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Commerce Exam  >  Commerce Tests  >  Test: Issue, Forfeiture And Reissue Of Shares - 4 - Commerce MCQ

Test: Issue, Forfeiture And Reissue Of Shares - 4 - Commerce MCQ


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30 Questions MCQ Test - Test: Issue, Forfeiture And Reissue Of Shares - 4

Test: Issue, Forfeiture And Reissue Of Shares - 4 for Commerce 2024 is part of Commerce preparation. The Test: Issue, Forfeiture And Reissue Of Shares - 4 questions and answers have been prepared according to the Commerce exam syllabus.The Test: Issue, Forfeiture And Reissue Of Shares - 4 MCQs are made for Commerce 2024 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests for Test: Issue, Forfeiture And Reissue Of Shares - 4 below.
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Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 1
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​G Ltd. acquired assets worth Rs.7,50,000 from H Ltd. by issue of shares of Rs.100 at a premium of 25%. The number of shares to be issued by G Ltd. to settle the purchase consideration = ?

Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 1

To calculate the number of shares to be issued by G Ltd. to settle the purchase consideration, we need to follow these steps:
1. Calculate the total purchase consideration amount:
- Assets acquired from H Ltd. = Rs. 7,50,000
2. Determine the share price:
- Face value of each share = Rs. 100
- Premium on each share = 25%
The share price can be calculated as:
- Face value + Premium = Rs. 100 + (25% of Rs. 100) = Rs. 100 + Rs. 25 = Rs. 125
3. Calculate the number of shares to be issued:
- Total purchase consideration / Share price = Rs. 7,50,000 / Rs. 125 = 6000 shares
Therefore, the number of shares to be issued by G Ltd. to settle the purchase consideration is 6,000 shares.
Answer: A
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 2
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B Ltd., a listed company, proposed to issue 1,00,000 equity shares of Rs.10 each at par by way of private placement. The maximum amount of brokerage that can be paid by the company = ?

Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 2

To calculate the maximum amount of brokerage that can be paid by the company, we need to consider the guidelines provided by the Securities and Exchange Board of India (SEBI).
1. According to SEBI guidelines, the maximum brokerage that can be charged on the issue of securities is 2.5% of the issue price.
2. In this case, the issue price is Rs.10 per share.
3. Therefore, the maximum brokerage that can be paid by the company is calculated as follows:
Maximum brokerage = 2.5% of (1,00,000 shares * Rs.10 per share)
= 2.5% of Rs.10,00,000
= Rs.25,000
Based on the above calculation, the correct answer is D: Rs.25,000.
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Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 3
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An artificial person created by Law is called : 

Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 3

The incorporation of a company is an artificial entity recognized by the law as a legal person that exists independently with rights and liability. This means that a company is treated as a separate person from its participants.

Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 4
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Declared dividend should be classified in the Balance Sheet as a _______.
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 4
Declared dividend should be classified in the Balance Sheet as a Current liability.

The declared dividend is a liability for the company because it represents an obligation to distribute funds to shareholders. It is recorded on the balance sheet as a current liability because it is typically paid out within one year.


Here are the reasons why declared dividend is classified as a current liability:



  • Timing: Dividends are usually paid out within one year from the date of declaration, making them a short-term obligation.

  • Payment: The company has a legal obligation to pay the declared dividend to its shareholders.

  • Priority: Dividends have a higher priority than other liabilities, such as interest payments, and are usually paid before other obligations.

  • Disclosure: Classifying declared dividend as a current liability provides transparency to investors and stakeholders about the company's financial obligations.


Other options like provision, reserve, or current asset are not appropriate classifications for declared dividends:



  • Provision: Provisions are typically set aside for anticipated future expenses or losses, and declared dividends do not fall under this category.

  • Reserve: Reserves are usually created to strengthen the financial position of the company or for future investments, and declared dividends do not serve this purpose.

  • Current asset: Current assets are resources that are expected to be converted into cash within one year, and declared dividends do not meet this criteria.


Therefore, the correct classification for declared dividend in the balance sheet is as a current liability.

Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 5
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The interest on calls-in-advance is paid for the period from the _______.
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 5
Explanation:
The interest on calls-in-advance is paid for the period from the date of receipt of advance to the date of appropriation. Let's break down the options and determine the correct answer:
- Option A: Date of receipt of application money to the date of appropriation - This option refers to the period when application money is received. However, interest on calls-in-advance is not related to application money, so this option is incorrect.
- Option B: Date of receipt of allotment money to the date of appropriation - This option refers to the period when allotment money is received. While allotment money is related to the process of shares being allocated, it is not directly related to calls-in-advance. Therefore, this option is also incorrect.
- Option C: Date of receipt of advance to the date of appropriation - This option correctly identifies the period for which the interest on calls-in-advance is paid. Calls-in-advance refer to the money paid by shareholders before the actual allotment of shares. The interest on these advances is paid for the period from the date of receipt of advance to the date of appropriation. Therefore, this option is the correct answer.
- Option D: Date of appropriation to the date of dividend payment - This option refers to the period after the appropriation of profits to the date of dividend payment. While dividends are distributed to shareholders, it is not directly related to the payment of interest on calls-in-advance. Hence, this option is incorrect.
In conclusion, the correct answer is option C: Date of receipt of advance to the date of appropriation.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 6
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As per Schedule VI of the Companies Act, 1956, under which of the following heads is ‘Premium on issue of Preference Shares’ shown in the balance sheet of a company?
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 6

In the balance sheet of a company, the 'Premium on issue of Preference Shares' is shown under the head of 'Reserves and surplus'. Here's a detailed explanation of why it is classified under this head:
1. Reserves and surplus: This head in the balance sheet represents the accumulated profits of the company that are not distributed as dividends. It includes various reserves such as general reserves, capital reserves, and specific reserves.
2. Premium on issue of Preference Shares: When a company issues preference shares at a price higher than their face value, the excess amount is called the 'premium'. It is a form of additional consideration received by the company from investors for issuing preference shares.
3. Treatment in the balance sheet: The premium on issue of preference shares is treated as a part of the company's accumulated profits. It is added to the reserves and surplus of the company, reflecting the additional value generated by the issuance of preference shares.
4. Disclosure: The premium on issue of preference shares is disclosed separately in the balance sheet under the head of 'Reserves and surplus'. It is usually shown as a line item within this category, providing transparency to stakeholders about the additional funds received by the company through the issuance of preference shares.
Therefore, as per Schedule VI of the Companies Act, 1956, the 'Premium on issue of Preference Shares' is shown in the balance sheet of a company under the head of 'Reserves and surplus'.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 7
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Which of the following signifies the difference between par value and an issue price below par?
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 7
Par Value vs. Issue Price Below Par:


The difference between par value and an issue price below par can be understood by considering the following factors:
1. Par Value:
- Par value is the nominal or face value of a security, which is determined by the issuing company at the time of its creation.
- It represents the minimum price at which the security can be issued or redeemed by the company.
- Par value is typically a fixed amount per share or bond, and it remains constant throughout the life of the security.
2. Issue Price Below Par:
- Issue price below par refers to the situation where the security is offered at a price lower than its par value.
- This scenario often occurs when market conditions or other factors result in a decreased demand for the security.
- The issue price below par is usually accompanied by a discount on the face value of the security.
Significance of Difference:
The difference between par value and issue price below par is primarily reflected in the accounting treatment and financial implications of the two scenarios. Specifically:
A. Securities Premium:
- Securities premium is the amount received by a company in excess of the par value of the security.
- It represents the additional value that investors are willing to pay for the security.
- Securities premium is recorded in the company's financial statements as a component of shareholders' equity.
- It signifies the difference between the issue price below par and the par value.
B. Discount on Issue of Shares:
- Discount on issue of shares is the reduction in the issue price of shares below their par value.
- It is recorded as a separate account in the company's financial statements.
- The discount on issue of shares represents the difference between the par value and the issue price below par.
- This discount is considered a capital loss for the issuing company.
C. Calls in Arrear:
- Calls in arrear refers to the situation where a shareholder has not paid the full amount of a call (an additional payment required by the company) by the due date.
- This is unrelated to the difference between par value and issue price below par.
D. Calls in Advance:
- Calls in advance refers to the situation where a shareholder has paid more than the amount required for a call.
- This is unrelated to the difference between par value and issue price below par.
In conclusion, the correct answer is B: Discount on issue of shares. The difference between par value and an issue price below par is represented by the discount on issue of shares, which is recorded as a capital loss for the issuing company.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 8
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The excess price received over the par value of shares, should be credited to
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 8

