NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

Accountancy Class 12

Created by: Nipun Tuteja

Commerce : NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

The document NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev is a part of the Commerce Course Accountancy Class 12.
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Page No 64:
Short Answers :
Question 1 : What is public company?
Answer : A public company is defined as a company that offers a part of its ownership in the form of shares, debentures, bonds, securities to the general public through stock market. There must be atleast seven members to form a public company. As per the section 3 (1) (iv) of Companies Act 1956, public company means a company which:
a) is not a private company,
b) has a minimum paid up capital of Rs 5,00,000 or such higher paid up capital, as may be prescribed,
c) is a private company, being a subsidiary of a company which is not a private company.
A public company should not be mistakenly understood as a publicly-owned company, as the latter is exclusively owned and controlled by the government. A public company issues its share to general public without any restriction on maximum number of persons. A public company can be segmented into two types:

1. Listed Company- A Company whose shares are listed and traded in the stock exchange like, Tata Motors, Reliance, etc.
2. Unlisted Company- A Company whose shares are not listed in the stock exchange and thereby these shares cannot be traded in the stock exchange.

Question 2:  What is private limited company?
Answer : Private limited company is a company that is limited by shares or by guarantee by its members. A private limited company is defined as a company that has a minimum paid up share capital of Rs 1,00,000. As defined by the Section 3 (1) (iii) of Companies Act 1956, private limited company is defined by the following characteristics:
a) It restricts the right to transfer its shares.
b) There must be atleast two and a maximum of 50 members (excluding current and former employees) to form a private company.
c) It cannot invite application from the general public to subscribe its shares, or debentures.
d) It cannot invite or accept deposits from persons other than its members, Directors and their relatives.
Unlike public company, a private company cannot issue its shares or debentures to general public at large as shares of these companies are not traded in the stock exchange, for example, Coca-Cola India Private limited, etc.

Question 3: When can shares be Forfeited?
ANSWER: When a shareholder fails to pay the allotment money or any subsequent calls, then the company informs the shareholder by giving him/her a proper notice.If even after the notice, the shareholder fails to pay the due money, then the company forfeits the shares allotted to him/her.

Question 4: What is meant by Calls-in-Arrears?
ANSWER:
When shareholder fails to pay all the instalments in due time, then company expects the shareholder to pay the outstanding amount in the later stages (or calls). Such amount of money that is being paid at the later stages is termed as Calls-in-Arrears.

Question 5:  What do you mean by a listed company?
Answer: Those public companies whose shares are listed and can be traded in a recognised stock exchange for public trading like, Tata Motors, Reliance, etc are called Listed Company. These companies are also called Quota Companies. The listing of securities (shares) helps the investor to determine the increase/decrease in value of their investment in a concerned listed company. This provides ample indication to the potential investors about the goodwill of the company and facilitates them to take various investment decisions and also to assess the viability of their investment in a company.

Question 6 : What are the uses of securities premium?
Answer: As per the Section 78 of the Companies Act of 1956, the amount of securities premium can be used by the company for the following activities:

1. For paying up un issued shares of the company to be issued to members (shareholders) of the company as fully paid bonus share,
2. For writing off the preliminary expenses of the company,
3. For writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company,
4. For paying up the premium that is to be payable on redemption of preference shares or debentures of the company.
5. Further, as per the Section 77A, the securities premium amount can also be utilised by the company to Buy-back its own shares.

Question 7: What is meant by Calls-in-Advance?
ANSWER: Calls-in-Advance refers to a situation when a shareholder pays the whole amount or a part of the amount of shares before it become due, i.e. before the company calls for it. So, the amount of money that is being paid in advance at the earlier stages is termed as Calls-in-Advance.

Question 8: Write a brief note on 'Minimum Subscription'.
Answer : When shares are issued to the general public, the minimum amount that must be subscribed by the public so that the company can allot shares to the applicants is termed as Minimum Subscription. As per the Company Act of 1956, the Minimum Subscription of share cannot be less than 90% of the issued amount. If the Minimum Subscription is not received, the company cannot allot shares to its applicants and it shall immediately refund the entire application amount received to the public.

Long Answers:
Question 1 : What is meant by the word 'Company'? Describe its characteristics.
Answer : The Section 3 (1) (i) of the Company Act of 1956 defines an organisation as a company that is formed and registered under the Act or any existing company that is formed and registered under any earlier company laws. In general, a company is an artificial person, created by law that has a separate legal entity, perpetual succession, common seal and has limited liability. It is a voluntary association of person who together contributes in the capital of the company to do business. Generally, the capital of a company is divided into small parts known as shares, the ownership of which is transferable subject to certain terms and conditions. There are two types of company, public company and private company.

