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Corporate Accounting
Corporate Accounting
Corporate Accounting
Theory Questions 2 marks &5 marks
UNIT-I
1.WHAT IS AUTHORISED CAPITAL?
It is the maximum amount of capital that can be raised by a company by the issue of shares.
This amount is also mentioned in the capital clause of the memorandum of association of the
company. This capital is also called is also “registered capital” or nominal capital”.
2.WHAT IS ISSUED CAPITAL?
Issued capital is that part of the authorized capital which is offered for subscription to the
public. This also includes authorized capital not offered for subscription to the public is known
as unissued capital.
3.WHAT IS SUBSCRIBED CAPITAL?
It is that part of issued capital which represents the face value of shares subscribed by the
public. This also includes face value of shares issued by the company for consideration other
than cash.
4.WHAT IS CALLED UP CAPITAL?
It is that portion of the subscribed capital which the direction have to called up in order to
carry on the business of the company.
5. WHAT IS PAID UP CAPITAL?
That portion of the called up called of a company which is Actually paid by the shareholders
is known as the paid up Capital. The paid up capital may be less than the called up capital due to
the nonpayment of allotment or call money by same of the shareholders.
6. WHAT IS RESERVE CAPITAL?
It is that part of uncalled which has been reserved by the company to be called only in the
event of its winding up. It is kept to instil confidence in the creditor of the company.
7.WHAT DO YOU MEAN BY ISSUE OF SHARES AT PREMIUM?
A company issues shares at a price greater than its face value is called issue of shares at
a premium. For example. A Rs.100 equity shares issued at a price of Rs.110. The excess
amount of Rs.10 is called share premium.
8.WHAT DO YOU MEAN BY ISSUE OF SHARES AT DISCOUNT?
A company issues shares at a price lesser than its face value is called issue of shares at a
discount. For example, A Rs.100 equity shares issued at a price of Rs.90. The difference of
Rs.10 is called discount on issue of shares.
SMART SOLUTION
UNIT-II
15. DEFINE DEBENTURE:
The companies Act defines debenture as, “Debenture includes debenture stock, bonds or any
other securities of a company, whether constituting a charge on the assets of the company or
not”. Debentures are classified on the basis of A) Transferability, B)Security,
SMART SOLUTION
UNIT-III
20. WHAT IS ABSORPTION?
In absorption, the business of an existing company is taken over by another existing
company. The company which takes over the business is called the absorbed company.
21. LIST OUT VARIOUS REASONS FOR THE AMALGAMATION OF COMPANIES?
1) Elimination of competition
2) Price maintenance by regulating output
3) Securing large share of the market
4) Building up goodwill
5) Equitable distribution of what is produced
6) Avoiding duplication
7) Reducing costs
8) Introducing rationalization schemes
9) Promoting research and development.
22. WHAT IS MEANT BY INTERNAL RECONSTRUCTION OF COMPANIES?
It refers to the internal reorganization of the financial structure of a company. It is the
internal reorganization either by alteration or by reduction in shares capital.
23. WHAT IS EXTERNAL RECONSTRUCTION?
It is the liquidation of an existing company and the formation of a new company for the
purpose of taking over the business of the liquidating company. Thus, one liquidation and one
new formation from the essence of external reconstruction.
UNIT-IV
24. DEFINE HOLDING COMPANY:
It is a company which holds the shares of another company. While the first is called holding
company, the company which is so controlled is termed ‘Subsidiary Company’.
25. EXPLAIN THE TERM MINORITY INTEREST:
The holding company usually acquire the majority of the shares of the Subsidiary Company.
The remaining portion as acquired by the outsides. The outsides are collectively called minority
shareholders. While preparing the consolidated balance sheet, the interest of the minority
shareholders should be shown in the balance sheet on the liabilities side under the heading
‘minority interest’.
SMART SOLUTION
UNIT-V
27. WRITE A NOTE ON UNEXPIRED DISCOUNT:
It means unearned discount. The amount of discount proportionate of the period that falls in
the year subsequent to the year in which the bills discounted should therefore be considered
unexpired discount of the year.