To determine where the excess price received over the par value of shares should be credited, we need to understand the different accounts related to share capital and their purposes.
The options given are as follows:
A: Calls-in-advance account
B: Share capital account
C: Reserve capital account
D: Securities premium account
Explanation:
The excess price received over the par value of shares is known as the securities premium. This premium represents the additional amount paid by investors over and above the face value of the shares. Here's how the different options relate to the securities premium:
A: Calls-in-advance account - This account is used to record any payments made by shareholders in advance of their call schedule. It is not related to the excess price received over the par value of shares.
B: Share capital account - This account represents the nominal or face value of the shares issued by a company. It does not include any premium amount.
C: Reserve capital account - This account is used to record any capital that is set aside for specific purposes, such as future expansions or contingencies. It does not relate to the excess price received over the par value of shares.
D: Securities premium account - This account is specifically meant to record the excess price received over the par value of shares. Therefore, the excess price should be credited to the securities premium account.
Conclusion:
In conclusion, the correct option is D: Securities premium account. The excess price received over the par value of shares should be credited to this account.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 9
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On approval from the Central Government, the rate of discount on issue of shares can be ———percent of the nominal value of the shares.
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 9

To solve this question, we need to understand the rules and regulations regarding the rate of discount on the issue of shares. Here are the key points:
1. The rate of discount on the issue of shares is determined by the Central Government.
2. Approval from the Central Government is required to issue shares at a discounted rate.
3. The discount is calculated as a percentage of the nominal value of the shares.
Now let's analyze the given options:
A: 10%
B: 20%
C: 15%
D: 5%
Since the question asks for the rate of discount on the issue of shares, we need to choose the option that represents a percentage value.
From the given options, option B: 20% is the correct answer. This means that, on approval from the Central Government, shares can be issued at a discount of 20% of the nominal value.
Therefore, the answer is option B: 20%.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 10
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The Share Premium Account should be shown under
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 10
The Share Premium Account should be shown under Reserves and Surplus.
HTML bullet points:
- Share Premium Account is a part of the company's reserves and surplus.
- Reserves and Surplus is a category under the equity section of the balance sheet.
- It represents the accumulated profits of the company that have not been distributed as dividends.
- Share Premium Account is created when a company issues shares at a price higher than their nominal value.
- The excess amount received over the nominal value of shares is recorded in the Share Premium Account.
- It reflects the additional value that shareholders are willing to pay for the company's shares.
- Share Premium Account cannot be distributed as dividends and is typically used for various purposes like issuing bonus shares, writing off preliminary expenses, or reducing future losses.
- It is an important component of a company's financial position and is disclosed in the balance sheet under the Reserves and Surplus section.
- Therefore, the correct answer is D: Reserves and Surplus.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 11
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Shareholders are : 
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 11

A shareholder, also referred to as a stockholder, is a person, company, or institution that owns at least one share of a company's stock, which is known as equity. Because shareholders are essentially owners in a company, they reap the benefits of a business' success.

Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 12
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  • The company wants to create a Debenture Redemption Reserve and to transfer Rs.50,000 every year out of profits to redeem the debentures.
  • The company declared 10% dividends.

Q.The balance of Profit and Loss Appropriation account transferred to Balance Sheet after effecting the above transactions = ?
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 13
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If the forfeited shares are issued at a premium, the amount of the premium shall be credited to
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 13
Explanation:
To understand the correct answer, let's break down the given information:
- Forfeited shares are the shares that were originally issued to a shareholder but were later taken back by the company due to non-payment.
- When forfeited shares are reissued, they can be issued at a premium, which means the new shareholders have to pay more than the face value of the shares.
- The premium amount received on the reissue of forfeited shares needs to be accounted for.
The correct answer is D: Share premium account. Here's why:
- The Share Premium Account is a reserve account that records the premium amount received on the issue of shares.
- Share premium is not a part of the company's profit or loss; it represents the excess amount received over the face value of the shares.
- When forfeited shares are reissued at a premium, the premium amount is credited to the Share Premium Account.
- By crediting the premium to the Share Premium Account, the company can keep track of the additional funds raised through the premium and maintain a clear record of the shareholders' equity.
To summarize:
- Share premium is the excess amount received over the face value of shares.
- When forfeited shares are reissued at a premium, the premium amount is credited to the Share Premium Account.
- This helps maintain a clear record of the shareholders' equity and the additional funds raised through the premium.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 14
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IJK Ltd. issued 20,000 shares of Rs.10 each at a premium of 20% on May 01, 2004, payable as follows:

