PROFIT PRIOR TO

INCORPORATION i

THEORY AND ILLUSTRATIONS

WE“
ONS
POET
293

294

Let us take an example to understand the term - profit before incorporation. Suppose: some
businessmen decide to purchase an existing business ofa firm on 1-1-2017 on the basis of its balant®
sheet on 31-12-2016. For this purpose, the businessmen promote a limited company which actually
gets a certificate of incorporation on 1-10-2017. The firm carries on the business in the meanwhile
on behalf of the promoters. From 1-10-2017, the same business is continued b ‘the company in its
own name. The company adopts the agreement between the promoters and th Sean for purchasils
the business. On the basis of this agreement, the profit of the business right fr if date ofagreem™
i.e. 1-1-2017 now belongs to the company. The profit of the busings om a to 11.2017 ®
30-9-2017 is known as “profit prior to incorporation”. The profit e . Na ato oration, i.e
profit earned b hee aie aon oft eat
from 1-10-2017 to 31-12-2017 is normal revenue
p the
before incorporation is capital profit of the company, The date y of ithe company. ‘on The i s taken 4S‘of
foe ration 1s
dividing point for ascertaining the period before in corporation and incorpo
: ‘
i ;
the period after incorporat! Q
[Note : According to strict legal: interpretation, the date of i ae : dered ata oy)
commencement of business is >
. to be ignored evenof inincotheeseone is to be consi
date of
U of a public ape cate!
which had to obtain an additional certificate to commence business
" ness. Under law, once a
prey a _— AION

(1) What is "Profit prior to incorporatio

n" 2...
(2) How will you ascertain "Profit prior to - [Ans.: Para 1]
incorporation" ?
(3) How is profit prior to incorporation recor [Ans.: Para 2]
ded in accounts ?:
(4) Write a short note on "Pre-acquisitio [Ans.: Para 2]
n Profits", (Oct. 2000)
(5) Write a short note on : Different Bases forAllo [Ans.: Para 1]
cation of Expenses: (April 2004)
; ‘[Ans.: Worksheet 3]

6.1 MULTIPLE CHOICE QUESTIONS

1. i xisti business
decide to purchase an existing ines ofof aa firm on 1-1-2017 on the babasis
walle on 31 12-2016. For this purpose, the businessmen promote a private limited
company which gets a certificate of incorporation on 1-10-2017. The firm carries on the business,
i ile, on behalf of the promoters.
ay vhs sow alie business earned from 1-1-2017 to 30-9-2017 is shared by the partners of the
irm i i fit sharing ratio ; ;
and the
(b) Hi vroft
p ofthe business camed from 1-1-2017 to 30-9-2017 is shared by the firm
to
bythe
‘ profit of n the pusiness
€ sea earned from 1-1-2017 to 30-9-2017 is known as “profit. prior
ion” the new limited company
red by the directors o
aes bu ceo ned from 1-1-2017 to 30-9-2017 is sha
profit of
(d) The € teat of the i ir shareholdings
the new limited
imi compa urchase
in the ratio anof theirs
existing business
i of a ai on mote
1-1-2017Aenon enathe basis
* Some businessmen decide 2016 For this purpose, the Rey and commences the business
Ce eens
Company which getsONTa cert! - ate
on oftheincorporation
business, in onthe 1-1meanwhile,
a hile, on behalf of the promoters.
On 1-12-2017. The firm carne - is shared by the partners of the
iness earned from 4-1-2017 to 30-9-2017 is shared by the p
(a) The profit of the business ¢
firm in their old profit sharing ratio.
 Financial Accounting (S.V.B.A.E: SEY. y)
th, .

330 to 30-11 -2017 is shared by the firm ang the

4-10-201 7
ned from
(b) The profit of the business ear 017 is known as “profit prio, to
new company, equally d from 4-1-2017 to 30-9-2
\(eY The profit of the business earne ‘mitad company 5 “profit ne
lirnit.4-2017 to 30 = 1-2017 is known as “profit prior 4,
incorporation” and belongs to the new ted company
(d) The profit of the business earned from
new
incorporation” and belongs to the
n ompany
3. The profit earned after incorporatio p
me earned by the ¢
(a) is deferred revenue inco company
byis normal revenue profit earned by the
(c) is capital profit .
ile business
(d) belongs to the vendors of the erstwh ,
it priorto Inc orporation
4. For the purpose of computing prof
(a) Gross profit is divided in Time Ratio
incorporation period
Gross profit is divided in Sales Ratio
Se roorporation period
ress oro is assumed to have arisen enti rely in the kted in Sales Rag
prof it is ass ume d to hav e ari sen entirely in the re Soot is div
(d) Gross Gros P 0
the pur pos e of com put ing prof it prio r to incorporation,
5. For ie
Gross profiti per Me en iheins the
same
that the amount of
(a) based on the assumption same 9
that the Gross Profit Ratio is the
Uby based on the assumption e
s per month remains the sam
c) based on the assumption that the amount 0 f sale
during the year .
) based on the csumpton that the Net Profit Ratio is the same
purpose of computing
6. Ifthe Gross Profit Ratio has changed due to change in sales prices, for the
profit prior to incorporation,
Gross profit cannot be divided in Sales Ratio
(b) Gross profit can be divided in Sales Ratio
(c) Gross profit should be divided.in Ratio of Sales prices
(d) Gross profit should be divided in Ratio of Cost per unit
7. The gross profit is divided in the ratio of time, for the purpose of computing profit prior to
incorporation,
(a) If the details regarding stocks are not available
(b) If the details regarding cost per unit are:not available
ey if the details regarding sales are’ not available
(d) If the details regarding purchases are not available
8. If the details regarding sales are not available
(a) the gross profit is divided in the ratio of opening and closing stocks, for the purpose of
computing profit prior to incorporation
(b) the gross profit is divided in the ratio of purchases, for the Purpose of computing profit prior
to incorporation
(c) the gross profit is divided in the ratio of direct wa
to incorporation ges, for the purpose of computing profit prior
the gross profit is divided in the rati i + ori
incorporation © Falio of time, for the purpose of computing profit prior t0
9. For gomputing pre-incorporation profits, In
ag p , Interest to vendor on Purchase consideration
reated as pre-incorporation expenditure
(b) is treated as post-incorporation expenditure
(c) is allocated in sales ratio
(d) none of the above
10. For computing pre-incorporation profits, fees to
directors
ie treated as pre-incorporation expenditure
is treated as post-incorporation expenditure
(c) is allocated in time ratio
(d) is allocated in sales ratio
 mputing pre-incorporation profits, (i SST
=F co
: 1 W186
if iv 4) treated as incorporation
prere-ine expenditure ©n debentures w/o

