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Test: Redemption Of Preference Shares - 3 - CA Foundation MCQ


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18 Questions MCQ Test Principles and Practice of Accounting - Test: Redemption Of Preference Shares - 3

Test: Redemption Of Preference Shares - 3 for CA Foundation 2024 is part of Principles and Practice of Accounting preparation. The Test: Redemption Of Preference Shares - 3 questions and answers have been prepared according to the CA Foundation exam syllabus.The Test: Redemption Of Preference Shares - 3 MCQs are made for CA Foundation 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests for Test: Redemption Of Preference Shares - 3 below.
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Test: Redemption Of Preference Shares - 3 - Question 1
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Which of the following statements is false?

Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 1
False Statement: Preference shareholders are creditors of a company.
Explanation:
- Statement A: A company can redeem its preference shares.
- This statement is true. Companies have the option to redeem their preference shares, usually after a specified period.

- Statement B: Preference shareholders are creditors of a company.
- This statement is false. Preference shareholders are not considered creditors of a company. They are considered as owners of the company, although their rights may be different from common shareholders.

- Statement 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.
- This statement is true. Reserve capital refers to the portion of authorized capital that can only be called up and paid in the event of the company's liquidation.

- Statement D: Capital redemption reserve can be utilized for issuing fully paid bonus shares.
- This statement is true. The capital redemption reserve can be utilized for various purposes, including issuing fully paid bonus shares.
In conclusion, the false statement is Statement B: Preference shareholders are creditors of a company.
Test: Redemption Of Preference Shares - 3 - Question 2
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The balance sheet of A Ltd. as on March 31, 2006 is as under


The 12% preference shares are redeemable at a premium of 10%. The company wishes to maintain the cash balance at Rs. 25,000. For the purpose of redemption of preference shares, it proposed to sell the investments for Rs. 2,00,000. The company proposes to issue sufficient number of equity shares of Rs. 100 each at a premium of 5% to raise required cash resources. 

Cash required to effect the above decisions is __________.

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Test: Redemption Of Preference Shares - 3 - Question 3
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The balance sheet of A Ltd. as on March 31, 2006 is as under
​

The 12% preference shares are redeemable at a premium of 10%. The company wishes to maintain the cash balance at Rs. 25,000. For the purpose of redemption of preference shares, it proposed to sell the investments for Rs. 2,00,000. The company proposes to issue sufficient number of equity shares of Rs. 100 each at a premium of 5% to raise required cash resources. 
Number of equity shares to be issued is __________.

Test: Redemption Of Preference Shares - 3 - Question 4
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The following is the balance sheet of G Ltd. as on March 31, 2006:

The Board of Directors of the company decided to redeem the preference shares at a premium of 10%. In order to facilitate the redemption, the Board has taken the following decisions: 
? To sell the investments for Rs. 4,00,000
? To issue sufficient equity shares at a premium of Rs. 2 per share to raise the balance of funds needed
&lowest; To maintain minimum bank balance of Rs. 50,000
The Board of Directors initiated the above course of action during the month of April, 2006 and redeemed all the preference shares.
Premium on issue of fresh equity shares =?
Test: Redemption Of Preference Shares - 3 - Question 5
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The following is the balance sheet of G Ltd. as on March 31, 2006:

The Board of Directors of the company decided to redeem the preference shares at a premium of 10%. In order to facilitate the redemption, the Board has taken the following decisions: 
? To sell the investments for Rs. 4,00,000
? To issue sufficient equity shares at a premium of Rs. 2 per share to raise the balance of funds needed
&lowest; To maintain minimum bank balance of Rs. 50,000
The Board of Directors initiated the above course of action during the month of April, 2006 and redeemed all the preference shares.
The amount to be transferred to Capital Redemption Reserve =?
Test: Redemption Of Preference Shares - 3 - Question 6
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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 = ?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 6

