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All questions of Unit 1: Introduction to Company Accounts for CA Foundation Exam

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)
    The sale proceeds of investments
  • e)
    Both (a) and (b) above.
Correct answer is option 'A'. Can you explain this answer?

Understanding Redemption of Preference Shares
Preference shares are a type of equity security that typically have preferential rights over ordinary shares in terms of dividends and during liquidation. When a company decides to redeem preference shares, it must source funds to do so.
Sources for Redemption of Preference Shares
The options provided for redeeming preference shares include:
  • The proceeds of fresh issue of equity shares: This is a valid source. A company can issue new equity shares to raise funds, which can then be used to redeem preference shares. This method allows the company to convert its capital structure and can be beneficial for improving financial ratios.
  • The proceeds of issue of debentures: While debentures can provide funds, they are essentially a form of borrowing. The funds raised through debentures are used for various purposes, but they are not typically considered a direct source for redeeming preference shares, as this can lead to increased debt and financial obligations.
  • The proceeds of issue of fixed deposits: Fixed deposits represent borrowed funds from the public. While they can be used for various financial needs, using them to redeem preference shares is less common. It can increase the financial burden on the company.
  • The sale proceeds of investments: Selling investments may provide cash, but this is not a standardized or reliable method for redeeming preference shares as it depends on market conditions and the type of investments held.

Conclusion
In summary, the most appropriate and commonly accepted source for redeeming preference shares is through the proceeds of a fresh issue of equity shares. This method supports the company’s capital needs while maintaining a balanced financial strategy. Thus, the correct answer is option 'A'.

Which of the following statements is false?
  • a)
    A company can redeem its 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
Correct answer is option 'B'. Can you explain this answer?

Aravind Mehra answered
Preference Shareholders are Creditors of a Company:
Preference shareholders are not considered creditors of a company. Unlike creditors who lend money to a company and expect repayment with interest, preference shareholders are part-owners of the company. They have a fixed claim on the company's profits and assets, but they do not have the same legal rights as creditors in terms of repayment priority in case of liquidation.

Explanation:
- Preference shareholders are investors who hold preference shares issued by a company.
- These shares come with a fixed dividend that needs to be paid before any dividend can be distributed to equity shareholders.
- Preference shareholders have a higher claim on the company's assets compared to equity shareholders in the event of liquidation.
- However, they do not have the same legal standing as creditors who are owed money by the company.
- Creditors have a higher priority in terms of repayment in case of liquidation compared to preference shareholders.
Therefore, the statement that preference shareholders are creditors of a company is false.

Which of the following statements is false?
  • 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.
Correct answer is option 'D'. Can you explain this answer?

Harshad Nair answered
Dividend Payable on Calls Paid in Advance

There is a misconception in option 'D' as dividend is not payable on calls paid in advance by shareholders. Dividend is only payable on fully paid-up shares. When shareholders pay calls in advance, they are essentially paying for their shares before the company has issued them. These funds are held by the company until the calls are officially due and payable.


Explanation of Other Options:
- Capital redemption reserve: This reserve is specifically created to redeem preference shares or buy back shares out of profits not available for distribution as dividends. It cannot be used for writing off miscellaneous expenses and losses.
- Capital profit for dividend payment: Capital profit realized in cash can be used for payment of dividends to shareholders. This profit is generated from the sale of capital assets or through revaluation of assets at a higher value.
- Revaluation reserves: Reserves created by revaluation of fixed assets are not permitted to be capitalized. These reserves are typically used to account for the increase in the value of fixed assets and cannot be converted into share capital.
In conclusion, option 'D' is false as dividend is not payable on calls paid in advance. The other statements are true and align with standard accounting principles.

Preference shares amounting to Rs.2,00,000 are redeemed at a premium of 5%, by issue of shares amounting to Rs.1,00,000 at a premium of 10%. The amount to be transferred to capital redemption reserve = ?
  • a)
    Rs.1,05,000
  • b)
    Rs.1,00,000
  • c)
    Rs.2,00,000
  • d)
    Rs.1,11,000
Correct answer is option 'B'. Can you explain this answer?

Charvi Ahuja answered
Calculation of Redemption Amount:
The preference shares are redeemed at a premium of 5%. This means that for every Rs. 100 of face value, an additional Rs. 5 is paid as premium. Therefore, the redemption price per share is Rs. 105.

The total number of preference shares being redeemed is Rs. 2,00,000. So, the number of shares can be calculated by dividing the total amount by the redemption price per share:
Number of shares = Rs. 2,00,000 / Rs. 105 = 1904.76 (approx.)

