NCERT Class 12 Accountancy Chapter 5 Accounting for Share Capital Solutions to each chapter is provided in the list so that you can easily browse through different chapters NCERT Class 12 Accountancy Chapter 5 Accounting for Share Capital Notes and select need one. NCERT Class 12 Accountancy Chapter 5 Accounting for Share Capital Question Answers Download PDF. NCERT Accountancy Class 12 Solutions.
NCERT Class 12 Accountancy Chapter 5 Accounting for Share Capital
Also, you can read the NCERT book online in these sections Solutions by Expert Teachers as per Central Board of Secondary Education (CBSE) Book guidelines. CBSE Class 12 Accountancy Solutions are part of All Subject Solutions. Here we have given NCERT Class 12 Accountancy Chapter 5 Accounting for Share Capital Notes, NCERT Class 12 Accountancy Textbook Solutions for All Chapters, You can practice these here.
Accounting for Share Capital
Chapter: 5
| PART – II |
Short Answer Questions:
1. What is a public company?
Ans: A company may be viewed as an association of person who contribute money or money’s worth to a common inventory and use it for a common purpose. It is an artificial person having a corporate legal entity distinct from its members (shareholders) and has a common seal used for its signature.
2. What is a private company?
Ans: A private company is a type of business entity that is privately owned, either by an individual or a group. A private company is owned by either a small number of shareholders, company members, or a non-governmental organization, and it does not offer its stocks for sale to the general public. Instead, its stock is offered, owned, or exchanged privately among a small number of shareholders – or even held by a single individual.
3. When can shares be Forfeited?
Ans: Shares can be forfeited:
(i) for non-payment of call money.
(ii) for failure to attend meetings.
(iii) for failure to repay the loan to the bank.
(iv) for which shares are pledged as a security.
4. What is meant by Calls in Arrears?
Ans: If any of the shareholders has not paid amount on calls, such an amount may be called as ‘calls in arrears’. Therefore, paid up capital is equal to the called-up capital minus call in arrears.
5. What do you mean by a listed company?
Ans: A listed company is a public company. A public company means a company which is not a private company. It has issued shares of its stock through an exchange, with each share representing a sliver of ownership of the company.
6. What are the uses of a securities premium?
Ans: The application money and rarely with the call money. The premium amount is credited to a separate account called ‘Securities Premium Account’ and is shown under the title ‘Equity and Liabilities’ of the company’s balance sheet under the head ‘Reserves and Surpluses’.
It can be used only for the following five purposes:
(a) To issue fully paid bonus shares to the extent not exceeding unissued share capital of the company.
(b) To write-off preliminary expenses of the company.
(c) To write-off the expenses of, or commission paid, or discount allowed on any securities of the company; and.
(d) To pay premium on the redemption of preference shares or debentures of the company.
(e) Purchase of its own shares (i.e., buy back of shares).
7. What is meant by Calls in Advance?
Ans: Sometimes shareholders pay a part or the whole of the amount of the calls not yet made. The amount so received from the shareholders is known as “Calls in Advance”. The amount received in advance is a liability of the company and should be credited to ‘Call in Advance Account.”
8. Write a brief note on “Minimum Subscription”.
Ans: When minimum subscription has been received and certain legal formalities on the allotment of shares have been duly compiled with, the directors of the company proceed to make the allotment of shares. The allotment of shares implies a contract between the company and the applicants who now become the allottees and assume the status of shareholders or members. If the amount of minimum subscription is not received to the extent of 90%, the issue dissolves. In case the applications received are less than the number of shares offered to the public, the issue is termed as ‘under subscribed’
| Long Answer Questions |
1. What is meant by the word ‘Company’? Describe its characteristics.
Ans: According to Chief Justice Marshall, “a company is a person, artificial, invisible, intangible and existing only in the eyes of law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence”.
