaffected by changes in membership.

[Solution Description] Perpetual succession ensures that a company continues its existence irrespective of changes in membership, such as death or departure of shareholders. This stability allows the company to pursue long-term objectives and investments without being affected by individual members’ circumstances. In contrast, partnerships typically dissolve upon a partner’s exit unless otherwise stated in the partnership agreement. Hence, perpetual succession strengthens a corporation’s ability to maintain consistent operations.

Key Concept: Definition Understanding

b) Shares are issued in exchange for assets or services

[Solution Description]

Issuing shares for consideration other than cash means that instead of receiving money, the company receives assets or services in exchange for issuing its shares. This could include assets like land, buildings, or services provided by another entity.

Key Concept: Critical Thinking, Case Study

c) It enables independent contract engagement

[Solution Description] As a separate legal entity, a company can enter into contracts independently from its members. This means it can engage in multiple contracts at once, as it represents itself and not the individual interests of its shareholders. Thus, it allows the company to manage numerous business deals concurrently without needing member involvement in each specific contract.

Key Concept: Complex Scenario Analysis, Interpretation of Financial Statements

a) Rs. 46,00,000

[Solution Description] To find the Paid up Capital, we subtract the calls in arrears from the called up capital. Here, the called up capital is Rs. 50,00,000 and the calls in arrears are Rs. 4,00,000.

$\text{Paid up Capital} = \text{Called up Capital} – \text{Calls in Arrears}$

= 50,00,000 – 4,00,000

= 46,00,000

Therefore, the Paid up Capital of the company is Rs. 46,00,000.

Key Concept: Terminology

d) Capital Reserve

[Solution Description] The balance left in the Share Forfeiture Account after the reissue of forfeited shares, which represents the profit, is transferred to the Capital Reserve Account.

Key Concept: Conceptual Distinction

d) It is portion of uncalled capital reserved specifically for winding up.

[Solution Description]

Reserve Capital is that part of the uncalled capital of a company which is reserved to be called up only in case of winding up or liquidation of the company.

Key Concept: Real-World Application

b) Issue more shares later if required.

[Solution Description] The authorised capital represents the upper limit of share issuance. The company may choose to issue additional shares up to the balance of \$150,000 whenever needed, provided they do not exceed this authorised cap.

Key Concept: Excess Application

b) Refunded to applicants

[Solution Description]

The total application money received = 10,000 shares $\times$ \$4 = \$40,000.

The application money required for 8,000 shares = 8,000 shares $\times$ \$4 = \$32,000.

Excess application money = \$40,000 – \$32,000 = \$8,000.

Typically, this \$8,000 will be refunded to applicants.

Key Concept: Strategic Decision Making, Financial Strategy

c) Rs. 15,00,000

[Solution Description]

To find out how much uncalled capital will remain after calling up 40% for expansion, we first calculate the portion that will be called up:

$$\text{Called Portion} = \frac{40}{100} \times 25,00,000 = 10,00,000$$

Then, subtract the called portion from the initial uncalled capital:

$$\text{Remaining Uncalled Capital} = 25,00,000 – 10,00,000 = 15,00,000$$

Thus, Rs. 15,00,000 will remain as potential funds.

Key Concept: Complex Dividend Scenarios, Real-World Application

a) Pay cumulative preference shareholders first, then non-cumulative preference shareholders; equity shareholders last.

[Solution Description] The priority of dividend payments is as follows: Cumulative preference shareholders have the first claim on dividends due to their ability to carry forward unpaid dividends to subsequent years. If there are any remaining profits after meeting these obligations, they will be distributed to non-cumulative preference shareholders. Only if there remain sufficient funds after satisfying all preference shareholders’ claims, equity shareholders may receive dividends.

Key Concept: Complex Scenario Analysis, Strategic Decision Making

c) Rs. 4,50,000

[Solution Description] To find the minimum subscription required, we need to calculate the total funds necessary and compare it with 90% of the issued amount. The total funds needed include the cost of land, preliminary expenses, and working capital:

$$\text{Total funds needed} = 3,00,000 + 30,000 + 1,20,000 = Rs. 4,50,000$$

Next, we calculate 90% of the issued amount, which is:

$$\text{90% of issued amount} = 0.9 \times 5,00,000 = Rs. 4,50,000$$

The total funds needed equal 90% of the issued amount, so the minimum subscription required is Rs. 4,50,000.