(o) is treated a8 inPOSt-INC oMporation expendi :

Nature
\ is allocated time ratio
jg aocated in Sales ratio
, i For computing pre-inco
ra» rporatio
7 n profits,wat siya rO
,
|e 386 '
Experisas w/o
a) is treated as Pre incorporation expenditure
4g treated as post-incorporation expendit
2) is allocated in time ratio a
d) is allocated in sales ratio
FO-. ented pouinrporatic
computinga pre-inco eoromie Share Transfer Feas Received
<) is allocated in time ratio a : treated as post-incorporation expenditure
,4,Fora)comput ing declared e uatreerpi oration $oome
pre-Incorporation profits, Divid end decan
is treated as pos pora
t-incorporattion
i income UbyTs treated as
on post
shar-inc is ration appropriation
es orpo
is allocated in time ratio
uting pre-inc : profits, is treated
. Freight(d) Outward as pre-incorporation appropriation
pprop
15. ()
For comp gp Orporation

(a) is treated as pre-incorporation expenditure

(b) is allocated in purchase ratio
(c) is llocated in time ratio
fs allocated in sales ratio
46.For computing pre-incorporation profits, Depreciation
(a) is treated as pre-incorporation expenditure
(b) is treated as post-incorporation expenditure
ers allocated in time ratio
(d) is allocated in sales ratio
17,For computing pre-incorporation profits, Audit Fee
(a) is treated as pre-incorporation expenditure
(b) is treated as post-incorporation expenditure
ers allocated in time ratio
(d) is allocated in sales ratio
18.For computing pre-incorporation profits, income-tax
(a) is treated as pre-incorporation expenditure
(b) is treated as post-incorporation expenditure
(c) is allocated in time ratio
profits
\(d7'6 allocated in ratio of taxable income /
over a business from 1-1-2017. Rent was paid
19.A company was incorporated on 1-4-2017 to take Books of accounts
the rate of ¥ 12,000 p.a. till 31-1 2-2017.
@ 79,000 p.a. till 30-6-2017 and aton of Rent between Pre and Post incorporation periods -
are closed on 31-12-2017. Allocati
(b) 3,000 : sla |
(a) 2,250 : 9,000
(d) 3,000 : 8,25
\or2250 : 8,250 of 45,0 00 afte r debi ting all expenses of % 75,000. The sale
s ratio
20.A company earned a net profit the allocation of Gross
Fre snc orp era ian rnd Pos t-i nco rporation periods is 2 : 3. Find out
of
orporation periods. 43,000 : 72,000
Profi it amount in pre & post inc
incorp
(a) 18,000 : 27,000
(2) oe ve Th company was registered on
(¢) 12,000 : 18,000 The
Its monthly sales
w.e-f. 1-4-2016. pany f from ‘the date date o of
doubled
ar Craft Ltd . acqui ired theits business
21.Kid firm9-2016.
business ofon a 1-1
of business were
*6. It commented ™ from the date of certificate of commencement he sales ratio for pre and
in outt
Corporation. Its monthly sales '" oration period. Fi
nd
i ended 31st Ma rch 2017.
t for
e a
the eyear -
e rationaperiods
Posthincorpo
t
(a)1:2 (b) 1
 rinancial Accounting Wore SEM
wit closed its books of acco Unt 4
‘ firm from 1st March ° Oost incorporation period wag Or
”
22.D.P. Ltd. took over the business of 4 time ratio for prea
the first time on 31st March 2017. mp Ltd.
Find out the date of incorporation of D" (b) 4-3-2016
(a) 1-5-2016 (d) 1-12-2016
fey1-8-2016 fits, Salary to vendor is
23. For computing pre-incorporation pre jiture
expenc " Oe
_{a) Treated as pre-incorporation
(b) Treated as post-incorporation © pen
(c) Allocated in ratio of time
d) Allocated in ratio of sales jrectors is
ation profits, Salary to dir
oa. bor computing pre-incorpor
(a) Treated as pre-Incorporation expenditure
ure
expendit
oy Treated as post-incorporation
(c) Allocated in ratio of time
(d) Allocated in ratio of sales n Debenture is
25. For computing pre-incorporation profits, Interest °
nditure
(a) Treated as pre-Incorporation expe
oy Treated as post-incorporation expenditure
(c) Allocated in ratio of time
d) Allocated in ratio of sales
oe For computing pre-incorporation profits, Fixed Expenses are
(a) Treated as pre-Incorporation expenditure
(b) Treated as post-incorporation expenditure
ey “Allocated in ratio of time
(d) Allocated in ratio of sales
27. For computing pre-incorporation profits, Variable Expenses are
(a) Treated as pre-Incorporation expenditure
(b) Treated as post-incorporation expenditure
(c) Allocated in ratio of time
Allocated in ratio of sales
28. For computing pre-incorporation profits, Insurance is
(a) Treated as pre-Incorporation expenditure
(b) Treated as post-incorporation expenditure
ef Allocated in ratio of time
(d) Allocated in ratio of sales
29.For computing pre-incorporation profits, Postage
(a) Treated as pre-Incorporation expenditure
(b) Treated as post-incorporation expenditure
Allocated in ratio of time
(d) Allocated in ratio of sales
30. For computing pre-incorporation profits, Discount Allowed is
(a) Treated as pre-Incorporation expenditure
(b) Treated as post-incorporation expenditure
(c) Allocated in ratio of time
Allocated in ratio of sales
31.For computing pre-incorporation profits, Sale com
mission is
(a) Treated as pre-Incorporation expenditure
(b) Treated as post-incorporation expenditure
(c) Allocated in ratio of time
l#f Allocated in ratio of sales
32. For computing pre-incorporation profi ;
(a) Treated as pre-Incorporation oxpenan ne Pations by company is
Treated as post-incorporation ®xpenditure
(c) Allocated in ratio of time
(d) Allocated in ratio of sales
 corporatio n
fit Prior to In 333
pre n
ofits prior to incorpdeorndatio are availilable for
divi |
- paymen| t of |
C payme nt
prio toof incorp
cost oforatio
fixedn assets
+e prior
profits
ae A st Nould be transf fnHod Nevo of se,
erred aeto Ot the above
; ai ane eee (by Capital Reserve
Cc
prelim inary expenses written off should be
charaergene
d to ot the above
(a) pre-incorporation Profit
(oy Post-incorporation Profit
(c) Trading Account (d) None of these
Nae 1 Le)
Teo
is
interest to vendor ute ene expenditure.
=