 

Q.Mrs. M, to whom 1,000 shares were allotted, has paid Rs.5,000 on June 01, 2004. At the time of remitting the allotment money, she indicated that the excess money should be adjusted towards the call money. The directors of the company made the first and final call on October 31, 2004. The company has a policy of paying interest on calls-in-advance.
The amount of interest paid to Mrs. M on calls-in-advance = ?
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 15
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The following information pertains to X Ltd.

i. Equity share capital called up Rs.5,00,000

ii. Calls in arrear Rs. 40,000

iii. Calls in advance Rs. 25,000

iv. Proposed dividend 15%

 

Q.The amount of dividend payable = ?
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 15


Given:


i. Equity share capital called up Rs.5,00,000


ii. Calls in arrear Rs. 40,000


iii. Calls in advance Rs. 25,000


iv. Proposed dividend 15%


To find: The amount of dividend payable


Calculation:


Equity share capital called up = Rs.5,00,000


Calls in arrear = Rs.40,000


Calls in advance = Rs.25,000


Amount available for dividend = Equity share capital called up - Calls in arrear + Calls in advance


Amount available for dividend = Rs.5,00,000 - Rs.40,000 + Rs.25,000 = Rs.4,85,000


Proposed dividend = 15% of amount available for dividend


Dividend payable = Proposed dividend = 15% of Rs.4,85,000


Dividend payable = (15/100) * Rs.4,85,000 = Rs.72,750


Therefore, the amount of dividend payable is Rs.72,750 (Option B).

Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 16
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Z Ltd. issued 10,000 shares of Rs.10 each. The called up value per share was Rs.8. The company forfeited 200 shares of Mr. A for non-payment of 1st call money of Rs.2 per share. He paid Rs.6 for application and allotment money. On forfeiture, the share capital account will be _________.
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 16

Here, 10,000 shares of Rs 10 each were issued and called up per share is Rs 8. A Ltd. sold 200 shares due to non-payment of first call at Rs 2 i.e. Rs 400. Allotment and application money was paid at Rs 6 per share i.e. Rs 1200. If there is forfeiture of shares, the share capital account will be debited by Rs 8*200 (Rs 8 is the called up value of shares) i.e. Rs 1600.

Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 17
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B Ltd. issued shares of Rs.10 each at a discount of 10%. Mr. C purchased 30 shares and paid Rs.2 on application but did not pay the allotment money of Rs.3. If the company forfeited his entire shares, the forfeiture account will be credited by ______.
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 17
Explanation:
To calculate the amount to be credited to the forfeiture account, we need to first determine the total amount paid by Mr. C for the shares he purchased.
1. Number of shares purchased by Mr. C = 30 shares
2. Face value of each share = Rs.10
3. Discount on each share = 10% of Rs.10 = Rs.1
4. Total amount paid on application = Rs.2
5. Amount paid per share (excluding discount) = Face value - Discount = Rs.10 - Rs.1 = Rs.9
6. Total amount paid for the shares purchased = Amount paid per share x Number of shares purchased = Rs.9 x 30 = Rs.270
Since Mr. C did not pay the allotment money of Rs.3, the company forfeited his entire shares. The amount to be credited to the forfeiture account is the total amount paid by Mr. C for the shares purchased.
Therefore, the forfeiture account will be credited by Rs.270.
Hence, the correct answer is option C: Rs.60.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 18
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Use the following information for questions 58 and 59

B Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per share payable as follows:

Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. C to whom 60 shares were allotted, failed to pay allotment money and call money. Mr. D the holder of 100 shares, failed to pay call money. All these shares were forfeited after proper notice.

 

Q.On forfeiture, the amount credited to share allotment account = ?
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 19
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B Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per share payable as follows:

Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. C to whom 60 shares were allotted, failed to pay allotment money and call money. Mr. D the holder of 100 shares, failed to pay call money. All these shares were forfeited after proper notice.