Key Concept: Advanced Conceptual Understanding, Real World Application

a) Rs. 65,00,000

[Solution Description]

To find the maximum subscribed capital allowed, we need to consider that the subscribed capital cannot exceed the issued capital. The company wants to issue additional shares worth Rs. 15,00,000.

Given:

$$\text{Authorised Capital} = \text{Rs. } 80,00,000$$

$$\text{Issued Capital} = \text{Rs. } 50,00,000 + \text{Rs. } 15,00,000 = \text{Rs. } 65,00,000$$

Since the issued capital can be entirely subscribed by the public, the maximum subscribed capital can also be equal to the new issued capital.

Therefore, the maximum subscribed capital allowed is Rs. 65,00,000.

Key Concept: Capital Calculation

b) \$396,000

[Solution Description] To find the paid-up capital, calculate called-up value received:

– Total call made = 50,000 shares $\times$ \$8 = \$400,000

– Amount not received = \$4,000

– Paid-up Capital = Total call made – Amount not received = \$400,000 – \$4,000 = \$396,000

Key Concept: Interest Rate Knowledge

b) 12%

[Solution Description] According to Table F, the interest payable on Calls in Advance cannot exceed 12% per annum.

Key Concept: Comparison with Share Companies

d) Limited to guarantee vs. limited to share value

[Solution Description]

In companies limited by guarantee, members are liable only for the amount they have agreed to contribute if the company is wound up. In companies limited by shares, liability is typically limited to the unpaid portion of their shares.

Key Concept: Premium Definition

b) 10%

[Solution Description]

The premium amount is calculated as the difference between the issue price and the nominal value, which is $110 – 100 = 10$. The premium percentage is then $(\frac{10}{100}) \times 100\% = 10%$.

Key Concept: Member Risk Assessment

a) Higher risk due to unlimited liability.

[Solution Description]

In an unlimited company, members face higher risk because they have unlimited liability. This contrasts with companies limited by guarantee, where members’ liability is restricted to an agreed-upon amount they commit to contribute if required. Therefore, the risk is higher for members in an unlimited company.

Key Concept: Policy Impact, Strategic Decision Making

c) No impact

[Solution Description]

If the company policy mandates that reissued shares cannot go below par value and yet they are issued at a Rs. 2 discount, it results in a breach of policy. This wrong move means the company incurs a loss instead of adding to the capital reserve. Since this is against policy, it should ideally have no impact on the capital reserve if managed correctly according to policy. Therefore, a decision needs to be made to ensure compliance.

Key Concept: Basic Concept

c) On reissue of forfeited shares

[Solution Description] Shares can be issued at a discount in specific cases like the reissue of forfeited shares and sweat equity shares, as per the syllabus.

Key Concept: Application and Allotment Process

b) 220,000

[Solution Description]

Since the company received fewer applications than the shares offered, the number of shares applied for will be fully allotted. Thus, all 220,000 shares that were applied for will be allotted.

Key Concept: Refund Process

d) It is refunded in full

[Solution Description] When applications are rejected due to over subscription, the application money received for those rejected applications is refunded in full. The company returns the funds to the investors who were not allotted shares.

Key Concept: Calls in Arrears and Advance

b) Calls in Advance A/c

[Solution Description]

Any extra payment made by a shareholder over the called-up amount is credited to a special liability account known as Calls in Advance Account. This ensures proper accounting and interest calculations applicable under such conditions.

Key Concept: Case Study Evaluation, Advanced Reasoning

a) The contract could face legal disputes over authenticity

[Solution Description] Without a common seal, the binding nature of the contract can be questioned, especially if it’s challenged in jurisdictions where seals hold significant legal weight. Issues might surface regarding the authority of signatories and the enforceability of contractual terms, potentially necessitating renegotiation or litigation.

Key Concept: Complex Dividend Scenarios, Equity vs. Preference Analysis

c) Rs. 8

[Solution Description]

After paying preference dividends, the remaining profit = Rs. 500,000 – Rs. 100,000 = Rs. 400,000. The company retains 20% of this amount for expansion, which equals Rs. 80,000 (calculated as $$0.2 \times 400,000$$). Therefore, available profit for dividends = Rs. 400,000 – Rs. 80,000 = Rs. 320,000. With 40,000 equity shares, the dividend per equity share = Rs. 320,000 / 40,000 = Rs. 8.

