Chapter accounting-for-share-capital: Accounting for Share Capital Long Questions | accountancy Class 12 CBSE

Chapter accounting-for-share-capital: Accounting for Share Capital Long Questions | accountancy Class 12 CBSE | ByteNotes.in

Long Answer

Medium difficulty • Structured explanation

Medium

Question 1

Long Form

Describe the various categories of share capital from an accounting point of view and explain how they are presented in the Notes to Accounts of the balance sheet.

Authorised Capital is the maximum capital a company can raise, as specified in its Memorandum of Association; it is also called Nominal or Registered Capital and forms the ceiling for all capital-raising activities.
Issued Capital is the portion of authorised capital offered for public subscription; Subscribed Capital is the portion actually subscribed by the public; the difference is Unissued Capital.
Called-up Capital is the portion of subscribed capital demanded by the company from shareholders; the balance not yet demanded is Uncalled Capital, and Reserve Capital is the portion of uncalled capital reserved for winding up only.
Paid-up Capital equals called-up capital minus Calls in Arrears (amounts demanded but not paid); this is the actual money received from shareholders for their shares.
In the Notes to Accounts, all these categories are disclosed separately: authorised capital with number and value of shares, issued capital, and subscribed capital showing both fully paid and not-fully-paid portions with calls in arrears deducted.

ByteNotes

Long Answer

Hard difficulty • Structured explanation

Hard

Question 2

Long Form

Analyse the three alternatives available to directors when a company's share issue is oversubscribed, and explain the accounting entries for the second alternative (pro-rata allotment).

When a share issue is oversubscribed, directors have three alternatives: (1) accept some applications in full and reject others outright with full refund; (2) make pro-rata allotment to all applicants; or (3) adopt a combination of both, which is the most common practice.
In the second alternative (pro-rata allotment), shares are allotted proportionately to all applicants; for example, if applications are for 25,000 shares and only 20,000 are offered, shares are allotted in ratio 4:5.
The excess application money received from pro-rata allottees is adjusted against the allotment amount due; journal entry: Share Application A/c Dr., To Share Capital A/c, To Share Allotment A/c (for excess).
Share Allotment A/c is then debited and Share Capital A/c credited for the total allotment amount due; when Bank is debited, only the net allotment amount (after adjusting excess application money) is received.
If excess application money exceeds allotment dues, the surplus may either be refunded to applicants or credited to Calls in Advance Account, depending on the company's decision.

ByteNotes

Long Answer

Hard difficulty • Structured explanation

Hard

Question 3

Long Form

Compare the accounting treatment for forfeiture of shares issued at par, at premium (where premium is received), and at premium (where premium is not received).

For shares issued at par: Share Capital A/c is debited with the called-up amount; unpaid call accounts (or Calls in Arrears A/c) are credited with unpaid amounts; and Share Forfeiture A/c is credited with the amount already received on the forfeited shares.
For shares issued at premium where the premium has been fully received: the accounting treatment is identical to shares at par, because the Securities Premium Reserve Account is not disturbed—it was already received and properly recorded; forfeiture reverses only the equity share capital entries.
For shares issued at premium where the premium has NOT been received: both Share Capital A/c and Securities Premium Reserve A/c are debited; the unpaid allotment (including premium) and call accounts are credited; Share Forfeiture A/c is credited only with the actual cash received.
The critical distinction is whether the premium was collected before the shares were forfeited; if premium was already credited to Securities Premium Reserve, it stays there; if it was never received, Securities Premium Reserve must be reversed on forfeiture.
In all three cases, the balance in Share Forfeiture Account represents the cash already received on the forfeited shares and is shown as an addition to paid-up capital in the balance sheet until the shares are reissued.

ByteNotes

Long Answer

Hard difficulty • Structured explanation

Hard

Question 4

Long Form

Explain the complete procedure and accounting treatment for reissue of forfeited shares, including the calculation and transfer of profit to Capital Reserve.