 

Q.On forfeiture, the amount credited to share forfeiture account = ?
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 20
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Which of the following statements is false?
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 20
False Statement: The share application money is automatically converted to share capital.
Explanation:
Statement A: Shares can be issued for cash or any other consideration.
- This statement is true. Shares can be issued in exchange for cash, as well as for other forms of consideration such as assets, services, or debt.
Statement B: In the event of over subscription, excess amount has to be refunded or a pro rata allotment is to be made.
- This statement is true. In case of oversubscription, when the number of shares applied for is greater than the number of shares available for allotment, the excess amount has to be refunded to the applicants or a pro rata allotment is made to ensure a fair distribution of shares.
Statement C: SEBI guidelines are applicable not only for the first issue of shares but also to subsequent issues of shares.
- This statement is true. SEBI (Securities and Exchange Board of India) guidelines are applicable for all issues of shares, whether it is the first issue or subsequent issues. SEBI regulates the securities market in India and ensures fair practices and investor protection.
Statement D: The share application money is automatically converted into share capital.
- This statement is false. The share application money is not automatically converted into share capital. It is held in a separate bank account called the "Share Application Money Account" until the shares are allotted. After the allotment of shares, the share application money is transferred to the share capital account.
In conclusion, the false statement is that the share application money is automatically converted to share capital.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 21
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A company invited applications for 25,000 equity shares of Rs10 each and received 30,000 applications along with the application money of Rs.4 per share. Which of the following alternatives can be followed?
I. Refund the excess applications.
II. Make pro rata allotment to all the applicants, and refund the excess application money.
III. Not to allot any shares to some applicants, full allotment to some of the applicants and pro rata allotment to the rest of the applicants.
IV. Not to allot any shares to some applicants and make pro rata allotment to other applicants.
V . Make pro rata allotment to all the applicants and adjust the excess money received towards call money.
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 21

To determine which alternatives can be followed in this scenario, let's analyze each option:

I. Refund the excess applications:


- The company has received 30,000 applications for 25,000 shares.
- This means that 5,000 applications are in excess and cannot be accommodated.
- The company can refund the excess application money to these applicants.

II. Make pro rata allotment to all the applicants and refund the excess application money:


- Pro rata allotment means allocating shares proportionally to all applicants based on the number of shares they applied for.
- In this case, the company can allocate shares to all applicants in proportion to their applications.
- The excess application money can be refunded to the applicants.

III. Not to allot any shares to some applicants, full allotment to some of the applicants, and pro rata allotment to the rest of the applicants:


- This option allows the company to selectively allocate shares based on certain criteria.
- Some applicants may not be allotted any shares, while others may receive a full allotment.
- The remaining applicants can be allocated shares on a pro rata basis.

IV. Not to allot any shares to some applicants and make pro rata allotment to other applicants:


- Similar to option III, this alternative involves not allocating shares to certain applicants.
- The difference is that all the remaining applicants receive shares on a pro rata basis.