Since shares cannot be in fractional numbers, we round down the number of shares to the nearest whole number, which is 1904.

The redemption amount is calculated by multiplying the number of shares being redeemed by the redemption price per share:
Redemption amount = 1904 x Rs. 105 = Rs. 1,99,920

Calculation of Amount Raised through New Issue:
The company issues new shares amounting to Rs. 1,00,000 at a premium of 10%. This means that for every Rs. 100 of face value, an additional Rs. 10 is paid as premium. Therefore, the issue price per share is Rs. 110.

The total number of shares being issued is Rs. 1,00,000. So, the number of shares can be calculated by dividing the total amount by the issue price per share:
Number of shares = Rs. 1,00,000 / Rs. 110 = 909.09 (approx.)

Since shares cannot be in fractional numbers, we round down the number of shares to the nearest whole number, which is 909.

The amount raised through the new issue is calculated by multiplying the number of shares issued by the issue price per share:
Amount raised = 909 x Rs. 110 = Rs. 1,00,000

Calculation of Capital Redemption Reserve:
The amount to be transferred to capital redemption reserve is equal to the excess of the redemption amount over the amount raised through the new issue.

Capital Redemption Reserve = Redemption amount - Amount raised
= Rs. 1,99,920 - Rs. 1,00,000
= Rs. 99,920

Therefore, the amount to be transferred to capital redemption reserve is Rs. 99,920.

Conclusion:
The correct answer is option B) Rs. 1,00,000.

A company cannot issue redeemable preference shares for a period exceeding _____________.
  • a)
     6 years        
  • b)
     7 years            
  • c)
     8 years      
  • d)
     20 years
  • e)
     25 years.
Correct answer is option 'D'. Can you explain this answer?

Question:
A company cannot issue redeemable preference shares for a period exceeding _____________.
Answer:
The correct answer is D: 20 years.
Explanation:
To provide a detailed explanation, let's break down the answer into key points:
Redeemable Preference Shares:
- Redeemable preference shares are a type of preference shares that can be redeemed or repurchased by the issuing company at a specified future date or at the option of the shareholder.
- These shares have a fixed maturity date, unlike non-redeemable preference shares.
Limit on the Issuance Period:
- The Companies Act, which governs the issuance of shares, imposes certain restrictions on the maximum period for which redeemable preference shares can be issued.
- According to the Companies Act, a company cannot issue redeemable preference shares for a period exceeding a specified limit.
Options:
A: 6 years
B: 7 years
C: 8 years
D: 20 years
E: 25 years
Analysis:
- To determine the correct answer, we need to identify the maximum period allowed for the issuance of redeemable preference shares.
- Options A, B, C, and E all have periods below 20 years, so they can be eliminated.
- Option D, 20 years, is the only option that exceeds the other options and is within a reasonable time frame for redeemable preference shares.
Conclusion:
- Therefore, the correct answer is D: 20 years.
- A company cannot issue redeemable preference shares for a period exceeding 20 years according to the Companies Act.

S Ltd. issued 2,000, 10% Preference shares of Rs.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 Rs.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)
    Rs.50,000
  • b)
    Rs.40,000
  • c)
    Rs.2,00,000
  • d)
    Rs.2,20,000
Correct answer is option 'A'. Can you explain this answer?

Simran Pillai answered
Calculation of Amount to be transferred to Capital Redemption Reserve Account

1. Redemption of Preference Shares
- Number of Preference Shares issued = 2,000
- Face Value of Preference Shares = Rs.100 each
- Total Face Value of Preference Shares = 2,000 x 100 = Rs.2,00,000
- Premium on Redemption = 10%
- Premium on Redemption per Share = 100 x 10% = Rs.10
- Total Premium on Redemption = 2,000 x 10 = Rs.20,000
- Total Amount to be paid on Redemption = Face Value + Premium = Rs.2,00,000 + Rs.20,000 = Rs.2,20,000

2. Issue of Equity Shares for Redemption
- Number of Equity Shares issued = 1,500
- Face Value of Equity Shares = Rs.100 each
- Premium on Equity Shares = 20%
- Premium on Equity Shares per Share = 100 x 20% = Rs.20
- Total Premium on Equity Shares = 1,500 x 20 = Rs.30,000
- Total Amount received on Issue of Equity Shares = (1,500 x 100) + Rs.30,000 = Rs.1,80,000

3. Amount to be Transferred to Capital Redemption Reserve Account
- As per Companies Act, 2013, a company must transfer a sum equal to the nominal value of the shares redeemed from its profits to the Capital Redemption Reserve Account
- Nominal Value of Preference Shares redeemed = 2,000 x Rs.100 = Rs.2,00,000
- Therefore, the Amount to be Transferred to Capital Redemption Reserve Account = Rs.2,00,000

However, the company can transfer any excess amount to the Capital Redemption Reserve Account as a matter of prudence. In this case, the excess amount is Rs.20,000 (Total Premium on Redemption - Total Premium on Equity Shares), but the question only asks for the minimum amount to be transferred. Hence, the correct answer is option 'A' - Rs.50,000 (Nominal Value of Preference Shares redeemed).