28. WHAT IS STATUTORY RESERVE? HOW IS IT CREATED IN BANKS:
Every banking company incorporated in India shall create a reserve fund and transfer 20% of
its net profits every year to a statutory reserve. This reserve gets accumulated year after year. If
the balance of this reserve and share premium are equal to the paid up capital of the bank.
Central government may permit a bank to stop transfer to this reserve annually.
29. HOW MANY SCHEDULES ARE PREPARED IN BANK ACCOUNTS? SCHEDULES:
1) Capital, 2) Reserve, 3) Deposits, 4)Borrwings, 5)Other liabilities and provisions, 6) Cash and
balance with RBI, 7)Balance with bank & Money at call & Short notice, 8) Investments, 9)
Advances, 10) fixed assets, 11) Other assets, 12) contingent liabilities, 13) Interest earned, 14)
Other income, 15) Interest expended (and),16) Opening expenses.
30. WHAT IS RE-INSURANCE?
The company which transfer the risk and the company to which the risk transferred should
share the premium in proportion to the risk understand by them. Accordingly, the original
insurer should pay the premium relating to the risk transferred to the reinsurer. The premium
payable by the original insurer to the reinsurer is called reinsurance premium.
PART-B UNIT-I
1. EXPLAIN THE PROVISIONS RELATING TO ISSUE OF SHARES AT PREMIUM AND
AT DISCOUNT?
ISSUE OF SHARES AT A PREMIUM:
Sometimes, a company issues shares at a price greater than its face value. This is called
issue of shares at a premium. Generally the share premium amount will be collected at the time
of allotment. Sometimes it may be collected even at the time of share application. According to
selection 78 of the companies Act, the amount of shared premium should be credited to a
separate account called share premium account, which may be applied for the following
purposes.
(1) For the issue of fully paid bonus shares to the members of the company.
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ON MAKING ALLOTMENT
Share Allotment A/C
Dr……
To Share Capital A/C
[Being the allotment money due]
ON RECEIPT OF ALLOTMENT MONEY
Bank A/c
Dr……
To Share Capital A/C
[Being the receipt of allotment money]
ON MAKING FIRST AND FINAL CALL
Share first and final call A/c
Dr…...
To share capital A/c
[Being first and final call receivable]
ON RECEIPT OFFIRST AND FINAL CALL
MONEY
Bank A/c
Dr……
To share First and Final call A/c
[Being receipt of first money call money]
5. In the event of winding up of the company In the event of winding up of the company the
the shareholders get their dues after paying all debenture holders are paid first.
the liabilities.
6. Dividend on equity shares is paid at a Debentures interest is paid at a predetermined
variable rate, which is vastly affected by the fixed rate. It is paid whether there is any profit
profit of the company. or not.
SMART SOLUTION
7. Dividends on appropriation of profit and Interest on debentures are the charges against
these are not deductible in determining profits and they are deductible as an expenses
taxable. Profit of the company. in determining taxable profits of the company.
8. There are only two kinds of shares equity There are different kinds of debentures such as
shares and preference shares. secured, unsecured, redeemable and etc.,
9.In the balance sheet shares are shown under In the company balance sheet debenture shown
share capital. under secured loans.
10. Shares cannot be inverted into debentures Debentures can be converted into shares as per
in any circumstance. the terms of issue of debentures.
UNIT –II
4) EXPLAIN THE VARIOUS KINDS OF DEBENTURES:
The companies Act defines debentures as “Debentures includes debentures stock, bonds or
any other securities of a company, whether constituting a charge on the assets of the company or
not”. Debentures are classified on the basis:
a) Transferability b) Security c)Redeembility d)Convertibility e)Priority
a) ON THE BASIS OF TRANSFERABILITY
Debentures may be bearer or registered debentures from this point of view.
1) REGISTERED DEBENTURES:
Registered debentures are made out in the name of a particular person who are registered as
debentures holders, with their full details, in the books of the company. The payment of interest
and repayment of capital transferable in the same way as shares.