Fees to directors is
ount on debentures w/o.
is
“..(Precincomportion/Post
st-inco incorporation) expert ;
OD
EF A

Disca 7
Preliminary Sor Fees w/o is Fe faincomcrationiPostincormceston) expand.
OND

Share Trans er ae received is (Pre-incorporation/Post-incorporation) income.

Gross Profits are divided, for computing pre-incorporation profits, in the ratio of
Printing is divided, for computing pre-incorporation profits, in the ratio of
Freight outward is divided, for computing pre-incorporation profits, in the ratio of
9. Audit fees are divided, for computing pre-incorporation profits, in the ratio of
10. Rent is divided, for computing pre-incorporation profits, in the ratio of .
11. Variable Expenses are divided, for computing pre-incorporation profits, in the ratio of
AZ: Salary to salesmen is divided, for computing pre-incorporation profits, in the ratio of
13. Advertisement is divided, for computing pre-incorporation profits, in the ratio of
14. Depreciation is divided, for computing pre-incorporation profits, in the ratio of

6.3. MATCH THE FOLLOWING COLUMNS

A COLUMN B
[A] COLUMN
(a) Pre-incorporation expenditure
1. The profit earned after incorporation is|
(b) -Post-incorporation appropriation
4 For the purpose of computing profit
( c) Capital Profit
prior to incorporation, Gross profit
(d) . Revenue Profit
is divided in
(e) Post-incorporation expenditure
A 3. For computing pre-incorporation
purchase (f) Post-incorporation income
profits, Interest to vendor on
(g) Time Ratio
consideration is treated as (h) Sales Ratio
4. For computing pre-incorporation
mM

s w/o
profits, Discount on debenture
.
is treated as
on —
5. For computing pre-incorporati ived
oe fm

er Fees Rece
profits, Share Transf
is treated as
6. For computing pre-incorporation
on shares
profits, Dividend declared
is treated as
ation
7. For computing pre-incorpor
S

din
profits, Audit Fee is allocate
 etnsesnliinl
tty c Hinaneial deoammtiins (SNEAK Spy ; ba] ")

sOL.UMN ft ~.,
("| COLUMN A a. teats tor now
' e¢ vate of Gartifieate for INomPopayjg.
Pra Ineorporatlon exper elitire . ead Alloy,
oo |
.
e
Post ineerparation axpenelur paraAllon

onan
Hy] 2. (0)
( Gay Cor rve
jayital tle sAa
inact
t a Rent, for ooanyautine pre (il) } é al
Intare ta Vendor
le 5 Tine
retl\ la,
| Yivielact IN Natio of m"
a
(a)
k 4 Wi el, faryw en eon
HrelahWt autwar il) Hivided In rallo OF PAPBEtIVE prof,
Wade rperation prette
prechvoo wate, 1 Hate of COMMENCAMANE ; Of burinagy
(0)
A} & Dividing point for aacertalning ‘aat on Debentures
(hh) iIntereal
je iWearpoaraton petlod
a Ahare tranater tees (\) lraated as poalinaorparatian
Yl
ture
C1
:
% Net pratt upto inearperation expenditure
ivarvaterred to (j) Poatineorporation Income
, \
‘allo Of 8Alea
Vs)
2
‘i Net lose upto inoorporatlon (K) Divided In ratio of .
waneterved to (I) Treated aa pracinaorporation
| TWure
F | 9 — Ineome tax for computing axpaneditut
ia (mM) General Heserve
presineorporation prot, Cent

6.4 STATE WHETHER TRUE OR FALSE

to capital reserve,
Protita prior to Incorporation are not available for dividend and muat be transferred s Is thy
For oaloulating the profit or loas prior to incorporation, date of commencement Of busines
relevant date in the cage of a publlo limited company.
Preliminary expensea muat be apportioned on time baals'to the pre-incorporation and pogt .
KOR

incorporation periods,
General Reserve.
The profit made on acquisition of business Is oredited to:
For aacertaining presincorporation profite, administration'expenses ara: apportioned in the Salas
RK

Ratio,
Profit after Incorporation are capital profit,
if gales la not given, gross profit should bevallocated in the equally.
KK

Time ratio is ratio of number of months: before iandeatterIncorporation.