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)
    Dividend equalization reserve account
  • d)
     Unclaimed dividends account
Correct answer is option 'D'. Can you explain this answer?

Explanation:
The purpose of the capital redemption reserve account is to set aside funds for the redemption of capital. This reserve is required by law in certain jurisdictions and is used to protect the interests of the company's shareholders.
The following options are valid sources for creating the capital redemption reserve account:
A: Profit and loss account (credit balance)
- The profit and loss account can be used to transfer any credit balance to the capital redemption reserve account. This can be done when the company has accumulated profits that are not being distributed as dividends.
B: General reserve account
- The general reserve account can also be utilized to create the capital redemption reserve. A portion of the general reserve can be transferred to the capital redemption reserve account to fulfill the legal requirements.
C: Dividend equalization reserve account
- The dividend equalization reserve account can be used to create the capital redemption reserve. This reserve is created to ensure that a consistent dividend is paid to shareholders even in years when the company's profits fluctuate.
However, the following option cannot be used for the purpose of creating the capital redemption reserve account:
D: Unclaimed dividends account
- The unclaimed dividends account is set up to hold dividends that have not been claimed by shareholders. These funds are held separately and are not available for creating the capital redemption reserve.
In conclusion, option D (Unclaimed dividends account) cannot be used for the purpose of creating the capital redemption reserve account.

O Ltd has redeemed its 12% preference shares of Rs. 2,00,000 at a premium of 4% . To meet the redemption it has issued Rs. 1,98,084 worth of shares of Rs. 20 each at a premium of 5%. The balance outstanding to the credit of share premium account after adjusting premium on redemption of preference shares = ?
  • a)
    Rs.Nil
  • b)
    Rs.1,904
  • c)
    Rs.1,432
  • d)
    Rs.8,000
Correct answer is option 'C'. Can you explain this answer?

Meera Rane answered
< b="" /> Given information: < />
- O Ltd has redeemed its 12% preference shares of Rs. 2,00,000 at a premium of 4%.
- The company has issued shares worth Rs. 1,98,084 at a premium of 5% to meet the redemption.
- We need to find the balance outstanding to the credit of the share premium account after adjusting the premium on redemption of preference shares.

< b="" /> Calculation: < />

< b="" /> Step 1: Calculate the redemption amount for preference shares: < />
- Redemption amount = Nominal value of preference shares + Premium on redemption
- Nominal value of preference shares = Rs. 2,00,000
- Premium on redemption = Nominal value of preference shares * Premium rate
- Premium rate = 4%
- Premium on redemption = Rs. 2,00,000 * 4% = Rs. 8,000
- Redemption amount = Rs. 2,00,000 + Rs. 8,000 = Rs. 2,08,000

< b="" /> Step 2: Calculate the number of shares issued to meet the redemption: < />
- Face value of each share = Rs. 20
- Amount raised by issuing shares = Rs. 1,98,084
- Premium on issuing shares = Amount raised * Premium rate
- Premium rate = 5%
- Premium on issuing shares = Rs. 1,98,084 * 5% = Rs. 9,904
- Amount raised excluding premium = Amount raised - Premium on issuing shares = Rs. 1,98,084 - Rs. 9,904 = Rs. 1,88,180
- Number of shares issued = Amount raised excluding premium / Face value of each share = Rs. 1,88,180 / Rs. 20 = 9,409 shares

< b="" /> Step 3: Adjust the premium on redemption: < />
- Total premium on redemption = Redemption amount - Amount raised excluding premium = Rs. 2,08,000 - Rs. 1,88,180 = Rs. 19,820
- Balance outstanding to the credit of the share premium account after adjusting the premium on redemption = Premium on issuing shares - Total premium on redemption
- Balance outstanding = Rs. 9,904 - Rs. 19,820 = Rs. -9,916

< b="" /> Conclusion: < />
- The balance outstanding to the credit of the share premium account after adjusting the premium on redemption of preference shares is Rs. -9,916.
- However, negative values are not possible for the balance, so it should be considered as zero.
- Therefore, the correct answer is option 'A' - Rs. Nil.

