Commerce Accountancy · Economics

Equity Shares and Capital

424 Questions

Equity shares and capital topics deal with corporate share issuance, forfeiture rules, dividend distributions, and yield calculations. Questions require an understanding of financial instruments like preference shares and call options. These concepts are essential for accountancy and commerce examinations.

Share valuationDividend yieldPreference sharesShare forfeitureCapital structure

Equity Shares and Capital Questions

Multiple choice commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

In case of oversubscription of shares each applicant receives the shares in some proportion, it is known as ____________.

  1. Bonus allotment

  2. Right allotment

  3. Per applicant allotment

  4. Pro rata allotment
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation
Pro rata allotment:-
If the promoters of a company are reputed for their successful promotional successes, the applications are received for more than shares offered under prospectus (over-subscription). They may allot full shares to some of applicants refuse allotment to others, accord partial allotment to someone. This way of allotting shares shows favour to someone and disfavour to others.

Justice in every walk of life needs that the company should also adopt it in making allotment. Instead of showing favour to certain applicants by allotting them full applied shares and disfavour to others by rejecting their applications, the company should treat all the applications of shares at par and allot them shares on pro-rata basis or proportionately. It means that all the applicants have been allotted or refused allotment on proportionate basis. For example: A company issued 60,000 shares, receives applications for 2, 40,000 shares and makes pro-rata allotment.

This will mean that applicants have been allotted 25% of the shares applied. In other words, applicants for 100 shares must have been allotted 25 shares; for 500 shares must have been allotted 125 shares and for 1,000 shares, 250 shares would have been allotted.
Multiple choice commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

_______may be said to be the compulsory termination of membership by way of penalty for non-payment of allotment and/or any call money.

  1. Surrender of shares

  2. Forfeiture of shares

  3. Transfer of shares

  4. Transmission of shares
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
 Forfeiture of shares:-

Forfeiture of shares means cancellation of shares as such whatever amount has already been received on shares being forfeited is seized. The shareholder, who applies for the shares of the company makes an offer on the one hand, and on the other hand company by accepting or allotting shares accords acceptance. In this way, offer and acceptance with the lawful consideration makes a valid contract between the shareholder and the company. The contract makes it binding upon the shareholder to pay the installment of amount due on allotment and calls, whenever due.
Notice before Forfeiture:
If a member having been called upon to pay any call on his shares fails to pay the calls, the directors may either by adoption of Table A or by an express provision on the articles proceed to forfeit the shares held by such a defaulting member. Before the shares can be forfeited the company may serve a notice on the defaulting member requiring payment of the call.
The notice must give not less than fourteen days’ time from the date of service of notice for the payment of the amount due. The notice must also state that in the event the non-payment of the amount due within the period mentioned in the notice the shares in respect of which call was made will be liable to forfeiture.
Non-compliance of Notice:
If the shareholder fails to comply with the requirement of this notice, the directors may pass a resolution effecting the forfeiture of the shares.
Effect of Forfeiture:
When the shares have been forfeited, the defaulting shareholder ceases to be member of the company and he loses all rights or interests in his shares. But notwithstanding the forfeiture he remains liable to pay to the company all moneys which at the date of forfeiture were payable by him to the company in respect of the shares.
Multiple choice commercial studies sources of business finance - 2 equity shares share and stock equity and preference shares

The shares issued for providing know how, intellectual property rights, etc are called ____________.

  1. Golden shares

  2. Right shares

  3. Sweat Equity shares

  4. Bonus shares
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation
Sweat equity shares’ means equity shares issued by a company to its employees or directors at a discount (to the market price) or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

According to Section 54, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled,

The issue is authorized by a special resolution passed by the company;
The resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;
At least one year should have elapsed, at the date of such issue, since the date on which the company had commenced business; and
Where the equity shares of the company are listed on a recognized stock exchange, the sweat equity shares should be issued in accordance with the regulations made by Securities and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.
The rights, limitations, restrictions and provisions which are applicable to equity shares shall he applicable to the sweat equity shares issued under this section and the holder of such shares shall rank with other equity shareholders.
Multiple choice book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

____________are available for Distribution of Dividends.

  1. Capital Reserve

  2. Revenue Reserve

  3. Both

  4. None
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Revenue reserves are those reserves which are created out of profits available for distribution by way of dividend. Revenue reserve refers to the amount which are free for distribution by way of dividend.

Multiple choice book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

Capital Redemption Reserve may be used for making partly paid up shares as fully paid up.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

This statement is false. Capital Redemption reserve is created to redeem fully paid preference shares. When the company proposes to redeem the preference shares out of the profits, it transfers an amount equal to the nominal value of redeemable preference shares to the capital redemption reserve. 

Multiple choice book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

Bonus shares are issued by companies because _____________.

  1. surplus cash is available

  2. there are heavy accumulated general reserves

  3. there is heavy competition from similar companies

  4. they have heavy gross-profit ratio
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company's accumulated earnings which are not given out in the form of dividends, but are converted into free shares.


In other words, when a company is prosperous and accumulates a large surplus, it converts this surplus into capital and divides the capital among the members in proportion to their rights. 

The essential reason behind issuance of bonus shares is to capitalize profits and increase a company’s equity base and therefore, the shareholders to whom the shares are allotted have to pay nothing.