Profit prior to Incorporation:la transferred) to;profitandiloss:a/c,
£202

Profit after incorporation is transferre d; andiloss:a/e,

to profit
_ Interest of vendor is allocated In the ratio. of time,
12. Preliminary expense s:are allocate d on the basis of sales.
13, Advertisement expenses are allocated on the|basis) of sales:ratio.
14, Depreciation are alloca ted
the basis,:on
of'time ratio,
Y€.The date of commencing the business, Is 'taken‘as the dividing point, for. computing pre
incorporation profits, In case of public limited company.
16. The accounting problem of ascert ing
prior incorpora
profits,ain tion arises In the context of business
acquisition,
17. Profits earned by a company, prior to Its Incorporation cannot be considered to have been earned
In the ordinary course of business.
4. Profits prior to Incorporation are available for distribution:in the form of dividends.
19. Profits prior to Incorporation should be transferred to capital reserve,
We. Loss prior to Incorporation Is charged to\ profit and'loss account.

Cee
6.1
1, (c) | 6 (a) |. (b) | 16. @) | 21. ¢ ) Ia @
2, (0) 7. (Gc) 12, (b) | 17. ) | ee. mt oy i g2. (0
3. (b) | 8 () | 18. (a) | 18. (4) | 29. (ay | 28. «) | 9% @
4. (b) | 9% (a) | 4 ) | 49. @ | 24. wy | 29. @ | ©
5. (b) 10. (b) 16, (d) 20. (b) 26, (b) 80. (d) 36. (P
profit Prior to Incorporation
335
(1) Pre-incorporation (2)
6.2 (5) Post-Incorporation Post-Incorporation . (3) Post-Incorporation (4) Post-Incorporation
(6) Sales (7) Time
(13) Sales (14) Time (8) Sales (9) Time (10) Time (11) Sales (12) Sales

6.3 A: (1) - ), (2)- (h), (8) - (a), (4)

- (@), (5) - (f), (6) - (b), (7) - (g)
B:: (1) - (a), (2) - (h), (8) -
(e), (4) - (k), (5) - (a ), (6) - (i), (7) - (c),
False:: 2,3, 4,5, 6, 7, 9, (8) - (b), (9) - (A)
6.4 11, 15,18, 20
True: 1, 8, 10, 12, 13, 14,16, 17, 19
 REDEMPTION OF |
| PREFERENCE SHARES

Sal
OUTLINE
f g
No. Topic 148
ence Shares
1. Issue and Redemption of Prefer
1.1. Legal Provision [S. 55]
1.2 Summary
150
2. Accounting
2.4 Worksheet 1 : Accounting Entries
2.2 Step-by-step Explanation ~
Ilustrations be 153
3.
3.1. Case Studies oe
3.2 Redemption Fully Out of Profits
3.3 Redemption Fully Out of New Issue
3.4 Redemption Partly Out of Profits / New Issue
3.5 Partly Paid-up
3.6 Company Balance Sheets
: 3.7. Unpaid
\_ 4. Rapid Revi oe 1 Before Exam. 196 3

1.1 LEGAL PROVISION [S. 55]

Section 55 of the Companies Act, 2013 states that —
5 e€com i j

(2) Aco
CO}mpany limited by sharesoe may, if so authorised b its
are liable to be redeemed within a period not
exceedinatu g twent
arti i reference s ich
tee P ou
subje ct to such conditions as may be prescribed
: Y Warg itor the date of heir ieee
Pr¢ vided that a com pany may
Pro |
issu
I e preference sh
a
infru t
astr ucture€ Proj ectscts,
proje subject
ect toto the = enat
redemptio n esof tot
eee nan annual basis at the option sucha
aa ‘ceed
er : ewe ate oe {
of such preferenti Isharcbeider i
ential shareholderse: re ey j

otherwise be available for

. di
the purposes of such redemption; e
Proceeds ofa fresh issue of shares made fo! ;
 Financial Ac counting (S.V.
B.A.F.; sp M
Sa . oan “ty

Red. of Pref. Shares [RPS]

[A] | Entries on RPS Spr Bank | Credit: Equity/ Pref. Share Capital
1 | Issue of New Shares eptt : ; it: :S Sec. Premium
jum, i
[Debit : Discountaesit - = om an
— Asset / Investment “VC
2 | Asset/ Investment Sold Debit :Bank | Credit - - A/c] it
Profit / Loss on Sale in Profit & Loss
[Adjust a~
Credit : Pref. Shareholders
i nolders Ae
3 | Payable on RPS Debit : Pref. Share Capital Alc if
is at a
[Debit Premium on RPS A\c, if redemption
4 | Premium on RPS W/O
; & Loss A/c / General Rese re
Debit : Profit
—_|
Credit: Premium on RP
5 | Create CRR Debit : Profit & Loss / General Reserve
é ——
Credit : Capital Redemption Reserve
6 | Payment of RPS Debit : Pref. Sharesholders | Credit: Bank
Note in addition, usual entries for final call making PS fully paid-up,
|
forfeiture, issue of bonus etc. are to be passed]
—
([B] | Special Points |
(a) If question shows only partly paid PS, make a call to |
1 | Partly Paid PS
make them fully paid and make RPS.
(b) If question shows both partly / fully paid PS, (i) redeem
only fully paid PS; or (ii) make a call to make all PS fully paid
(c) If calls are arrears, forfeit them only if mentioned in the question
2 | CRR Amount = Divisible Profit (DP) Used for RPS
= NV of RPS Less Proceeds of New Shares Issue.
3 | DP include Profit & Loss + General Reserve + Dividend Equalisation
Reserve + Funds + Investment Fluctuation Reserve
4 | Adjust DP (a) Adjust Profit / Loss on sale of asset / Investment in Entry
(2) in Profit & Loss for calculating DP available / used for RPS
(a) Adjust Premium / Loss on sale of asset / inv. in Entry
(3) in P & L for calculating DP available / used for RPS
5 | DP Exclude Security Premium, Capital Reserve, CRR (Old), Tax Reserv
Pre-Inc. Profits, Share Forfeited A/c, Revaluation Reserve,
Debenture Redemption Reserve
6 | Proceeds of New Share Issue | = Amount Received Towards C apital (ignore premium)
7 | Amount of New Issue = NV of RPS Less Divisible Profits
8 = — —_ Show under ‘Current Liabilities’ in Balance Sheet.
9 seo or Bonus 5
CRR cannot be used for making partly paid shares, fully|
10 | Dividend till RPS Dividend on PS ist ; ee ’
specifically ran 2in BethePaidquestion
Pecincally required
of redemption, only#
till dateStee
a
eteeig
 nt OF OPCTERL
TE DIP EN
Fg
197