The features/ characteristics of company are listed below:
(i) Body Corporate: A company is formed according to the provisions of Law enforced from time to time. Generally, in India, the companies are formed and registered under Companies Law except in the case of Banking and Insurance companies for which a separate Law is provided for.
(ii) Separate Legal Entity: A company has a separate legal entity which is distinct and separate from its members. It can hold and deal with any type of property. It can enter into contracts and even open a bank account in its own name.
(iii) Limited Liability: The liability of the members of the company is limited to the extent of unpaid amount of the shares held by them. In the case of the companies limited by guarantee, the liability of its members is limited to the extent of the guarantee given by them in the event of the company being wound up.
(iv) Perpetual Succession: The company being an artificial person created by law continues to exist irrespective of the changes in its membership. A company can be terminated only through law. The death or insanity or insolvency of any member of the company in no way affects the existence of the company. Members may come and go but the company continues.
(v) Common Seal: The company being an artificial person, cannot sign its name by itself. Therefore, every company is required to have its own seal which acts as official signatures of the company. Any document which does not carry the common seal of the company is not binding on the company.
(vi) Transferability of Shares: The shares of a public limited company are freely transferable. The permission of the company or the consent of any member of the company is not necessary for the transfer of shares. But the Articles of the company can prescribe the manner in which the transfer of shares will be made.
(vii) May Sue or be Sued: A company being a legal person can enter into contracts and can enforce the contractual rights against others. It can sue and be sued in its name if there is a breach of contract by the company.
2. Explain in brief the main categories in which the share capital of a company is divided.
Ans: The main categories in which the share capital of a company is divided are:
(i) Authorised Capital: Authorised capital is the amount of share capital which a company is authorised to issue by its Memorandum of Association. The company cannot raise more than the amount of capital as specified in the Memorandum of Association. It is also called Nominal or Registered capital. The authorised capital can be increased or decreased as per the procedure laid down in the Companies Act. It should be noted that the company need not issue the entire authorised capital for public subscription at a time. Depending upon its requirement, it may issue share capital but in any case, it should not be more than the amount of authorised capital.
(ii) Issued Capital: It is that part of the authorised capital which is actually issued to the public for subscription including the shares allotted to vendors and the signatories to the company’s memorandum. The authorised capital which is not offered for public subscription is known as ‘unissued capital’. Unissued capital may be offered for public subscription at a later date.
(iii) Subscribed Capital: It is that part of the issued capital which has been actually subscribed by the public. When the shares offered for public subscription are subscribed fully by the public the issued capital and subscribed capital would be the same. It may be noted that ultimately, the subscribed capital may be equal to or less than issued capital. In case the number of shares subscribed is less than what is offered, the company allots only the number of shares for which subscription has been received. In case it is higher than what is offered, the allotment will be equal to the offer. In other words, the fact of over subscription is not reflected in the books.
(iv) Called up Capital: It is that part of the subscribed capital which has been called up on the shares, i.e., what the company has asked the shareholders to pay. The company may decide to call the entire amount or part of the face value of the shares, For example, if the face value (also called nominal value) of a share allotted is Rs. 10 and the company has called up only Rs. 7 per share, in that scenario, the called up capital is Rs. 7 per share. The remaining Rs. 3 may be collected from its shareholders as and when needed.
(v) Paid up Capital: It is that portion of the called up capital which has been actually received from the shareholders. When the shareholders have paid all the called amount, the called up capital is the same to the paid up capital. If any of the shareholders has not paid amount on calls, such an amount may be called as ‘calls in arrears’. Therefore, paid up capital is equal to the called-up capital minus call in arrears.
(vi) Uncalled Capital: That portion of the subscribed capital which has not yet been called up. As stated earlier, the company may collect this amount any time when it needs further funds.
(vii) Reserve Capital: A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the company. Such uncalled amount is called ‘Reserve Capital’ of the company. It is available only for the creditors on winding up of the company.
3. What do you mean by the term ‘share’? Discuss the type of shares, which can be issued under the Companies Act, 2013 as amended to date.