Key Concept: Perpetual Succession

c) It continues irrespective of changes in membership

[Solution Description] Perpetual succession ensures that a public company’s existence continues unaffected by changes in membership, meaning it operates independently from the life events of its members.

Key Concept: Real-world Application, Complex Scenarios

c) Only the company’s assets can be seized, protecting shareholders’ personal assets.

[Solution Description] Since XYZ Ltd. is a separate legal entity, creditors can only claim against the company’s property and not the personal assets of its shareholders. The shareholders’ personal assets remain protected from claims against the company.

Key Concept: Legal Case Study, Liability Evolution

c) Liability restricted to the guaranteed amount agreed upon initially.

[Solution Description] For companies limited by guarantee, each member’s liability is capped at the pre-agreed guarantee amount, regardless of the total debt owed by the company during liquidation.

Key Concept: Initial Journal Entry

a) Debit Share Capital, Credit Share Forfeiture and Share Call

[Solution Description] When shares issued at par are forfeited due to non-payment of call money, the typical journal entry involves debiting Share Capital and crediting Share Allotment/Share Call and Share Forfeiture accounts. This represents the cancellation of shares and acknowledgment of any paid amount retained.

Key Concept: Basic Concept

c) Non-payment of call money

[Solution Description] Shares are typically forfeited when a shareholder fails to pay the call money that has been demanded by the company on the shares allotted to them. This failure leads to forfeiture as per the company’s rules and regulations.

Key Concept: Strategic Decision Making, Real-world Application

a) Use Reserve Capital to pay off creditors entirely, then distribute any remaining capital to shareholders.

[Solution Description] To achieve both objectives, the company should utilize its Reserve Capital primarily to pay off creditors, as it ensures that outstanding debts are settled, maintaining a good reputation and legal compliance. Maximizing shareholder value happens indirectly by protecting the company’s integrity, even though shareholders may not directly receive these funds.

Key Concept: Comparative Analysis

b) Subscribed capital can be less than or equal to issued capital

[Solution Description]

In this scenario, we need to understand the relationship between issued and subscribed capital. The given data shows that the issued capital is Rs. 50,00,000 while the subscribed capital is Rs. 45,00,000.

From definitions, subscribed capital represents the part of issued capital that has been subscribed by shareholders. Generally, subscribed capital can be equal to or less than the issued capital but never more.

Here, since Rs. 45,00,000 (subscribed capital) is less than Rs. 50,00,000 (issued capital), option B holds true: “Subscribed capital can be less than or equal to issued capital.”

Key Concept: Application of Concepts

c) Rs. 840,000

[Solution Description]

Calculate the amount actually received by subtracting the unpaid portion from the total called-up amount.

Total called-up capital:

$$300,000 \times 3 = 900,000$$

Calls in arrears (unpaid):

$$20,000 \times 3 = 60,000$$

Effective called-up capital received:

$$900,000 – 60,000 = 840,000$$

Hence, the effective called-up capital received is Rs. 840,000.

Key Concept: Real-world Application, Complex Share Structures

b) Cumulative preference shares

[Solution Description]

These shares give priority to dividends and provide voting rights only if dividends are unpaid for a specific period, indicating they are “cumulative preference shares.” In this case, cumulative nature allows voting after dividend is in arrears, matching option b.

Key Concept: Simple Calculation

b) \$2,800

[Solution Description] The amount credited to the Share Forfeiture Account is calculated as the paid value of the shares forfeited. Here, the paid value is \$7 (\$10 – \$3). Thus, for 400 shares, it would be $$400 \times 7 = 2800$$.

Key Concept: Interest Rate Knowledge

c) 10%

[Solution Description] According to Table F, the maximum interest rate that may be charged on calls in arrears is 10%.

Key Concept: Real-world Application, Complex Membership Changes

b) The company continues without any change in operations.

[Solution Description] Perpetual succession ensures that a company continues to exist regardless of changes in its membership. The resignation of founding members and appointment of new directors does not affect the company’s legal status or operations. It still exists as a separate legal entity, with the newly appointed directors continuing its management.