2) BEARER DEBENTURES:
It is freely transferable without endorsement and they are just like bearer cheque or Govt.
currency notes. They are treated as negotiable instruments and transferable by mere delivery.
The principal amount and investment when due are payable to the holders of the debentures.
b) ON THE BASSIS OF SEECURITY
1) SECURED OR MORTGAGE DEBENTURES: These are debentures which are secured by
a fixed or floating charge on the assets of the company. Repayment of principal and interest on
such debentures is secured. When specific assets are named as security it becomes fixed charge.
On the hand when assets in general are offered as security, it becomes a floating charge.
2) SIMPLE OR UNSECURED DEBENTURES: These debentures carry no with regard to
repayment of principal and interest. They are also called “naked debentures”. The general
solvency of the company is the only security for these debentures. On winding up of the
company, the holders of the debentures will be treated like other unsecured creditor.
SMART SOLUTION
3) Capital profits such a shares forfeiture account, Development Rebate account, capital to
incorporation, capital reserve etc….. are not available for dividend and hence not applied for
repayment of reference share capital.
4) Premium if any, payable on redemption should be provided for out of profit of the
company or out of the share premium of the company.
5) Where redemption is made out of profits, a sum equivalent to the amount paid on
redemption should be transferred to reserve called capital redemption reserve.
6) The capital redemption reserve account can be used for issuing fully paid bonus shares
to the shareholders.
6) EXPLAIN THE METHODS AND SOURCES OF REDEMPTION OF DEBENTURES:
Redemption of debentures means repayment of debentures amount by the company to the
debentures holders. The methods are,
a) LUMP SUM PAYMENT:
Debentures can be redeemed by the payment of the entire debentures amount to debenture
holder either at par or at premium on the expiry of a specified period. At the option of the
company, debentures can be redeemed even before the expiry specified period, depending upon
the terms and conditions of issue. Since the data of redemption is known in advance the
company can pain for the redemption of debentures.
b) PURCHASING OWN DEBENTURES FROM OPEN MARKET:
If a company authorized by the terms of issue, it can purchase its own debentures from the
open market. Debentures thus purchased can either be cancelled or treated ass investment by the
company. This methods of redemption of debentures is usually adopted when the market price
of debentures falls below the normal value.
c) CONVERSION: There are certain type of debentures which are convertible into shares or
new debentures of the company. Debentures originally issued by the company are cancelled and
converted into shares or new debentures.
d) DRAW OF LOTS:
This method provides for repayment by installments [equal or unequal] through drawing lots.
For example, a company issues debentures of Rs.100000 repayable in period of 10 years “annual
drawings”. The company can repay Rs.100000 each year to debenture holder in 10 installments.
The random selection of debenture holders to be discharged each year will be selected by
drawing lots.
SOURCE OF FINANCE FOR REDEMPTION OF DEBENTURES:
Large sum of money is needed for redemption of debentures. Companies can provide the
required funds for redemption from the sum following sources.
SMART SOLUTION
UNIT –III
1) WHAT IS MEANT BY PURCHASE CONSIDERATION? HOW IS IT CALCULATED?
[DIFFERENT METHODS OF PURCHASE CONSIDERATION]:
Purchase consideration is the compensation payable by the purchasing company to the vendor
company as the purchase price of the business.
The consideration depends on the agreement between this companies. It may be payable in cash,
debentures, shares etc. The following are the different methods usually employed to calculate
purchase consideration. They are follows:
1) Lump Sum Method: It is a method off presentation of purchase consideration in which the
purchase price is given in total. For instance, if A Ltd. takes over the business of B Ltd. for
Rs.500000 payable Rs.200000 in equity shares, Rs. 200000 in debentures and balance in cash, it
is the lump sum method of presenting the purchased price.
2) Net Assets Methods: Here, the different assets taken over by purchasing company at agreed
values added up. From this total liabilities taken over or subtracted. The balance is “NET
ASSETS”. The net assets is the purchase consideration which may be paid in cash or shares or
debentures as per agreement. If nothing is mentioned the book values of assets and liabilities are
to be taken.