To calculate the amount to be transferred by the company to the Capital Redemption Reserve Account, we need to consider the following:
1. Number of Preference Shares issued: 2,000
2. Face value of each Preference Share: Rs.100
3. Redemption premium on each Preference Share: 10%
4. Total redemption premium on all Preference Shares: 10% of (2,000 * Rs.100) = Rs.20,000
Next, we need to calculate the number of Equity Shares issued for the purpose of redemption:
1. Redemption premium on each Equity Share: 20%
2. Face value of each Equity Share: Rs.100
3. Total redemption premium on all Equity Shares: 20% of (1,500 * Rs.100) = Rs.30,000
Now, let's calculate the amount transferred to the Capital Redemption Reserve Account:
1. Amount transferred = Total redemption premium on Preference Shares - Total redemption premium on Equity Shares
2. Amount transferred = Rs.20,000 - Rs.30,000
3. Amount transferred = - Rs.10,000
Since the result is negative, it means that no amount needs to be transferred to the Capital Redemption Reserve Account. Therefore, the correct answer is option A: Rs.50,000.
Test: Redemption Of Preference Shares - 3 - Question 7
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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 = ?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 7

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.
Test: Redemption Of Preference Shares - 3 - Question 8
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According to section 78 of the Companies Act, the amount in the Securities Premium A/ c cannot be used for the purpose of
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 8

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.
Test: Redemption Of Preference Shares - 3 - Question 9
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Which of the following can be utilized for redemption of preference shares?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 9

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. 

Test: Redemption Of Preference Shares - 3 - Question 10
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Which of the following can be utilized for redemption of preference shares?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 10
Redemption of Preference Shares:
The redemption of preference shares refers to the process of repaying the shareholders their invested capital along with any outstanding dividends. This can be done through various means, including:
A: The proceeds of fresh issue of equity shares:
- When a company issues new equity shares, it can utilize the funds raised from this issuance to redeem preference shares.
- This method allows the company to use the funds generated from the fresh issue to fulfill its obligation towards the preference shareholders.
B: The proceeds of issue of debentures:
- Debentures are a form of long-term debt instrument issued by a company to raise funds.
- If a company issues debentures, it can use the proceeds from this issuance to redeem preference shares.
- By utilizing the funds from the debenture issue, the company can meet its redemption obligations towards the preference shareholders.
C: The proceeds of issue of fixed deposit:
- Fixed deposits are a form of financial investment where individuals deposit a certain amount for a fixed period of time at a fixed rate of interest.
- While fixed deposits are not typically used for redeeming preference shares, a company could potentially utilize the proceeds from such deposits for this purpose.
- However, it is important to note that this method may not be commonly used and may have certain legal and regulatory considerations.
D: The sale proceeds of investments:
- If a company has investments in other assets, such as stocks, bonds, or real estate, it can sell these investments and use the proceeds to redeem preference shares.
- This method allows the company to generate funds from the sale of its investments and fulfill its redemption obligations.
E: Both (a) and (b) above:
- The correct answer is option E, as both the proceeds from the fresh issue of equity shares and the proceeds from the issue of debentures can be utilized for redemption of preference shares.
- Companies have the flexibility to choose either or both of these options depending on their specific financial situation and strategic considerations.
Overall, the redemption of preference shares can be carried out using various sources of funds, including the proceeds from the fresh issue of equity shares, the proceeds from the issue of debentures, the sale proceeds of investments, and potentially even the proceeds from the issue of fixed deposits. The choice of method depends on factors such as the company's financial position, its capital structure, and the availability of funds from different sources.
Test: Redemption Of Preference Shares - 3 - Question 11
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Which of the following statements is false?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 11
False Statement: D: Dividend is payable on the calls paid in advance by shareholders.
Explanation:
The false statement is D: Dividend is payable on the calls paid in advance by shareholders. Here's why:
- A: Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses.
- This statement is true. The capital redemption reserve is created when a company redeems its own shares, and it cannot be used for writing off miscellaneous expenses and losses.
- B: Capital profit realized in cash can be used for payment of dividend.
- This statement is true. When a company realizes a profit from the sale of its fixed assets, that profit can be used for the payment of dividends to shareholders.
- C: Reserves created by revaluation of fixed assets are not permitted to be capitalized.
- This statement is true. Reserves created by revaluation of fixed assets cannot be capitalized. They are used to reflect the increase in the value of the assets and are not available for distribution as dividends.
- D: Dividend is payable on the calls paid in advance by shareholders.
- This statement is false. Dividends are not payable on the calls paid in advance by shareholders. Calls in advance are payments made by shareholders before the due date, and they are not considered as part of the distributable profits of the company.
In conclusion, the false statement is D: Dividend is payable on the calls paid in advance by shareholders.
Test: Redemption Of Preference Shares - 3 - Question 12
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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 = ?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 12