Characteristics of Company

1. Association of Person: A company is formed voluntarily by a group of persons to perform a common business. Minimum number of person should be two for formation of a private company and seven for a public company.

2. Artificial Person: Company is an artificial and juristic person that is created by law.

3. Separate Legal Entity: A company has a separate legal entity from its members (shareholders) and Directors. It can open a bank account, sign a contract and can own a property in its own name.

4. Limited Liability: The liability of the members of a company is limited up to the nominal value or the face value of the shares. Unlike a partnership firm, on insolvency of a company, the members and the shareholders are not liable to pay the amount due to the creditors of the company. In fact, the members and the shareholders are only liable to pay the unpaid amount of the shares held by them. For example, if the value of share is Rs 10 and Rs 6 is paid up, then the member is liable to pay only Rs 4.

5. Perpetual Existence: The existence of company is not affected by the death, retirement, and insolvency of its members. That is, the life of a company remains unaffected by the life and the tenure of its members in the company. The life of a company is infinite until it is properly wound up as per the Company Act.

6. Common Seal: The Company is an artificial person and has no physical existence; hence it cannot put its signature. Thus, the Common Seal acts as an official signature of a company that validates the official documents.

7. Transferability of Shares: The shares of public limited company is easily and freely transferable without any consent from other members. But the share of ownership of a private limited company is not transferable without the consent of the other members.

Question 2: Explain in brief the main categories in which the share capital of a company is divided.
Answer :  The division of the share capital of a company into main categories is diagrammatically  explained below.

NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

1. Authorised Capital: It is an amount which is stated in the Memorandum of Association. It is the maximum amount that the company can raise by issuing shares. This maximum amount can be increased as per the procedures laid down in the Company Act.
2. Issued Capital: It is a part of authorised capital which is offered by the company to the general public for subscription. For example, if the authorised capital of a company is Rs 1,00,000 divided into Rs 10 per share, then the issued capital cannot be more than Rs 1,00,000.
3. Unissued Capital: It is a part of authorised capital that is not offered till now but can be offered to the general public in future. In the above example, if the issued capital is Rs 80,000, then the unissued capital is Rs 20,000.
4. Subscribed Capital: It is a part of issued capital that is actually subscribed by the general public. For example, if the company has issued 8,000 shares of Rs 10 per share and public has subscribed for 7,500 shares, then the subscribed share capital of the company amounts to Rs 75,000.
5. Unsubscribed Capital: It is that part of the issued capital that is not subscribed by the public. For example, in the above example, 500 shares were left unsubscribed, making an unsubscribed share capital of Rs 5,000.
6. Called up Capital: It is a part of subscribed capital that is called up by the Directors from the shareholders of a company to pay. For example, if the Directors call up Rs 6 out of Rs 10 (i.e. the face value of the share) from the shareholders of 10,000 to pay, then Rs 60,000 is regarded as called up share capital.
7. Uncalled up Capital: It is that part of subscribed capital which is not called up till now but can be called up in future as per the need of the company. For example, in the above example, Rs 4 were left uncalled from shareholders holding 10,000 shares, so Rs 40,000 is uncalled up share capital.
8. Paid up capital: It is that part of called up share capital which is actually received from the shareholders. If the entire called up money of Rs 4 on 1,000 shares has been received except from a shareholder holding 300 shares, then the paid up share capital is Rs 2,800 (Rs 4,000 - Rs 1,200). The amount of Rs 1,200 is called Call in Arrears that has been called up but is unpaid.
9. Reserved Capital: As per the Section 99 of the Company Act of 1956, a limited company may call up any portion of uncalled share capital in the event of winding up of the company to pay its creditors. This amount of uncalled share capital cannot be used for any other purpose and is reserved for paying back the creditors, that is why, such portion of share capital is called reserve capital.

