Chapter 6 (Equity shares and Debt Financing)

1. Company cannot use or apply securities premium in

a) paying dividend
b) paying directors remuneration.
c) paying up unissued shares of the company to be issued to members of the company
as fully paid bonus shares.
d) writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares of the company.
2. Assume you are one of the Board members in the Annual General Meeting of AB Ltd.
The agenda of the meeting is regarding issue of shares in the form of right issue to its
existing shareholders. As a member, which ONE of the following would you recommend
to the board regarding issue of right shares?
a) A The right issue is made at a price below market value but above nominal value.
b) B The right issue is made at a price above market value but below nominal value.
c) C The right issue is made at a price below market value as well as nominal value.
d) D The right issue is made at a price above market value as well as nominal value.
3. Company can utilize securities premium for:
a) Writing off loss incurred on revaluation of asset
b) Issuing fully paid up bonus shares
c) Paying divided
d) Writing off trading loss
4. A company has a retained earning balance of Nu. 200,000 on 1 st January 2020. During
the year, the company earned a net profit of Nu. 30,000 and a dividend of Nu. 10,000 was
declared. Further, a reserve amount of Nu. 12,000 was created for business expansion
purpose. The company also issued 1,000 equity share of Nu. 20 each. The ending balance
of retained earnings will be

a) Nu. 212,000.
b) Nu. 232,000.
c) Nu. 208,000.
d) Nu. 200,000.
5. A Company has issued Nu. 650,000 ordinary shares of Nu.10 each and ordinary dividend
of Nu. 4 per share are paid. The dividend paid would be:
a) Nu. 162,500
b) Nu. 260,000
c) Nu. 2,600,000
d) Nu. 6,500,000
6. A company has an equivalent capital composition of both common stock and
bonds. They provide a higher expected return to common stockholders as
opposed to bondholders. What could be the reason for allowing higher returns to
common stockholders?
a) There is a market premium required for bonds.
b) There is less demand for common stock than for bonds.
c) There is greater demand for common stock than for bonds.
d) There is more systematic risk involved for the common stock.
 7. Tendruk Mart Ltd, a newly established company issued 20000 shares of Nu.8 each to the
public on 1st April 2020. The subscription date was closed as at 30th April. The company
received an application for 23000 shares. What will be the amount of cash refunded by
company due to over subscription? 
a) Nu.160000 c) Nu.3000
b) Nu.24000 d) Nu.184000
8. STCL Co. registered with capital of Nu. 500,000 in shares of Nu. 10 each issued 25,000
of such shares. The public subscribed for 30,000 shares. The above statement refers to?
a) Premium 5,000 shares c) Under subscription 5,000 shares
b) Discount 5,000 shares d) Over subscription 5,000 shares
9. Companies issues new shares to its existing shareholders for consideration or for a price
is known as
a) Bonus issue c) Issue of shares at par
b) Rights issue d) Discount on shares

Fill in the blanks

1. When the company issues share higher than its nominal value it is called as shares issued
at …….

True or false

1. Bonus shares are given out of retained earning……………..

2. Right shares are issued without any consideration.
3. Companies create general reserve mainly to avoid payment of profits as divided to the
shareholders.

Section B
Question 1
a) Bhutan Telecom Limited (BTL) decided to issue Nu. 1 million of 10% bonds on
1st January 2015 repayable three years after the date of issue. Further, BTL issued 100,000
ordinary shares of Nu. 10 each at Nu. 12. The dividend of Nu. 1 per share issued is declared
on 31st Dec 2015.
Required;
i. Pass the journal entry to record the issue of bonds on 1st January 2015 and interest
payable on the bonds on 31st December 2015.
 ii. Pass journal entry for redemption of 10% bonds.
iii. Pass the journal entry to record the issue of ordinary shares.

b) Bhutan Government issued 10,000 8% bonds of Nu. 30 each to the public on 1 stMay
2020, due to financial constraints during COVID_19 pandemic. The subscription date
was closed as at 31st May, and the government received total applicants for 11,000
bonds. Excess application of bonds money were rejected and refunded through bank
account. Pass necessary journal entry in the books of accounts.
c) Baeyoel Company Ltd issued 100,000 shares of Nu.100 each for public subscription.
The company received the application for 120,000 shares. Show the effect of this over
subscription in the books.
d) A company has a retained earning balance of Nu. 100,000 on 1st January 2015. During
the year, the company earned a net profit of Nu. 20,000 and a dividend of Nu. 10,000
was declared. Further, a reserve amount of Nu. 8,000 was created for business expansion
purpose. The company also issued 1,000 equity share of Nu. 10 each.
Required;
i. Calculate ending balance of retained earnings for the company.
ii. Differentiate between equity share and preference share.

Question 2
a) Yoebab Pvt. Ltd management had decided to raise share capital of Nu.20,000,000 in
order to have sufficient fund for business functioning. Further, it was agreed that total of
1000,000 shares will be issued for public subscription on 1st January 2021.
Required;
i) Journalize transactions, if the money on shares issued is received in TWO installments, i.e.
on application of 20% and balance 80% on share allotment.
ii) After 3 months on 1st August 2020, Yoebab Pvt. Ltd. also makes a bonus issue of one for ten
shares. Calculate number of bonus shares for issue and pass necessary entry.
iii) Should the management of Yoebab opt for debt financing or equity financing? Why?
b) ABC company limited issued 500,000 shares at a price of Nu.10 each. Company
announces rights issue of 2 for 5. The rights shares are offered at Nu. 13 per share.
Journalize the following.
c) The Decoy Company limited was registered with capital of Nu. 600,000 in shares at a
premium of Nu. 2 each payable as follows; on application Nu. 5 and on allotment Nu. 7
(including premium). Company invited application of 60,000 shares. All sum was duly
received and allotted
Required
i. Calculate the nominal value of shares
ii. Pass entries on issue of shares when issue money is received in two
installments.
Question 3
a) XYZ limited issued 80,000 equity shares of Nu.10 each to the public on 1st April, 2019.
The subscription date was closed as at 30th April, and the company received the
application for 85,000.
i. What do you understand by oversubscription of shares?
ii. Write the journal entries of over subscription in the books of XYZ Company
Limited.
b) ABC limited company with total share capital of Nu. 10 million with the face value of
Nu. 10, offers a rights issue of 2 for 5 shares at an offer price of Nu. 12 per share. The offer
is fully taken up by the existing shareholders.
i Calculate the number of rights issue shares and share premium.
ii Pass the necessary entries for the rights issue of shares and show its
presentation in the financial statement.
iii How many right shares you will get, if you own Nu. 500,000 shares.