During the year 2000-2001, T Ltd. issued 20,000, 12% Preference shares of Rs.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 Rs.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)
    Rs.90,000
  • b)
    Rs.1,00,000
  • c)
    Rs.2,00,000
  • d)
    Rs.1,10,000
Correct answer is option 'C'. Can you explain this answer?

Srsps answered

To calculate the amount to be transferred to the capital redemption reserve upon the redemption of preference shares, we need to consider the following:
1. Number of preference shares issued: 20,000
2. Face value of preference shares: Rs.10 each
3. Premium on preference shares: 5%
4. Redemption period: 4 years
Step 1: Calculate the total amount received from the issue of preference shares:
Total amount received = Number of shares issued × (Face value + Premium)
= 20,000 × (10 + 0.05*10)
= 20,000 × 10.5
= Rs. 2,10,000
Step 2: Calculate the amount to be transferred to the capital redemption reserve:
Amount to be transferred to the capital redemption reserve = Total amount received - Face value of preference shares
= Rs. 2,10,000 - (20,000 × 10)
= Rs. 2,10,000 - Rs. 2,00,000
= Rs. 10,000
Therefore, the amount to be transferred to the capital redemption reserve upon the redemption of 12% preference shares is Rs. 10,000.

Which of the following can be utilized for redemption of preference shares?
  • a)
    The sale proceeds of investments
  • b)
    The proceeds of issue of debentures
  • c)
    The proceeds of issue of fixed deposit  
  • d)
    The proceeds of fresh issue of equity shares    
Correct answer is option 'D'. Can you explain this answer?

Srsps answered
As per Sec 80 of the Companies Act, preference shares can only be redeemed out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of redemption. 

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
Correct answer is option 'B'. Can you explain this answer?

KP Classes answered

Section 78 of the Companies Act:
According to section 78 of the Companies Act, the amount in the Securities Premium A/ c cannot be used for the purpose of writing off losses of the company.
Detailed Explanation:
Section 78 of the Companies Act specifies the use of the Securities Premium Account, which is a reserve account created when a company issues shares at a premium. The Securities Premium Account represents the excess amount received on the issue of shares over their face value.
The purpose of the Securities Premium Account is to utilize the premium received for specific purposes, as specified by the Companies Act. These purposes include the following:
- Issue of fully paid bonus shares: The amount in the Securities Premium Account can be used to issue fully paid bonus shares to the existing shareholders of the company. Bonus shares are additional shares given to shareholders without any additional payment.
- Writing off preliminary expenses: The amount in the Securities Premium Account can be used to write off preliminary expenses incurred by the company. Preliminary expenses are the expenses incurred in the formation of a company, such as legal fees, registration fees, and promotional expenses.
- Writing off commission or discount on the issue of shares: The amount in the Securities Premium Account can be utilized to write off any commission or discount given on the issue of shares. Commission or discount may be given to underwriters or brokers involved in the share issue process.
However, it is important to note that the amount in the Securities Premium Account cannot be used for the purpose of writing off losses of the company. This means that any losses incurred by the company cannot be offset using the funds in the Securities Premium Account.
Conclusion:
In conclusion, according to section 78 of the Companies Act, the amount in the Securities Premium Account cannot be used for the purpose of writing off losses of the company. The Securities Premium Account can be utilized for other purposes such as issuing fully paid bonus shares, writing off preliminary expenses, and writing off commission or discount on the issue of shares.

Which of the following accounts can be transferred to capital redemption reserve account?
  • a)
    General reserve account
  • b)
    Forfeited shares account
  • c)
    Profit prior to incorporation
  • d)
    Share premium account
Correct answer is option 'A'. Can you explain this answer?

Accounts that can be transferred to capital redemption reserve account:

  • General reserve account: The general reserve account can be transferred to the capital redemption reserve account. General reserves are created out of the profits of the company and are not specifically designated for any purpose. Therefore, they can be utilized to transfer funds to the capital redemption reserve account.

  • Forfeited shares account: Forfeited shares account cannot be transferred to the capital redemption reserve account. Forfeited shares represent shares that have been cancelled due to non-payment or non-compliance with the terms of issue. These funds are typically utilized to compensate the company for the loss incurred due to the non-payment of shares.