Ans: Shares, refer to the units into which the total share capital of a company is divided. Thus, a share is a fractional part of the share capital and forms the basis of ownership interest in a company. The persons who contribute money through shares are called shareholders.
As per The Companies Act, a company can issue two types of shares:
(i) Preference shares: According to Section 43 of The Companies Act, 2013, a preference share is one, which fulfils the following conditions:
(a) That it carries a preferential right to dividend to be paid either as a fixed amount payable to preference shareholders or an amount calculated by a fixed rate of the nominal value of each share before any dividend is paid to the equity shareholders.
(b) That with respect to capital it carries or will carry, on the winding up of the company, the preferential right to the repayment of capital before anything is paid to equity shareholders.
(ii) Equity shares (also called ordinary shares): According to Section 43 of The Companies Act, 2013, an equity share is a share which is not a preference share. In other words, shares which do not enjoy any preferential right in the payment of dividend or repayment of capital, are termed as equity/ordinary shares. The equity shareholders are entitled to share the distributable profits of the company after satisfying the dividend rights of the preference shareholders.
4. Discuss the process for the allotment of shares of a company in case of over subscription.
Ans: In such a condition, three alternatives are available to the directors to deal with the situation:
(i) they can accept some applications in full and totally reject the others.
(ii) they can make a pro-rata allotment to all. and
(iii) they can adopt a combination of the above two alternatives which happens to be the most common course adopted in practice.
The problem of over subscription is resolved with the allotment of shares. Therefore, from the accounting point of view, it is better to place the situation of over subscription within the total frame of application and allotment, i.e. receipt of application amount, amount due on allotment and its receipt from the shareholders, and the same has been observed in the pattern of entries.
(i) First Alternative: When the directors decide to fully accept some applications and totally reject the others, the application money received on rejected applications is fully refunded.
(ii) Second Alternative: When the directors opt to make a proportionate allotment to all applicants (called ‘pro-rata’ allotment), the excess application money received is normally adjusted towards the amount due on allotment. In case, the excess application money received is more than the amount due on allotment of shares, such excess amount may either be refunded or credited to calls in advance.
(iii) Third Alternative: When the application for some shares are rejected outrightly; and pro-rata allotment is made to the remaining applicants, the money on rejected applications is refunded and the excess application money received from applicants to whom pro-rata allotment has been made is adjusted towards the amount due on the allotment of shares allotted.
5. What is a ‘Preference Share’? Describe the different types of preference shares.
Ans: Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do.
Following are the types of shares:
(i) Callable shares: Callable preferred stock, also known as redeemable preferred stock, is a popular means of financing for large companies, combining the elements of equity and debt financing.
(ii) Convertibles shares: Convertible shares are a class of shares that can be converted into a predetermined number of ordinary shares (common stock) of the issuing company.
(iii) Cumulatives shares: Cumulative preference shares contain all the features and benefits of ordinary preference shares such as entitlement to higher dividend payouts, preference in payment of dividends, and preference in payment over equity shares during the liquidation of the company.
(iv) Participatory shares: Participating preference shares are often referred to as “preferred stock.” They are a unique class of equity investments that offer the stability of fixed dividends and the potential for additional profits.
6. Describe the provisions of law relating to ‘Calls in Arrears’ and ‘Calls in Advance’.
Ans: (i) Calls in Arrears represent the debit balance of all the calls account. Such amount shall appear as ‘Note to Accounts. However, where a company maintains ‘Calls in Arrears’ Account, it needs to pass the following additional journal entry:
Calls in Arrears A/c Dr.
To Share First Call Account A/c
To Share Second and Final Call Account A/c
The Articles of Association of a company may empower the directors to charge interest at a stipulated rate on calls in arrears. If the articles are silent in this regard, the rule contained in Table F shall be applicable which states that the interest at a rate not exceeding 10% p.a. shall have to be paid on all unpaid amounts on shares for the period intervening between the day fixed for payment and the time of actual payment thereof.