f OUTLINE — >

no. Topic
« Theory Questions Page
~ 84 Descriptive Questions
wer
5.2 Short Notes 197
é Objective Questions abl
&1 Multiple Choice Questions bi
62 Fillin the Blanks i
63 Match the Following Columns
ov
é4 State Whether True or False
208
5.5 Check Your Answers 208
7. Practical Problems oe
7.1. Redemption Fully Out of Profit
204
7.2 Redemption Fully from New Issue
204
7.3 Redemption Partly Out of Profit + New issue
205
74 Bonus a4 3s
7.5 Partly Paid Preference Shares — 208
7.6 Unpaid Preference Shareholders oe 208
7.7 Company Balance Sheets _ 209
8 Master Key to Exercises = 216
8.1. Redemption Fully Out of Profit or New Issue 216
8.2 Bonus 219
8.3 Unpaid Preference Shareholders 220
8.4 Part-Paid RPS
8.5 Forfeiture
Gc. 8.6 Balance Sheet

5 THEORY QUESTIONS
5.1 DESCRIPTIVE QUESTIONS
Rh. _. : Act, 2013 regardini g redemption
ion ofo preference shares.
(1) Exola Companies
pain the provisions of the ° (Oct. 97, Oct. 98, Apr. 99, Apr. 2001 Oct. 2001)
[Ans.: Para 1.1]
[Ans.: Para 2.2.5]
>) Explain Capital Redemption Reserve. (Apr. 98)
nm

any two items each of ‘Divisible Profits’ and ‘Non-divisi ble Profits’ for the purpose of
oo

‘) Give
"edemption of preference shares. (March 2006) [Ans.: Exh. 1]

52 SHORT NOTES
Write
(1) & Short Note on - ses
0 oo provisions for redemption of Preference Sha [Ans.:
ns.: Para 1.1]
[Ans.: Para 2.21]
43 Sdemption of partly paid Preference Sha
[Ans.: Para 2.2.3]
Visible Profits
[Ans.: Para 2.2.5]
*) Capital Redemption Reserve
 em» Financ ia l Ac co un ti ng (S.V.B.A.F; Sey y
198 y

6.1. MULTIPLE CHOICE QUESTIONS

1. The following statement is false - emable
issue preference shar es wh ich are rede
(a) A Company can
syA company can issue irredeemable oe
ference shares
rmally 20 years from the date of issue
(c) The maximum period for redemption !s NO
(d) All
. The following statement is true -
nm

(a) Partly paid preference shares can be redeemed

be redeemed
(b) Preference shares on which calls are unpaid can
“¢) Only fully paid pref. shares can be redeemed
(d) None of the above
Redeemable Preference shares can be redeemed
a