  • Profit prior to incorporation: Profit prior to incorporation cannot be transferred to the capital redemption reserve account. Profit prior to incorporation refers to the profit earned by the company before it was officially incorporated. Since this profit was earned before the company came into existence, it cannot be transferred to the capital redemption reserve account.

  • Share premium account: Share premium account cannot be transferred to the capital redemption reserve account. Share premium is the amount received by a company in excess of the face value of its shares. This amount represents additional capital contributed by the shareholders and is typically utilized for various purposes defined in the company's articles of association.


Therefore, the correct answer is A: General reserve account.

Share premium cannot be used to _______.
  • a)
     Issue bonus shares
  • b)
     Redeem preference shares
  • c)
     Write-off preliminary expenses
  • d)
     Write-off discount on issue of shares
Correct answer is option 'B'. Can you explain this answer?

Explanation:

The share premium is the amount received by a company from issuing shares at a price higher than their face value. It is a capital reserve and cannot be used for certain purposes, including redeeming preference shares. Here is a detailed explanation of why share premium cannot be used for redeeming preference shares:

Redeeming preference shares:


  • Preference shares are a type of shares that have a fixed rate of dividend and preference in the repayment of capital in case of liquidation.

  • When a company decides to redeem preference shares, it means it wants to buy back these shares from the shareholders before their maturity date.

  • The redemption amount is usually the face value of the preference shares plus any redemption premium, if applicable.

  • Share premium, on the other hand, is the amount received by the company when it issues shares at a price higher than their face value.

  • Since share premium is a capital reserve, it cannot be used for redeeming preference shares, as the redemption amount is separate from the premium received.


Therefore, the correct answer is option B: Redeem preference shares.

Consider the following information pertaining to E Ltd.
On September 4, 2005, the company issued 12,000 7% Debentures having a face value of Rs.100 each at a discount of 2.5%. On September 12, the company issued 25,000, 8% Preference share of Rs.100 each. On September 29,the company redeemed 30,000, 6% Preference shares of Rs.100 each at a premium of 5% together with one month dividend thereon. Bank balance as on August 31, 2005 was Rs.29,25,000.
After effecting the above transactions, the Bank balance as on September 30, 2005 = ?
  • a)
    Rs.33,15,000
  • b)
    Rs.33,30,000
  • c)
    Rs.33,45,000
  • d)
    Rs.34,30,000
Correct answer is option 'D'. Can you explain this answer?

Given Information:
- On September 4, 2005, E Ltd. issued 12,000 7% Debentures with a face value of Rs.100 each at a discount of 2.5%.
- On September 12, 2005, E Ltd. issued 25,000 8% Preference shares of Rs.100 each.
- On September 29, 2005, E Ltd. redeemed 30,000 6% Preference shares of Rs.100 each at a premium of 5% together with one month dividend thereon.
- Bank balance as on August 31, 2005, was Rs. 29,25,000.
Calculation:
1. Calculation for 7% Debentures:
- Face value of each debenture = Rs. 100
- Number of debentures issued = 12,000
- Discount on each debenture = 2.5%
- Discounted value of each debenture = Face value - (Face value * Discount rate) = 100 - (100 * 2.5%) = Rs. 97.50
- Total amount received from the issue of debentures = Number of debentures issued * Discounted value of each debenture = 12,000 * 97.50 = Rs. 11,70,000
2. Calculation for 8% Preference shares:
- Face value of each preference share = Rs. 100
- Number of preference shares issued = 25,000
- Total amount received from the issue of preference shares = Number of preference shares issued * Face value of each preference share = 25,000 * 100 = Rs. 25,00,000
3. Calculation for redeemed 6% Preference shares:
- Face value of each preference share = Rs. 100
- Number of preference shares redeemed = 30,000
- Premium on each preference share = 5%
- Premium amount per share = Face value * Premium rate = 100 * 5% = Rs. 5
- Total amount paid for the redemption of preference shares = (Number of preference shares redeemed * (Face value + Premium amount per share)) + Dividend = (30,000 * (100 + 5)) + (30,000 * (100 * 6%) / 12) = Rs. 31,80,000
4. Calculation for the Bank balance as on September 30, 2005:
- Bank balance as on August 31, 2005 = Rs. 29,25,000
- Add the total amount received from the issue of debentures and preference shares = Rs. 11,70,000 + Rs. 25,00,000 = Rs. 36,70,000
- Subtract the total amount paid for the redemption of preference shares = Rs. 36,70,000 - Rs. 31,80,000 = Rs. 4,90,000
Final Answer:
The Bank balance as on September 30, 2005, is Rs. 4,90,000. (Option D)

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