V. Make pro rata allotment to all the applicants and adjust the excess money received towards call money:


- Call money refers to the money that shareholders need to pay after the allotment of shares.
- This option suggests adjusting the excess application money received towards the call money.
- All applicants will receive a pro rata allotment, and the excess money will be used for future payments.
Based on the analysis, it can be concluded that all the alternatives mentioned above can be followed in this scenario. Therefore, the correct answer is option C: All (I), (II), (III), (IV), and (V) above.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 22
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The document inviting offers from public to subscribe for the debentures or shares or deposits of a body corporate is a _____.
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 22
The document inviting offers from the public to subscribe for the debentures or shares or deposits of a body corporate is called a prospectus.
Explanation:
- A prospectus is a formal document that provides information about the company and its securities to potential investors.
- It is a legally required document when a company wants to raise funds from the public through the issuance of debentures, shares, or deposits.
- The prospectus contains important details such as the objectives of the company, financial information, management team, and terms of the offer.
- It helps potential investors make informed decisions about whether to invest in the company.
- The prospectus is usually prepared by the company with the assistance of professionals such as lawyers and accountants to ensure compliance with regulatory requirements.
- It is distributed to potential investors and filed with the regulatory authorities for review and approval before the offering can take place.
- The prospectus serves as a key marketing tool for the company, highlighting its strengths and potential to attract investors.
- It is important for the prospectus to provide accurate and complete information to avoid any misleading statements or omissions that could lead to legal consequences.
- Investors are encouraged to read the prospectus carefully and seek professional advice before making any investment decisions.
In conclusion, the document inviting offers from the public to subscribe for the debentures or shares or deposits of a body corporate is a prospectus.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 23
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As per Schedule VI of the Companies Act, 1956, forfeited shares account will be ______.
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 23
Schedule VI of the Companies Act, 1956 - Treatment of forfeited shares account:
According to Schedule VI of the Companies Act, 1956, the treatment of forfeited shares account is as follows:
1. Added to paid-up capital:
- Forfeited shares can be added to the paid-up capital of the company.
- This increases the total capital base of the company and reflects the additional funds available for the company's operations and investments.
- This treatment is applicable when the forfeited shares are reissued or sold again by the company.
2. Deducted from paid-up capital:
- Alternatively, forfeited shares can be deducted from the paid-up capital of the company.
- This reduces the total capital base of the company and reflects the decrease in the funds available for the company's operations and investments.
- This treatment is applicable when the forfeited shares are canceled or permanently retired by the company.
3. Shown as a capital reserve:
- Forfeited shares can also be shown as a capital reserve in the company's financial statements.
- This indicates that the funds represented by the forfeited shares are set aside for specific purposes, such as the expansion of the company or the acquisition of new assets.
- This treatment is applicable when the company intends to utilize the forfeited amount for capital expenditures in the future.
4. Shown as a revenue reserve:
- In some cases, forfeited shares can be shown as a revenue reserve.
- This indicates that the funds represented by the forfeited shares are available for general business purposes and can be used to meet the company's operational expenses.
- This treatment is applicable when the company does not have any specific plans for utilizing the forfeited amount for capital expenditures.
Conclusion:
The treatment of forfeited shares account under Schedule VI of the Companies Act, 1956 can vary depending on the company's intentions and requirements. It can be added to paid-up capital, deducted from paid-up capital, shown as a capital reserve, or shown as a revenue reserve. The choice of treatment should be in compliance with the regulatory guidelines and the company's financial objectives.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 24
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The authorized capital of M Ltd. consists of both cumulative preference shares and equity shares. Each 5% cumulative preference share has a par value Rs.100. Each equity share has a par value Rs.10.  During the year April 01, 2005 to March 31, 2006, the cumulative preference share capital balance was Rs.2,00,000 and the equity share capital balance was Rs.5,00,000.

 

Q.If dividend declarations totalled Rs.8,000 and Rs.15,000 in the year 2004-05 and 2005-06 respectively, the dividends allocated to the equity share holders in the year 2005-06 = ?
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 24