Forfeited shares may be reissued by the directors at par, at a premium, or at a discount; when reissued at a discount, the discount cannot exceed the credit balance of the Share Forfeiture Account relating to those shares.
Journal entry for reissue: Bank A/c Dr. (with amount received), Share Forfeiture A/c Dr. (with discount allowed), To Share Capital A/c (with full nominal value of shares reissued).
After reissue, the balance remaining in Share Forfeiture Account attributable to the reissued shares (amount forfeited minus discount allowed) represents a capital profit and must be transferred to Capital Reserve Account.
When only some forfeited shares are reissued, the entire balance of Share Forfeiture Account cannot be transferred to Capital Reserve; only the proportionate amount relating to the reissued shares is transferred.
For example, if 200 shares were forfeited with Rs. 600 received (Rs. 3 per share), and 150 shares are reissued at Rs. 9 each with Rs. 1.50 discount per share, the discount on 150 shares = Rs. 225; profit transferred to Capital Reserve = Rs. 3 × 150 – Rs. 225 = Rs. 225; Rs. 150 remains in Share Forfeiture A/c for the 50 unissued forfeited shares.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 5

Long Form

Describe the process of allotment of shares and explain the accounting implications from the point of view of the company.

Allotment of shares is made after minimum subscription is received and certain legal formalities are fulfilled; letters of allotment are sent to successful applicants and letters of regret to unsuccessful ones.
Allotment creates a valid legal contract between the company and applicants who now become shareholders; it is customary to demand allotment money from allottees at this stage.
The application money received must be transferred to Share Capital Account since it has formally become part of share capital; money on rejected applications must be refunded within the period prescribed by law or SEBI.
Where fewer shares are allotted than applied for (over subscription), excess application money must be adjusted towards allotment amount due; the Share Application Account (a temporary account) is closed by these transfers.
When a combined Share Application and Allotment Account is maintained, all receipts are first credited to this account; later, share capital dues are transferred out and refunds are made from this account, with the balance due on allotment being collected separately.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 6

Long Form

How are equity shares different from preference shares? Discuss the types of preference shares recognised under the Companies Act, 2013.

Equity shares do not carry any preferential right to dividend or capital repayment; dividend on equity shares is not fixed and depends on available profits, declared after satisfying preference shareholders.
Preference shares, under Section 43 of the Companies Act, 2013, carry a preferential right to a fixed dividend before equity shareholders, and a preferential right to repayment of capital before equity shareholders upon winding up.
Based on dividend rights, preference shares can be cumulative (unpaid dividends accumulate and are paid in future years) or non-cumulative (unpaid dividends lapse).
Based on profit-sharing, they can be participating (entitled to share in surplus profits after equity gets a specified return) or non-participating (entitled only to fixed dividend).
Based on redemption, they can be redeemable (repayable during the company's lifetime) or irredeemable; additionally, convertible preference shares can be converted into equity shares under specified conditions.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 7

Long Form

Evaluate the legal provisions relating to 'Calls in Arrears' and 'Calls in Advance', including their balance sheet treatment and interest provisions.

Calls in Arrears arises when shareholders do not pay the call amount on the due date; it represents the debit balance of all call accounts and is shown as a deduction from called-up capital in Notes to Accounts.
The Articles of Association may empower directors to charge interest on calls in arrears; if the Articles are silent, Table F applies, which provides for interest at a rate not exceeding 10% p.a. from the due date to the date of actual payment.
Calls in Advance arises when shareholders pay amounts not yet called up; this amount is a liability of the company and is credited to a Calls in Advance Account, shown under current liabilities in the balance sheet.
On the due date of the relevant call, Calls in Advance Account is debited and the Call Account is credited to adjust the advance against the call due.
Interest on Calls in Advance is an expense for the company (not income); if the Articles are silent, Table F provides for interest at a rate not exceeding 12% p.a. from the date of receipt to the date the call becomes due.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 8

Long Form

Distinguish between the issue of shares at par, at premium, and at discount with reference to accounting treatment and relevant legal provisions.