(a) only out of the proceeds of the fresh issue of shares

(b) only out of divisible profits
le profits
-(C) out of fresh issue of shares and/or out of the divisib
(d) none of the above
_ If Redeemable Preference shares are redeemed at a premium, the premium cannot be provide
for
(a) out of the company’s security premium account
(b) out of the profits of the company
(c) out of the proceeds of the fresh issue of shares at par
(dy (a) and (b) above
Redemption of pref. shares
(a) leads to reduction in authorised capital
.(bydoes not change the authorised capital of the company
(c) increases the authorised capital
(d) none of the above
. Capital redemption reserve account can be used
(a) for declaring bonus for making partly paid shares fully paid
«(by for issuing fully paid up bonus shares to the equity shareholders
‘(c) partly for issuing fully paid up bonus shares to the equity shareholders and partly for declaring
bonus for making partly paid shares fully paid
(d) for none of the above
. The following balance is not available for transfer to Capital redemption reserve
(a) General Reserve (b) Dividend Equalization Fu
q ion Fund
.{e}-Revaluation reserve (d) Profit and Loss Account
_ Which of the following balances is availablef or transfer to Capital Red
emption Reserve ?
(a) Forfeited Shares Account
(b) Profit prior to Incorporation
(c) Investment Allowance reserve \Ld)-None of the above
. When pref. shares are redeemed out of profits, the am Z res
redeemed should be transferred to - Ount equal to the nominal value of sha
(a) Capital Reserve Account
eY Capital Redemption R. eserve Accoun' t
(c) General R Reserve Account ma
(d) Sinking Fund Account !
10. When pref. shares are redeemed out of profits, th 6 ;
Reserve should be equal to - amount be transferred to Capital Redem? I
(a) Premium payable on redemption
(b) Amount payable on redemption
ey the nominal value of shares redeemed
(d) the nominal value of shares redeemed less Premium received on fresh issue
issu of shares
a
 4mption of Preference Shares
pea? 199
ref. shares are re deemed at premium,
premj 5
tl profit and loss account Nch Premium may be provided out of
oe proceeds of fresh issue of shares
( Forfeited Shares Account
d) Capital Redemption Reserve
Account
capital redemption reserve account
42. a) may be crea ted at the
option of th ea compan
( must be created 0 ;
to comply with law,
’ on redemption ine
(c) must be crealee © ae . oe
shares
with law, on conversion of pref. shares into equity
(d) created out o 0 eited Shares Account, on forfeiture
shares
4g. The is Capital Redemption Reserve A/c can of share
be used for - ,
(a) payment of dividend
issue Of fully paid shares as (b) writing off accumulated losses
bonus (d) for all of the above
44.Which of the following statements is false ?
(a) Proceeds of fresh issue of shares, f or the purpose of redem Ption of pref.
;
Face Value of shares, if shares are Issued shares, is equal to
at par
roceeds of fresh issue of shares, for the Purpose
& of redemption of pref. shares, is equal to
Issue price of shares, if shares are issued at premium
(c) Proceeds of fresh issue of shares, for the Purpose of redempt
ion of pref. shares, is equal to
the actual money received on the new shares till the date of redemption of
Preference shares
(d) All of the above
15.Which of the following redeemable pref. shares of = 10 are eli
gible for redemption ?
(a) on which application and allotment money of
75 has been paid by cheque
(b) on which application and allotment money of % 8 has been
paid in cash
eyron which application and allotment money of % 10 has
been paid
(d) all of the above
16. If pref. shares are redeemed by conversion into equity shares, then, the amount
transferred to
Capital Redemption Reserve is-
il
(b) equal to the face value of pref. shares redeemed
(c) equal to the face value of the equity shares issued
(d) difference between the face value of the pref. shares redeemed and the equity shares issued
17.Provisions regarding redemption of pref. shares are given in-
(a) section 78 of Companies Act, 2013 (b) section 81 of Companies Act, 2013
(c) section 77A of Companies Act, 2013 \{dpnone of the above
18.Balance of Capital Redemption Reserve Account is shown under Liabilities side of the Balance
Sheet under -
(a) Share Capital (b) Secured Loans
Reserves and Surplus (d) Current Liabilities
19. Balance of Capital redemption Reserve Account can be utilized for -
(a) payment of dividend
(b) declaring bonus to make partly paid shares into fully paid up shares
(C) (a) or (b)
One of (a) or (b) .
20. Profit on forfeiture of redeemable pref. shares is credited to
\d@f Capital Reserve Alc (b) Capital Redemption Reserve A/c
(C) Profit & Loss A/c (d) General Reserve A/c
A Company cannot issue ;
(a) redeemable cumulative pref. shares (b) redeemable non-cumulative pref. shares
(C) redeemable participating pref. shares ayirredeemable pref. shares
“Preference shares can be redeemed
(@) Out of profits only (b) Out of proceeds of fresh issue only
(C) Out of capital profit only
ut of proceeds of fresh issue an d/or profit otherwise available for distribution by way of
dividend
 (4, NAL Nyy
untlte
biWi rynetat Acco
200 Fou of pratts, AMOUNT BG1H) ty thy, y )
aeniel
jaar atl jai fd WF Hy,
23, To the extent prefarenoe shares na jynutel He {PHA
, 1 | frasarve
value of preference shares radeciiet ()) Genera
wdamptlan Heserve
(a) Development Hebate Haneive
. —_
(c) / Sinking Fund lw (i) gjapital ¥ 100
g oHwach At tO Par Cont
SN pySite
spare allhard 0 sory
1) AROI YS AITO
AMNOUNE traty "thy i
24,X Co. Lid, has to redeam 000 H (0) pat gant, GOnerF i Ir,
issues 5,000 aquily shares 0 .
capital redemption reserve will be, cay? 60,000
(a) % 1,00,000 («l) v{, 1), 000 din

ah (c} © 66,000 ere eter ie shares fora period axceading

25, A company cannot lane roceomable pt
i .

(b) j 7 yours
a) 6 years
fay20 yours
) 8 yours ea promlum
lanu e protprofaranue heshares
e redeemablslo
26,A companyy oan
c a n lak
‘co ett ayo
(a) only at par
c) only at discount HICH Ae fedaarnabl.
en8 ia [ssuod 2,000,
ut 10% Proforonce
, sharas ton, Ihe616 company
ade 7 1s6u0d 4800 Euiy Shae
um of 10%. For the purpose of redemption, Gal" OC e
. as nO Bhare
NAGS of
et Do euohatacremiat ol 20% por share. At the tine of redenpts ee snares, I
amount to be transtforred by the company to the Capital Redemption "ee COUN ty
fa) % 50,
daft? & 00000 (b) % 40,000
(d) % 2,20,0)00
28. See
i
Light ee 5 10,000 5%5% prefere
Ltd. has preference shares of {%§ 10 10 oaeeach to be0G redeemed
TE after received
not been ~5 yoars, MiThy
eee ay
company forfeited 500 preference shares on which final call of
|
72 has ala
t & £ z