To calculate the dividends allocated to the equity shareholders in the year 2005-06, we need to consider the proportionate allocation of dividends based on the authorized capital and the dividend declarations in the previous years.
1. Calculate the total authorized capital of M Ltd:
- Cumulative preference share capital balance: Rs.2,00,000
- Equity share capital balance: Rs.5,00,000
- Total authorized capital = Cumulative preference share capital + Equity share capital
- Total authorized capital = Rs.2,00,000 + Rs.5,00,000 = Rs.7,00,000
2. Calculate the proportion of authorized capital held by each type of share:
- Cumulative preference shares: Par value of each share = Rs.100
- Number of cumulative preference shares = Cumulative preference share capital balance / Par value
- Number of cumulative preference shares = Rs.2,00,000 / Rs.100 = 2,000 shares
- Proportion of cumulative preference shares = Number of cumulative preference shares / Total authorized capital
- Proportion of cumulative preference shares = 2,000 shares / Rs.7,00,000
- Equity shares: Par value of each share = Rs.10
- Number of equity shares = Equity share capital balance / Par value
- Number of equity shares = Rs.5,00,000 / Rs.10 = 50,000 shares
- Proportion of equity shares = Number of equity shares / Total authorized capital
- Proportion of equity shares = 50,000 shares / Rs.7,00,000
3. Calculate the dividends allocated to the equity shareholders in the year 2005-06:
- Dividend declarations in the year 2004-05 = Rs.8,000
- Dividend declarations in the year 2005-06 = Rs.15,000
- Dividends allocated to the equity shareholders in the year 2005-06 = Proportion of equity shares * Dividend declarations in the year 2005-06
- Dividends allocated to the equity shareholders in the year 2005-06 = (Proportion of equity shares * Dividend declarations in the year 2005-06) - (Proportion of equity shares * Dividend declarations in the year 2004-05)
4. Substitute the values to calculate the dividends allocated to the equity shareholders in the year 2005-06:
- Dividends allocated to the equity shareholders in the year 2005-06 = (50,000 shares / Rs.7,00,000) * Rs.15,000 - (50,000 shares / Rs.7,00,000) * Rs.8,000
- Dividends allocated to the equity shareholders in the year 2005-06 = Rs.3,000
Therefore, the dividends allocated to the equity shareholders in the year 2005-06 is Rs.3,000.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 25
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Which of the following statements is true?
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 25
Explanation:
Common shareholders assume a higher investment risk than long-term creditors
- Common shareholders are the owners of a company and they bear the ultimate risk of the business. If the company fails or goes bankrupt, they may lose their entire investment. On the other hand, long-term creditors like bondholders have a higher priority in getting their investment back in case of liquidation.
- Long-term creditors, such as bondholders, have a legal claim on the company's assets and are entitled to receive interest and principal payments. They have a lower risk compared to common shareholders as they have a contractual agreement with the company.
- Common shareholders are not guaranteed any fixed return on their investment and their dividends are paid after all other obligations are met. They are exposed to the volatility of the stock market and the company's performance.
- In terms of risk, common shareholders are considered to have a higher risk tolerance as they have the potential for higher returns but also face the possibility of losing their investment.
Therefore, statement C is true: Common shareholders assume a higher investment risk than long-term creditors.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 26
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F Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20% payable Rs.4 on application (including premium), Rs.5 on allotment and the balance on first and final call.
The company received applications for 15,000 shares and allotment was made pro-rata. G, to whom 3,000 shares were allotted, failed to pay the amount due on allotment. All his shares were forfeited after the call was made. The forfeited shares were reissued to H at par.
Assuming that no other bank transactions took place, the bank balance of the company after effecting the above transactions = ?
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 26
Bank Balance Calculation:
To calculate the bank balance of the company after the given transactions, we need to consider the following steps:
1. Calculation of Application Money Received:
- Total application money received = Number of shares applied for x Application money per share
- Number of shares applied for = 15,000
- Application money per share = Rs.4 (including premium)
- Total application money received = 15,000 x Rs.4 = Rs.60,000
2. Calculation of Allotment Money Received:
- Allotment money per share = Rs.5
- Allotment money received from G (3,000 shares allotted) = 3,000 x Rs.5 = Rs.15,000
3. Calculation of Forfeited Amount:
- Allotment money not received from G (3,000 shares allotted) = Rs.5 x 3,000 = Rs.15,000
- Forfeited amount = Allotment money not received + Premium on forfeited shares
- Premium on forfeited shares = Premium percentage x Forfeited shares
- Premium percentage = 20%
- Forfeited shares = 3,000
- Premium on forfeited shares = 20% x 3,000 = 600
- Forfeited amount = Rs.15,000 + Rs.600 = Rs.15,600
4. Calculation of Bank Balance:
- Total bank balance = Application money received + Allotment money received - Forfeited amount
- Total bank balance = Rs.60,000 + Rs.15,000 - Rs.15,600 = Rs.59,400
Therefore, the bank balance of the company after effecting the given transactions is Rs.59,400.
Answer: B: Rs.1,32,000
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 27
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At the time of forfeiture of shares which were originally issued at a discount, the accounting entry involves __________.
I. A debit to Share capital account with the called-up value of shares forfeited

II. A credit to Share forfeiture account with the amount received on forfeited shares

III. A credit to Discount on issue of shares with the amount of discount allowed on forfeited shares

IV. A credit to Calls-in-arrears with the amount due but not paid on forfeited shares
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 27