Multiple choice book keeping and accountancy reserve and fund meaning and characteristics of reserves reserves provisions and reserves

The paid-up capital of Mukund Ltd. is Rs $18,00,000$. The company decided to propose a dividend of Rs $2,16,000$ out of current profit. How much of current profit is to be transferred to reserve?

  1. At least $2.5$ $\%$
  2. At least $5$ $\%$
  3. At least $10$ $\%$

  4. None of the above
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

As per the provision of sub section (2) of section 205 of the companies act, no dividend can be declared or paid by the company to its shareholders out of the profits of the company for the financial year after providing depreciation until a specified percentage of profit of the financial year is transferred to reserves. 


Rules are as under:

  • If proposed dividend exceeds 10% but less than 12.5% of the paid up capital, an amount of 2.5% of the current profit need to be transferred to reserve.
  • If proposed dividend exceeds 12.5% but less than 15% of the paid up capital, an amount of 5% of the current profit need to be transferred to reserve.
  • If proposed dividend exceeds 15% but less than 20% of the paid up capital, an amount of 7.5% of the current profit need to be transferred to reserve.
  • If proposed dividend exceeds 20% of the paid up capital, an amount of 10% of the current profit need to be transferred to reserve.

In present case dividend percentage is 12% (216000/1800000), falls under first rule, hence 2.5% need to be transferred to reserves from current year's profit.

Multiple choice organisation of commerce and management government organisation meaning and features of government company government companies forms, comparison and cases of public enterprises

Minimum paid up capital to be kept by the government of a government company is ______.

  1. 35%

  2. 75%

  3. 51%

  4. 50%
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation
A “Government company” is defined under Section 2(45) of the Companies Act, 2013 as “any company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government. A government-owned corporation is a legal entity that undertakes commercial activities on behalf of an owner government.
Multiple choice organisation of commerce and management government organisation meaning and features of government company government companies forms, comparison and cases of public enterprises

_________ refers to the company in which $51\%$ or more of the paid up capital is held by the government.

  1. Departmental undertaking

  2. Statutory corporation

  3. Government company

  4. All of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Government Company is a company or an organization in which at least 51% of the paid up share capital is held by the central government or the state government or partly by both central and state government.

A company having business operations in India and registered under the Indian Companies Act, 1956 is called Indian Company. An Indian company may be formed as a public limited, private limited or government company.

Multiple choice organisation of commerce and management government organisation meaning and features of government company government companies forms, comparison and cases of public enterprises

Central Government has prescribed that public companies with paid up share capital of _________; or turnover of ______; or in aggregate, outstanding loans/ borrowings/ debentures/ deposits/ exceeding ________ as on the last date of latest audited financial statements mentioned below shall also have at least ________ as independent directors.

  1. Rs.1 crore or more; Rs.10 crore or more; Rs.50 crore or more; 2 directors

  2. Rs.10 crore or more; Rs.100 crore or more; Rs.50 crore or more; 2 directors

  3. Rs.20 crore or more; Rs.150 crore or more; Rs.100 crore or more; 3 directors

  4. Rs.100 crore or more; Rs.1,000 crore or more; Rs.500 crore or more; 3 directors
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The Companies Act, 2013 defied a Public Limited Company as a private company means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed.Hence, a public limited company can also be started without a minimum capital of rupees five lakhs.

Rs.10 crore or more; Rs.100 crore or more; Rs.50 crore or more; 2 directors.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Preference shares may be redeemed out of________________.

  1. Proceeds of Debentures

  2. Proceeds of new issue of shares

  3. Out of divisible profits

  4. Both (b) and (c)
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Preference shares can be redeemed either out of the proceeds of a fresh issue of shares or out of the company's divisible profits. Therefore, both options (b) and (c) are correct.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Preference shares amounting to Rs. $2,00,000$ are redeemed at a premium of $5$% by issue of shares amounting to Rs. $1,00,000$ at a premium of $10$%. The amount to be transferred to capital redemption reserve ___________.

  1. Rs. $1,05,000$
  2. Rs. $1,00,000$
  3. Rs. $2,00,000$
  4. Rs. $1,11,000$
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The Capital Redemption Reserve (CRR) is created by the amount of preference shares redeemed out of profits. The nominal value of shares to be redeemed is 2,00,000. Since 1,00,000 is raised via a fresh issue of shares, the amount to be transferred to CRR is 2,00,000 - 1,00,000 = 1,00,000.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Which of the following accounts can be transferred to capital redemption reserve account?

  1. General reserve account

  2. Forfeited shares account

  3. Profit prior to incorporation

  4. Share premium account
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The Capital Redemption Reserve (CRR) must be created out of divisible profits. General Reserve is a form of divisible profit, whereas share premium and forfeited shares are capital receipts and cannot be used for this purpose.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Debenture premium cannot be used to -

  1. Write off the discount on issue of shares or debentures

  2. Write off the premium on redemption of shares or debentures

  3. Pay dividends

  4. Write off underwriting commission
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

According to the Companies Act, the Securities Premium Account (often referred to as debenture premium when applied to debentures) has restricted uses. It cannot be used to pay dividends to shareholders.