Shares are issued at par when the issue price equals the nominal (face) value; accounting is straightforward with full proceeds credited to Share Capital Account.
Shares are issued at a premium when the issue price exceeds nominal value; the excess amount is credited to Securities Premium Reserve Account, shown under Reserves and Surplus in the balance sheet, and its use is restricted to five specific purposes under the Companies Act.
Shares issued at a discount means the issue price is below nominal value; as a general rule, companies cannot issue shares at a discount—this is permitted only in the case of reissue of forfeited shares and issue of sweat equity shares.
When shares are issued at discount, the amount of discount is debited to Discount on Issue of Shares Account, which is a capital loss for the company.
The premium may be collected at application, allotment, or call stage; however, regardless of the stage at which premium is collected, it must always be credited to Securities Premium Reserve Account and never to Share Capital Account.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 9

Long Form

Describe the features of a company that distinguish it from other forms of business organisation, with particular emphasis on features relevant to accounting for share capital.

A company has a separate legal entity distinct from its members, which means it can hold property, enter contracts, and open bank accounts in its own name; this necessitates a separate Share Capital Account rather than individual capital accounts.
Limited liability of shareholders means members are only liable up to the amount unpaid on their shares; this concept is fundamental to the accounting distinction between called-up and paid-up capital.
Transferability of shares (in a public company) means share ownership changes frequently; this is why individual shareholder accounts are not maintained in the general ledger—only a consolidated Share Capital Account is kept.
Perpetual succession ensures the company continues despite changes in membership; this means share capital remains a permanent fund in the company's books regardless of who owns the shares.
The company as a body corporate is formed under specific law (Companies Act, 2013); all its capital-raising activities including share issues must comply with the Act, SEBI guidelines, and its own Memorandum and Articles of Association.

ByteNotes

Long Answer

Medium difficulty • Structured explanation

Medium

Question 10

Long Form

Analyse the steps involved in the issue of shares to the public and explain the role of the prospectus, minimum subscription, and the process of allotment.

The first step is issuing a prospectus—an invitation to the public indicating the company's existence and fund requirements; it contains complete information about the company and terms of share issue.
Upon receiving the prospectus, prospective investors submit applications with application money to a scheduled bank in a separate account; the company must receive minimum subscription (at least 90% of issued amount as per SEBI) within 120 days.
If minimum subscription is not received within 130 days of the prospectus issue, all application money must be refunded; delay beyond 8 days from closure of subscription list attracts interest at 15% p.a.
Once minimum subscription is received and other legal formalities are completed, directors proceed with allotment; letters of allotment go to successful applicants and letters of regret to unsuccessful ones.
Allotment creates a binding contract; application money is transferred to Share Capital Account, refunds are made for rejected applications, and excess application money (in case of over subscription) is adjusted against allotment dues.

ByteNotes

Premium Access

Unlock all Long Questions

You are viewing 10 free long questions from this chapter. Upgrade to Premium to unlock the remaining 10 questions.

Upgrade to Premium10 questions locked

Chapter sections

Chapter accounting-for-share-capital: Accounting for Share Capital | Long Questions

Describe the various categories of share capital from an accounting point of view and explain how they are presented in the Notes to Accounts of the balance sheet.

Analyse the three alternatives available to directors when a company's share issue is oversubscribed, and explain the accounting entries for the second alternative (pro-rata allotment).

Compare the accounting treatment for forfeiture of shares issued at par, at premium (where premium is received), and at premium (where premium is not received).

Explain the complete procedure and accounting treatment for reissue of forfeited shares, including the calculation and transfer of profit to Capital Reserve.

Describe the process of allotment of shares and explain the accounting implications from the point of view of the company.

How are equity shares different from preference shares? Discuss the types of preference shares recognised under the Companies Act, 2013.

Evaluate the legal provisions relating to 'Calls in Arrears' and 'Calls in Advance', including their balance sheet treatment and interest provisions.

Distinguish between the issue of shares at par, at premium, and at discount with reference to accounting treatment and relevant legal provisions.

Describe the features of a company that distinguish it from other forms of business organisation, with particular emphasis on features relevant to accounting for share capital.

Analyse the steps involved in the issue of shares to the public and explain the role of the prospectus, minimum subscription, and the process of allotment.

Unlock all Long Questions