Assertion & Reason Type Questions: Accounting for Share Capital

Q1: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Tara Ltd. gave shares worth ₹1,50,000 to the vendor from whom they bought machinery.

Reason (R): The company can issue shares as against the payment to the vendors.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

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

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: a

Sol: Instead of paying the amount, the company can issue shares to the vendors from the authorised share capital, at par, premium or discount.

Q2: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): The securities premium amount received by the company will be shown in the balance sheet directly.

Reason (R): Securities premium account is a capital receipt.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

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

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: a

Sol: The premium amount is credited to a separate account called 'Securities Premium Account' and Is shown on the liabilities side of the company's balance sheet under the heading 'Reserve and Surplus'.

Q3: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Preference shareholders are given a fixed rate of dividend even if the company earns no profit.

Reason (R): The preference shares have preferential right of dividend to be paid as fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income tax.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

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

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: d

Sol: If the company does not earn profit, the preference shareholders are not given dividend as dividend cannot be declared in case of no profit even if they have preferential rights.

Q4: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

The equity shareholders are paid a dividend on the shares held by them.

Reason (R): As the equity shareholders are the owners and dividend form their earning.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

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

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: a

Sol: The equity shareholders are given a dividend as per the shares held by them from the profit earned by the company as they get the ownership of the company to the extent of shares held by them.

Q5: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): A share is a fractional part of the share capital and forms the basis of ownership interest in a company.

Reason (R): Shares refer to the units into which the total share capital of a company is divided.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

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

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: b

Sol: Shares are the fractional part or the unit of share capital forming the basis of ownership of a company because buying a share by a person makes him/her a shareholder and thus the owner to the extent of the shares purchased.

Q6: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

(A): Govind Ltd. invited applications for issuing 20,00,000 equity shares of ₹10 each. The public applied for 17,10,000 shares. The company cannot proceed for the allotment of shares.

Reason (R): The application can only be processed if the company receives a minimum of 12.5% subscription.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

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

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: c

Sol: The company can only proceed with the allotment when it receives 90% of the application for subscription.

Q7: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): The security premium amount can be used to issue partially paid up bonus shares.

Reason (R): According to Section 52(2) of the Companies Act, 2013, the amount of Securities Premium Reserve can be used only for some specific purposes.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

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

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: d

Sol: According to Section 52(2) of the Companies Act, 2013, the amount of Securities Premium Reserve can be used only for the following purposes(i) To issue fully paid-up bonus shares to the shareholders.

(ii) To write off preliminary expenses of the companies.

(iii) To write off the commission paid or expenses on issue of shares/debentures.

(iv) To pay premium on the redemption of preference shares or debentures of the company.

(v) Buy-back of equity shares and other securities as per Section 68.

Q8: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Authorised share capital is not issued to the public at once.

Reason (R): Companies do not exhaust their authorised capital in the beginning but only a part of the authorised capital is issued for public subscription. Rest of the authorised capital is raised by the company in a phased manner depending on the need for funds.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

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

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: a

Sol: Authorized share capital also known as "authorized stock," "authorized shares," or "authorized capital stock" refers to the maximum number of shares a company is legally allowed to issue or offer based on its corporate charter. A company's authorized share capital will not increase without shareholder approval.