3) Net Payment Method: Here all the payment agreed upon by the purchasing company are
added up. Under this methods, purchase consideration is calculated by adding the various
payment made by purchasing company in the form of cash, shares and debentures etc… No
deduction is made for any liability assumed by the purchasing company. This methods is called
SMART SOLUTION
net payment methods because consideration under the method is the total of payment made even
after assuming the liabilities.
4) Intrinsic Value Method: Under this method, purchase consideration is calculated on the basis
of the intrinsic value of the shares of the vendor company as well as the purchasing company.
This is almost like net assets method. However, based on net assets, intrinsic values of the
shares of selling and purchasing companies are determined. On this basis the ratio of exchange
for shares is found out. This method is more useful when the selling and purchasing companies
have shares in each other.
Assets available for equity shareholders
INTRINSIC VALUE = -----------------------------------------------------------------
No. of equity shares.
5) If Vendor Company Holds Certain Shares: If the vendor company already holds certain
number of shares in the purchasing company the purchase consideration will be conducted from
the shares to be issued by the purchasing company.
6) If Purchasing Co. Hold certain shares: If the purchasing company already holds certain
shares in the vendor company calculations should be made as if only other shareholders are
involved.
8) DISTINCTION BETWEEN AMALGMATION AND EXTERNAL RECONSTRUCTION,
ABSORPTION AND EXTERNAL RECONSTRUCTION.
UNIT – IV
9) EXPLAIN BRIEFLY THE STEPS IN PREPARING CONSOLIDATED BALANCE SHEET:
1) Find out the ratio between the holding company and minority shareholders.
2) To ascertain the capital profit [or] capital loss and divide them in the respective ratio.
3) Similarly to find the revenue profit and divide them in the respective ratio.
4) Find the total amount of minority shareholders.
5) Ascertain the goodwill / cost of control or capital reserve.
6) Common transaction appearing in the consolidated balance sheet should be eliminated.
7) To ascertain the true capital profit, the existing assets and liabilities should be revalued.
8) Treatment should be given for the unrealized profit. After considering the above points, by
eliminating investment accounts, consolidated balance sheet can be prepared.
10) GIVE THE STEPS FOR CAALCULATION OF COST OF CONTROL FOR HOLDING
COMPANY:
If the holding company purchase the shares of the subsidiary company, at a price which is
above the face value, the excess value is called cost of control or goodwill. While purchasing the
shares of a subsidiary company, the holding loss, it is debited to goodwill or cost of control
account. If there is any goodwill existing in the subsidiary company, that should be adjusted
with the new goodwill or capital reserve.
The cost of control is computed in the following manner.
Rs.
Amount Paid For Shares Purchased [Holding Company] Xxx
Add: Shares Of Capital Loss [Holding Company]
Less: Face value of shares purchased Xxx Xxx
Share of capital profit [holding company]
Xxx
Share of capital dividend [holding company]
Xxx
Share of bonus share[holding company]
Xxx
Xxx
Goodwill / capital reserve
Xxx Xxx
Xxx
The goodwill, along with any goodwill already existing in the balanced sheets of the holding and
subsidiary companies, will be shown in the consolidated balance sheet.
SMART SOLUTION
UNIT-V
11) GIVE A SPECIMEN SCHEDULES PREPARED IN BANK BALANCE SHEET.
The third schedule
(section29)
FROM OF BALANCE SHEET
Balance sheet…… [here enter name of the banking company]
Balance sheet as on 31st march (year)
Schedule As on 31.3.19… As on 31.3.19…
No. [current year] [previous year]
Capital &liabilities
Capital 1
Reserve & surplus 2
Deposits 3
Borrowings 4
Other liabilities & 5
provisions
Total
Assets
Cash and balance with RBI 6
Balances with bank and
money at call and short 7
notice
Investment
Advances 8
Fixed assets 9
Other assets 10
11
Total
Contingent liabilities
Bills for collection 12