 

Test: Redemption Of Preference Shares - 3 - Question 13
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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 = ?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 13

To find the balance outstanding to the credit of the share premium account after adjusting the premium on the redemption of preference shares, we need to calculate the premium amount on the new shares issued and subtract it from the total share premium account balance.
Step 1: Calculate the premium on the new shares issued:
- Total value of new shares issued = Rs. 1,98,084
- Face value of each share = Rs. 20
- Number of new shares issued = Total value of new shares issued / Face value of each share = 1,98,084 / 20 = 9,904 shares
- Premium per share = 5% of face value = 5% of Rs. 20 = Rs. 1
- Premium on the new shares issued = Premium per share x Number of new shares issued = Rs. 1 x 9,904 = Rs. 9,904
Step 2: Calculate the total premium on the redemption of preference shares:
- Face value of preference shares redeemed = Rs. 2,00,000
- Premium on preference shares redeemed = 4% of face value = 4% of Rs. 2,00,000 = Rs. 8,000
Step 3: Calculate the balance outstanding to the credit of the share premium account:
- Total premium on the redemption of preference shares = Premium on preference shares redeemed + Premium on the new shares issued = Rs. 8,000 + Rs. 9,904 = Rs. 17,904
Therefore, the balance outstanding to the credit of the share premium account after adjusting the premium on the redemption of preference shares is Rs. 17,904.
Test: Redemption Of Preference Shares - 3 - Question 14
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Which of the following accounts can be transferred to capital redemption reserve account?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 14
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.
Test: Redemption Of Preference Shares - 3 - Question 15
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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 = ?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 15

Given:
Preference shares redeemed = Rs.2,00,000 (at a premium of 5%)
Shares issued = Rs.1,00,000 (at a premium of 10%)
To find:
Amount to be transferred to capital redemption reserve
Step 1: Calculate the premium amount for redeeming the preference shares.
Premium amount = Redemption value * Premium rate
= Rs.2,00,000 * 5/100
= Rs.10,000
Step 2: Calculate the premium amount for issuing the new shares.
Premium amount = Issue value * Premium rate
= Rs.1,00,000 * 10/100
= Rs.10,000
Step 3: Calculate the total premium amount.
Total premium amount = Premium for redeeming preference shares + Premium for issuing new shares
= Rs.10,000 + Rs.10,000
= Rs.20,000
Step 4: Transfer the premium amount to the capital redemption reserve.
Amount to be transferred to capital redemption reserve = Total premium amount
= Rs.20,000
Therefore, the amount to be transferred to capital redemption reserve is Rs.1,00,000. Hence, the answer is B: Rs.1,00,000.
Test: Redemption Of Preference Shares - 3 - Question 16
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Share premium cannot be used to _______.
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 16

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.

Test: Redemption Of Preference Shares - 3 - Question 17
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A company cannot issue redeemable preference shares for a period exceeding _____________.
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 17
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.
Test: Redemption Of Preference Shares - 3 - Question 18
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Which of the following cannot be used for the purpose of creation of capital redemption reserve account?
Detailed Solution for Test: Redemption Of Preference Shares - 3 - Question 18
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.
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