Question 3: What do you mean by the term 'share'? Discuss the type of shares, which can be issued under the Companies Act, 1956 as amended to date.
Answer : The total capital of a company is divided into equal units of small denomination termed as shares. The ownership of these shares is easily transferable, from one person to other, subject to certain conditions. The person who is contributing in the capital in the form of shares is known as shareholder. The ownership of a shareholder is limited to the value of the shares held by him/her.
Types of Shares
As per the Section 86 of the Company Act of 1956, there are two types of shares- Preference Shares and Equity Shares (also known as Ordinary Shares)
i) Preference Shares: Section 85 of the Company Act,1956 defines Preference Shares to be featured by the following rights:
a. Preference Shares entitle its holder the right to receive dividend at a fixed rate or fixed amount.
b. Preference Shares entitle its holder the preferential right to receive repayment of capital invested by them before their equity counterparts at the time of winding up of the company.
ii) Equity Shares: Equity Shareholders have a voting right and control the affairs of a company. As per Section 85 (2) of Companies Act 1956; equity share is a share that is not a preference share. It does not possess any preferential right of payment of dividend or repayment of capital. The rate of dividend is not fixed on equity shares and varies from year to year, depending upon the amount of profit available for distribution after paying dividend to the preference shareholders.

Question 4: Discuss the process for the allotment of shares of a company in case of over subscription.
Answer : When the total number of applications received for shares exceeds the number of shares offered by the company to the public, the situation of oversubscription arises. A company can opt for any of the three alternatives to allot shares in case of oversubscription of shares.
i) Excess applications are refused and money received on excess applications is returned to the applicants.
The company can refuse excess applications and the money received on these excess applications is returned to the applicants.
NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

Example: Shares issued 10,000 @ Rs 10 per share and money received for 12,000 shares.
Amount is payable Rs 2 on application, Rs 5 on allotment, Rs 3 on first and final call.

NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev 

ii) Pro rata Basis
The company can allot shares on pro rata basis to all the share applicants. The excess amount received in the application is adjusted on the allotment.
NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

Example: Shares issued 10,000 @ Rs 10 per share and money received for 12,000 shares. Amount is payable Rs 2 on application, Rs 5 on allotment, Rs 3 on first and final call.

 NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev
NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev
NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

iii) Pro rata and refund of money
In this case, the company follows a combination of both the method. It may reject some share applications and may allot some applications on the pro rata basis.
NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev
Example: Shares issued 10,000 @ Rs 10 per share and money received for 13,000 shares. Amount is payable Rs 2 on application, Rs 5 on allotment, Rs 3 on first and final call. If the company rejects the applications for 1,000 shares and allots the remaining on the pro rata basis.

 NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev 

NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

Question 5: What is a 'Preference Share'? Describe the different types of preference shares.
Answer: Preference Shares: Section 85 of the Company Act,1956 defines Preference Shares to be featured by the following rights:
a. Preference Shares entitle its holder the right to receive dividend at a fixed rate or fixed amount.
b. Preference Shares entitle its holder the preferential right to receive repayment of capital invested by them before their equity counterparts at the time of winding up of the company.
Types of Preference Shares
The different types of Preference Shares are diagrammatically explained below.

NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

 

1. On the basis of Dividend:
a) Cumulative Preference Shares
When a preference shareholder has a right to recover any arrears of dividend, before any dividend is paid to the equity shareholders, then the type of Preference Shares held by the shareholder is known as Cumulative Preference Shares. All Preference Shares are cumulative unless otherwise expressly stated to be non cumulative.
b) Non Cumulative Preference Share
When a preference shareholder receives dividend only in case of profit and is not entitled any right to recover the arrears of dividend, then the type of Preference Shares held by the shareholder is known as Non Cumulative Preference Shares.
2. On the basis of Participation:
a) Participating Preference Share
When a preference shareholder enjoys the right to participate in the surplus profit (in addition to the fixed rate of dividend) that is left after the payment of dividend to the equity shareholders, the type of shares held by the shareholder is known as Participating Preference Share.
b) Non participating Preference Share
When a preference shareholder receives only a fixed rate of dividend every year and do not enjoy the additional participation in the surplus profit, then the type of shares held by the shareholder is known as Non Participating Preference Shares.
It must be noted that all Preference Shares are non-participating until and unless expressly stated.

3. On the basis of Redemption:
a) Redeemable preference share
When a preference shareholder is repaid by the company after a certain specified period in accordance with the term specified in the Section 80 of Company Act of 1956, then the type of the shares held by him/her is known as Redeemable Preference Shares.
b) Non Redeemable Preference share
These shares are not repaid by the company during its lifetime. As per the Section 80A of the Company Act of 1956, no company can issue Non Redeemable Preference Shares. It is merely a theoretical concept.
4. On the basis of Convertibility:
a) Convertible Preference Share
The shareholders holding Convertible Preference Shares have a right to convert his/her shares into equity shares.
b) Non Convertible Preference Share
Unlike Convertible Preference Shares, the shareholders holding Non Convertible Preference Shares do not enjoy the right to convert their shares into equity shares.