The accounting entry for the forfeiture of shares originally issued at a discount involves the following:
I. A debit to Share capital account with the called-up value of shares forfeited:
- This entry reduces the share capital account by the called-up value of the forfeited shares.
II. A credit to Share forfeiture account with the amount received on forfeited shares:
- This entry records the amount received by the company on the forfeited shares in the share forfeiture account.
III. A credit to Discount on issue of shares with the amount of discount allowed on forfeited shares:
- This entry reduces the discount on issue of shares account by the amount of discount allowed on the forfeited shares.
IV. A credit to Calls-in-arrears with the amount due but not paid on forfeited shares:
- This entry records the amount due but not paid on the forfeited shares in the calls-in-arrears account.
Therefore, the correct answer is:
D. (I), (II), (III), and (IV) above.
Note: The accounting treatment for the forfeiture of shares may vary depending on the specific circumstances and the accounting policies followed by the company. It is always recommended to refer to the relevant accounting standards and consult with a professional accountant for accurate guidance.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 28
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When shares are forfeited, the share capital account is debited with______ and the share forfeiture account is credited with_________
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 28
Explanation:
When shares are forfeited, there are two accounts that are affected: the share capital account and the share forfeiture account.
The share capital account represents the capital invested by the shareholders. It is a part of the company's equity and reflects the value of the shares issued.
The share forfeiture account is created to record the forfeiture of shares. Forfeiture occurs when a shareholder fails to pay the amount due on their shares and the company decides to cancel their shares.
To account for the forfeiture of shares, the following entries are made:
1. The share capital account is debited:
- The debited amount represents the called-up capital of the shares forfeited.
- This reduces the value of the share capital account, reflecting the cancellation of the forfeited shares.
2. The share forfeiture account is credited:
- The credited amount represents the amount received on the forfeited shares, which is typically less than the called-up capital.
- This account is used to record the forfeiture and any subsequent actions related to the forfeited shares.
Therefore, the correct answer is:
- The share capital account is debited with the called up capital of shares forfeited.
- The share forfeiture account is credited with the amount received on shares forfeited.
Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 29
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Capital Reserves are created out of ______.
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 29
Capital Reserves are created out of Capital Profits.

  • Capital Profits: These are the profits earned by a company from sources other than its normal business operations. Capital profits are generated from activities such as the sale of fixed assets, investments, or any other non-operating income.



  • Capital reserves are created when a company decides to set aside a portion of its capital profits for specific purposes, such as:


    • Expansion or growth of the business

    • Acquisition of new assets or technology

    • Repayment of long-term debts

    • Legal or regulatory requirements

    • Supporting future business opportunities




  • Capital reserves are not available for distribution as dividends to shareholders. They are meant to strengthen the financial position of the company and enhance its long-term stability and sustainability.



  • Capital reserves are reflected in the balance sheet as part of the company's equity capital.


Therefore, the correct answer is B: Capital Profits.

Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 30
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As per The Companies Act, only preference shares, which are redeemable within ____ can be issued
Detailed Solution for Test: Issue, Forfeiture And Reissue Of Shares - 4 - Question 30
Explanation:
The Companies Act specifies the rules and regulations for the incorporation and operation of companies in India. According to the Act, preference shares can be issued by a company, but they must be redeemable within a certain period of time. The correct answer is option D, which states that preference shares must be redeemable within 20 years.
Here is a detailed explanation:
1. The Companies Act:
- The Companies Act is an important legislation that governs the functioning and operation of companies in India.
- It provides guidelines and regulations for various aspects of company management, including share issuance.
2. Preference Shares:
- Preference shares are a type of shares issued by a company that give certain preferential rights to the shareholders.
- These rights may include a fixed dividend rate, priority in the distribution of assets during liquidation, and preference in the payment of dividends.
3. Redemption of Preference Shares:
- Redemption refers to the repayment of the capital invested in preference shares by the company.
- The Companies Act specifies the time period within which preference shares must be redeemed.
- This means that the company must repay the capital invested in the preference shares to the shareholders within a specific time frame.
4. Time Period for Redemption:
- According to the question, the time period for redemption of preference shares is given as 20 years (option D).
- This means that the company must redeem the preference shares and repay the capital invested by the shareholders within 20 years from the date of issuance.
5. Other Options:
- Option A states that preference shares must be redeemable within 24 years, which is incorrect.
- Option B states that preference shares must be redeemable within 22 years, which is incorrect.
- Option C states that preference shares must be redeemable within 30 years, which is incorrect.
6. Conclusion:
- Based on the rules specified in the Companies Act, preference shares must be redeemable within 20 years.
- This means that a company can issue preference shares, but they must be repaid within 20 years from the date of issuance.
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