(ii) Sometimes shareholders pay a part or the whole of the amount of the calls not yet made. The amount received from the shareholders is known as “Calls in Advance”. The amount received in advance is a liability of the company and should be credited to ‘Call in Advance Account.” The amount received will be adjusted towards the payment of calls as and when they becomes due. Table F of the Companies Act provides for the payment of interest on calls in advance at a rate not exceeding 12% per annum. The following journal entry is recorded for the amount of calls received in advance.
Bank A/c Dr.
To Calls in Advance A/c.
7. Explain the terms ‘Over subscription’ and ‘Under subscription’. How are they dealt with in accounting records?
Ans: There are instances when applications for more shares of a company are received than the number offered to the public for subscription. This usually happens in respect of shares issue of well-managed and financially strong companies and is said to be a case of ‘Over Subscription’.
The problem of over subscription is resolved with the allotment of shares. Therefore, from the accounting point of view, it is better to place the situation of over subscription within the total frame of application and allotment, i.e. receipt of application amount, amount due on allotment and its receipt from the shareholders, and the same has been observed in the pattern of entries.
The journal entries on application and allotment according to this alternative are as follows:
Bank A/c Dr.
To Share Application A/c
(Money received on application for 25,000 shares @ Rs. _ per share).
Under subscription is a situation where number of shares applied for is less than the number for which applications have been invited for subscription. For example, a company offered 2 lakh shares for subscription to the public but the applications were received for 1,90,000 shares, only. In such a situation, the allotment will be confirmed to 1,90,000 shares and entries shall be made accordingly. However, as stated earlier, it must be ensured that the company has received the minimum subscriptions and the company will have to refund the entire subscription amount received.
8. Describe the purposes for which a company can use the amount of Securities Premium.
Ans: It can be used only for the following five purposes:
(a) To issue fully paid bonus shares to the extent not exceeding unissued share capital of the company.
(b) To write-off preliminary expenses of the company.
(c) To write-off the expenses of, or commission paid, or discount allowed on any securities of the company; and.
(d) To pay premium on the redemption of preference shares or debentures of the company.
(e) Purchase of its own shares (i.e., buy back of shares).
9. State clearly the conditions under which a company can issue shares at a discount.
Ans: Shares can as well be issued at a discount, i.e. for an amount less than the nominal or par value of shares provided the company fully complies with the provisions laid down by law with regard to the same. Apart from such compliance, shares of a company cannot ordinarily be issued at a discount. According to the Companies Act, 2013, only sweat equity shares can be issued at a discount. When shares are issued at a discount, the amount of discount is debited to ‘Discount on Issue of Share Account’, which is in the nature of capital loss for the company.
10. Explain the term ‘Forfeiture of Shares’ and give the accounting treatment on forfeiture.
Ans: It may happen that some shareholders fail to pay one or more instalments, viz. allotment money and/or call money. In such circumstances, the company can forfeit their shares, i.e. cancel their allotment and treat the amount already received thereon as forfeited to the company within the framework of the provisions in its articles. These provisions are usually based on Table F which authorise the directors to forfeit the shares for non-payment of calls made. For this purpose, they have to strictly follow the procedure laid down in this regard. Following is the accounting treatment of shares issued at par, premium or at a discount. When shares are forefeited all entries relating to the shares forfeited except those relating to premium, already recorded in the accounting records must be reversed. Accordingly, share capital account is debited with the amount called-up in respect of shares are forfeited and crediting the respective unpaid calls accounts’s or calls in arrears account with the amount already received.
Thus, the journal entry will be as follows:
(a) Forfeiture of Shares issued at Par:
Share Capital A/c……….(Called up amount) Dr.
To Share Forfeiture A/c………..(Paid up amount)
To Share Allotment A/c
To Share Calls A/c (individually) (….. shares forfeited for non-payment of allotment money and calls made).