due notice and cancolled these shares on account of redemption. Remaining shares way
redeemed out of reserves of the company. The amount to be credited to capital redemptin,
reserve will be
“a) % 1,00,000 (b) % 95,000
(c) % 99,000 (d) % 99,500
29. Indigo Ltd. had 10,000, 10% redeemable preference shares of % 10 each, fully paid up and
1,000 10% Redeemable Preference shares of % 10 each partly paid-up. The company decidad
to redeem preference shares at par by the issue of sufficient number of equity shares of¢1)
each fully paid up at par. The number of equity shares issued should be :
(a) 9,000 (b) 11,000
»e)"10,000 (d) None of the above
30. Ankush Ltd, had issued 10,000, 10% Redeemable Preference Shares of % 100 each, tully pal
up. The company decided to redeem these preference shares at par, by issue of sufficient numb
of equity shares of % 10 each at a premium of % 2 per share
transferred to capital redemption reserve account wil be nt to be
8 Tully Paid p,;The amu
(a) 10,00,000
(b) % 12,00,000
(c) % 8,00,000 LANII
31.Which of the following statements is NOT TRUE with r e har
(a) Partly paid shares cannot be redeemed
i
EGE PRION pL Patera?
.(b)-
(b sh Phe al
redet
mption of Preference shares shall
be taken as reduction of company’
s authori
(c) Preference share can be redeemed eithe
. 5.
(d) None of the above ‘out of the profit or amount of fresh issue of sha”
32.When Redeemable Preference share are d
Ue for redemption :
(a) Debit redeemable preference , the entry pa
share ca pital a/c:
cr ed it
ssed is
ebitredeemable preference share cash a/c .
Capital a/c; credit
(c) Debit preference share holders alc; Preference share holders a/
credit cash a/c
(d) Debit preference share holders
alc; i
33. Which of the following cannot be utilized te
company hone reduction auf
(a) Proceeds of fresh issue of shares * redemption of preference share capilal ot?
(b) General Reserve
Securities premium on fresh igg
ue of Shares
(d) Dividend equalization reserve
 Re demption of Preference Shares
201
ing statements is false
g4. Which of the follow
a) Redee mable preference share can be Issued
be used. if authorized by the articles of association
pital Redemption Reserve cannot

of 10%. The
amount to be transferred to Capital Redemption Ree, of F 10 each at a premium
nee will be :
a) € 1,00,000
(o) € 1,10,000 Hecue
From which of the following accounts can
3 redemption of preference shares ? transfer be made to capital redemption reserve on
(a) Sec urities Premium
i
(b) Capital Reserve
(c) Profits Prior to Incorporation (dG
37. The term ‘Divisible Profits’ means aes
ayProfit available to shareholders for distribution as div;
(b) Profit as per P&Lajlc wicend
(c) Profit as per P& L appropriation a/c
(d) None of the above
3g.A company has issued 20,000 equity shares of = 10 each, at a premium of 10%, to redeem
ption
30,000 prefer
Is
ence shares of ¥ 10 each. The amount to be transferred to Capital Redem
Reserv e
(b) Z 2,20,000
(a)z 2,00,000
None of the above
1,00,0 00 the amount to be transferred to (d)Capital Redemption Reserve Account in each of
99-43 : Calculate
the following cases :
39. Redeemable Pref. Shares New Issue of Shares
% 50,000 redeemable at par % 30,000 at par
(a) 50,000 (b) 30,000
(c),20,000 (d) None of these
40.fedeemable Pref. Shares New Issue of Shares
% 50,000 redeemable at 5% premium & 30,000 at par
(a) 25,000 (b)}-20,000
(c) 22,500 (d) None of these
41.Redeemable Pref. Shares New Issue of Shares
~ 50,000 redeemable at par % 30,000 at premium of 5%
(ay20,000 (b) 30,000
(d) None of these
(c) 21,500
42.Redeemable Pref. Shares New Issue of Shares
% 50,000 redeemable at par Z 30,000 at premium of 10%
3,000
(a) 20,000
(d) None of these
(c) 27,000
New Issue of Shares
43.Redeemable Pref. Shares
Z 30,000 at premium of 20%
750,000 redeemable at 5% premium
(b) 25,000
4a¥20,000 (d) None of these
(c) 22,000
6.2 FILLIN THE BLANKS
be redeemed.
1. —______ paid: preference shares can not
.
redeemed out of profits of the company.
2. Redeemable preference shares can be t balance in
ehol ders cann ot be paid beca use they cannot be traced etc., the credi
3. tf some shar
shar ehol ders acco unt indi cati ng such unpaid balance should be shown under
the preferen ce ;
.
i et. ium must be provi ded
ed at a premium, the prem
eemable preference
in the Bala nce sha
St res are re deem
If Redo
. Fa
for out of the __ of the company-
 wv
202 Financial Accounting (SVB.AF: Sy, ly
j
emed out of divisible profits ot the compan ,
5. When Redeemable preference shares are rede d from the divisiyy
al value of the share redeemed must be transferre
amount equal to the nomin
profits to the __. Account.
taken to mean reduction of Capital of,
6. Redemption of preference shares is not
company.
PUrpog,
Preference shares, on which calls are in arrears, should be (ignored/considered) for the
“I

of redemption.
for redemption 4
8. Workmen's Compensation Fund balance (is/is not) divisible profit available
preference shares.
le for redemption of Praterenc,
9. Shares Forfeited Account balance (is /is not) divisible profit availab
shares.
e (is / is not) divisible profit available for redemption
q
10. Investment Fluctuation Reserve balanc
preference shares.
ble profit available for redemption of Preforangg
11. Revaluation Reserve balance (is / is not) divisi
shares.
profit available for redemption
42. Debenture Redemption Reserve balance (is / is not) divisible
preference shares.
13. Preference shares redeemable within
years can be issued.
shares. (bonus, rights)
14.Capital redemption reserve may be used for issuing
it is necessary for the compan,
15.Where a company redeems preference shares from out of profits
a/c.
to transfer the nominal value of shares redeemed to a
authorised by its
16.A company may issue redeemable preference shares if so

6.3 MATCH THE FOLLOWING COLUMNS

[A] COLUMN A COLUMN B

&1 1. Partly paid preference shares (a) does not result in reduction of
~ | 2. Irredeemable preference shares authorised capital of the company
“>| 3. Maximum period for redemption of (b) Profits
pref. shares (c) cannot be redeemed
Al 4. Redemption of pref. shares (d) On redemption of pref. shares out
2 5. lf Redeemable Preference shares are of divisible profits
redeemed at a premium, the premium | (e) can be used only for issue of fully
; can be provided for out of paid bonus shares
[| 6. Amount equal to Nominal Value of (f) results in reduction of paid-up
shares redeemed transferred to capital of the company
od Capital redemption Reserve (g) can be used for declaring bonus for
—| 7. Capital Redemption Reserve making partly paid shares fully paid
(h) cannot be issued
(i) On redemption of pref. shares out
of proceeds of fresh issue of shares
(j) 20 years from the date of issue
———
|