Question 6 :  Describe the provision of law relating to 'Calls-in-Arrears' and 'Calls-in-Advance'.
Answer : Calls-in-Arrears: When a shareholder fails to pay the amount due on allotment or any subsequent calls, then it is termed as Calls-in-Arrears. The Company is authorised by its Article of Association to charge interest at a specified rate on the amount of Call in Arrears from the due date till the date of payment. If the Article of Association is silent in this regard, then Table A shall be applicable that is interest at 5% p.a. is charged from the shareholders. As per the Revised Schedule VI of the Companies Act, Calls-in-Arrears are deducted from the Called-up Share Capital in the Notes to Accounts (that is prepared outside the Balance Sheet) under the head 'Share Capital'. The final amount of Share Capital is shown on the Equity and Liabilities side of the Company's Balance Sheet. The company can also forfeit the shares on account of nonpayment of the calls money after giving proper notice to the shareholders.
ExampleX Ltd. issued 12,000 shares of Rs 10 each. All the shares were duly subscribed, however, the first and final call of Rs 4 on 5,000 shares remained unpaid.

NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

NOTES TO ACCOUNTS
NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

Calls-in-Advance: When a shareholder pays the whole amount or a part of the amount in advance, i.e. before the company calls, then it is termed as Calls-in-Advance. The company is authorised by its Article of Association to pay interest at the specified rate on call in advance from the date of payment till the date of call made. If the Article of Association is silent in this regard, then the Table A shall be applicable that is, interest at 6% p.a. is provided to the shareholders. As per the Revised Schedule VI of the Companies Act, Calls-in-Advance (along with interest on it) is added to the 'Other Current Liabilities' in the Notes to Accounts. The final amount of Other Current Liabilities is shown under the main head of 'Current Liabilities' on the Equity and Liabilities side of the Company's Balance Sheet. 

Example- X Ltd. issued 12,000 shares of Rs 10 each. All the shares were duly subscribed. The final call of Rs 3 was not yet made, however, a shareholder holding 5,000 shares paid the final call installment in advance along with the allotment money.


X Ltd.

Balance Sheet

Particulars

Note No.

Amount

(Rs)

I. Equity and Liabilities

 

 

1. Shareholders’ Funds

 

 

   a. Share Capital

1

84,000

2. Non-Current Liabilities

 

 

3. Current Liabilities

 

 

   a. Other Current Liabilities

2

15,000

Total

 

 

 

 

 

II. Assets

 

 

1. Non-Current Assets

 

 

2. Current Assets

 

 

 

 

 

Total

 

 

 

 

 

NOTES TO ACCOUNTS

Note No.

Particulars

Amount   (Rs)

1

Share Capital

 

 

  Authorised Share Capital

 

 

   …….. shares of Rs 10 each

-

 

   Issued Share Capital

 

 

   12,000 shares of Rs 10 each

1,20,000

 

   Subscribed, Called-up and Paid-up Share Capital

 

 

   12,000 shares of Rs 10 each, Rs 7 called-up

84,000

 

 

 

2

Other Current Liabilities

 

 

    Calls-in-Advance (5,000×3)

15,000

 

Question 7 :  What is buy-back of shares?
Answer : Buy-back of shares means repurchasing of its own shares by a company from the market for reducing the number of shares in the open market. As per the Section 77A, 77AA and 77B of the Company Act of 1956, a company can Buy-back its own shares and debentures on the account of following reasons:
1. To improve EPS (Earnings Per Share)
2. To return surplus cash to the shareholders that is not required by the business
3. To support value of its shares
4. To facilitate capital restructuring of the company.
5. To prevent take-over bid.

Buy-back of shares may be done:
a) By purchasing shares from existing share holders on a proportionate basis, or
b) By purchasing shares from the open market, or
c) By purchasing shares from odd lots, viz. where the lot of securities listed in the recognised stock market is smaller than such marketable lot, or
d) By purchasing shares from the employees of the company

Sources for Buy-back of share:
1. Free Reserves,
2. Securities Premium Account,
3. Proceeds of any shares or other specified securities, provided that no Buy-back of any kind of shares or other specified securities shall be made out of the proceeds of the earlier issues of the similar kind of shares or similar kind of other specified securities.

 NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

NCERT Solution (Part - 1) - Accounting for Share Capital Commerce Notes | EduRev

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