[B] COLUMN A COLUMN B ey

' 4. On forfeiture of pref. shares for (a) Nominal value of Pref. Shares
non-payment of call redeemed Less Proceeds of new
(5 2. Profit on forfeiture of pref. shares shares issued
3. Profit which is divisible (b) Amount called up is debited to
Ww 4. Profits not divisible Redeemable Pref. Shares A/c
f 5. Transfer to Capital (c) Proceeds of new shares issued Less
. Redemption Reserve Nominal value of Pref. Shares redeemed
\'4.| 6. Unpaid balance in Pref. (d) Show under Current Liabilities in
Shareholders Account Balance Sheet
(e) transferred to Capital Redemption
Reserve A/c
a
f ty yr 7 ption of Preference Shares
if he 203
a a rs (f) Show under Share Capital in
Balance Sheet
fthe (g) transferred to Capital Reserve A/c
0g, Capital Reserve
) Sinking Fund after deducting liability
(j) Amount paid up is debited to
q of
id Redeemable Pref. Shares A/c
» [—cOLUMNA
SS ee

| (¢_ — — ae,
COLUMN B
D of
ividend Equalisation R
-j : tion p profits sgerve & (a) Lees Redes
Sheree Redeemed
CRR A= NV of CRERP Shares
9,a Pre-incorpora
i mount Received on
3, Ifp ref. shares ! redeeme d entirely Share Issue
out of profits “J” (b)
Issue of Full Paid-up Bonus Shares
lo | 4, If pref. shares redeemed partly out (C) Divisible profits available for
of new issus at par A redemption of pref. shares
6, NVof sjaianblacii New Share Issue Gy (d) Cannot be used for meeting premium
6. Use es pooee Redemption Reserve & Payable on redemption of pref. shares
any Premium received on new shares (e) CRR = Proceeds of New Shares Issue
issued before redemption of pref. shares Less NV of RP Shares Redeemed
= (f) | Capital profits not available for
redemption of pref. shares
(g) NV of RP Shares Redeemed
Less Divisible Profits
(h) Bonus for making partly paid-up
shares fully paid
(i) | Cannot be used for meeting premium
payable on redemption of pref. shares
(j) | CRR = Nominal Value of Pref.
Shares Redeemed
(k) CRR = Price at which Pref.
Shares Redeemed

64 STATE WHETHER TRUE OR FALSE

K Redemption of redeemable preference shares can be made only out of the proceeds of fresh
issue of equity shares.
‘ Acompany can redeem only fully paid preference shares.
é Premium payable on redemption of redeemable preference shares must be debited against
Profits only,
Capital redemption reserve account can be utilised for writing off miscellaneous expenditure
and losses,
To the extent redemption of preference shares takes place from out of profits an equal amount
Should be transferred to General Reserve.
' Tansfer to Capital redemption reserve account on redemption of preference shares can be
Made from Security premium account. .
‘
* Capital rademnption reserve account cannot be used for declaring bonus for making partly paid
Shares fully paid.

"ly paid pref. shares cannot be redeemed.

Capital R j sna Reserve a mount can be be u utilised for writing off share issue expenses.
Wo edemption
n 'edemption of pref. shares out of profits, a sum equal to the nominal value of shares so
'edeemeg should a transferred from the profit & loss a/c to the general reserve.
y €mption of pref. shares shall be taken as reduction of companys authorised an capital.
: i t out of security premiummi account.
| “PremMiu Mon re of pref. s hares can be met o ;
of the company.
, Semable ee aes a be issued if authorised by the Articles of Association
a BO

204 Financial Accounting (S. ¥.B.A.F: SEM-1y,

ny.
m4. Redeemable pref. shares can be redeemed only out of the profits of the compa
15, Dividend equalisation reserve can be used as divisible profits while redeeming preference shares

WMT eral eu cin sas

6.1

1. (b) 8. (d) 15. (c) 22. (d) 29. (c) 36. (d) 43. (a)
2. (Cc) 9, (b) 16. (a) 23. (d) 30. (d) 37. (a)
3. {c) 10. (c) 17. (d) 24. (b) 31. (b) 38. (Cc)
4. (d) 11. (a) 18. (c) 25. (d) 32. (b) 39. (c)
5. (b) 12. (b) 19. (d) 26. (d) 33. (c) 40. (b)
6. (b) 18. (c) 20. (a) 27. (a) 34. (b) 41. (a)
7. (c) 14. (b) 21. (d) 28. (a) 35. (b) 42. (b)

Hints :
38. (13,000 x 100) + (13,000 x 10) = 20,000 + 9,10,000 + (N x 10) — (N x 2) «. N = 62,500
6.2 (1) Partly (2) Divisible (3) Current Liabilities (4) Profits (5) Capital Redemption Reserve (6)
Authorised (7) Ignored (8) is (9) is not (10) is (11) is not (12) is not (13) 20 (14) Bonus (15) |
Capital Redemption Reserve (16) Articles
6.3 = A:(1) -(c), (2) - (h), (3) - (i), (4) - (a), (5) - (b), (6) - (d), (7) - (e)
B : (1) - (b), (2) - (g), (3) - (i), (4) - (A), (5) - (a), (6) - (d)
C : (1) - (c), (2) - (f), (3) - (i), (4) - (a), (5) - (g), (6) - (b), (7) - (i)
6.4 True: 2,3, 7, 8, 13, 15; False : 1, 4,5, 6, 9, 10, 11, 12, 14