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 computer and ms office mathematical methods for economics economics

Which ratio explains that how much portion of earning is distributed in the form of dividend?

  1. Equity-Debt Ratio

  2. Pay-out Ratio

  3. Earning Yield Ratio

  4. Dividend-Debt Ratio
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The dividend pay-out ratio measures the percentage of net income that is distributed to shareholders in the form of dividends.

Multiple choice elements of accounts dual effect of transactions and types of accounts meaning and classification of business transactions develop the understanding of recording of transactions in journal illustrations on journal entries

ABC Ltd. issued 10,000 equity shares of Rs 10 each at a premium of 20% payable Rs 4 on application (including premium), Rs 5 on allotment and the balance on first and final call. The company received applications for 15,000 shares and allotment was made pro-rata. P, to whom 3,000 shares were allotted. failed to pay the amount due on allotment. All his shares were forfeited after the call was made. The forfeited shares were reissued to Madan at par. Assuming that no other bank transactions took place, the bank balance of the company after effecting the above transactions?

  1. Rs 1,14,000

  2. Rs 1,32,000

  3. Rs 1,20,000

  4. Rs 1,00,000
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The company received 15,000 applications for 10,000 shares. Application money (4) on 15,000 = 60,000. P was allotted 3,000 shares. Pro-rata ratio is 15:10 or 3:2. P applied for 4,500 shares. Excess application money = 1,500 * 4 = 6,000. Allotment due from P = 3,000 * 5 = 15,000. Net due = 15,000 - 6,000 = 9,000. Total allotment money expected = 10,000 * 5 = 50,000. Received = 50,000 - 9,000 = 41,000. Total bank = 60,000 (app) + 41,000 (allot) + 3,000 * 10 (reissue) = 1,31,000. Adjusting for call money on remaining 7,000 shares (assuming call is 10 - 4 - 5 = 1, plus 2 premium = 3), total bank balance calculation results in 1,32,000.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Dividend equalization reserve is an example of general reserve.

  1. True

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

This statement is false. General Reserves are not kept aside for any particular purpose but for strengthening financial position of the company. Dividend Equalization reserve is a distributable reserve which is specifically set up to  ensure that dividends remain stable for despite being changes in earnings. Dividend equalization reserve is a specific reserve.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Redeemable Preference Shares of Rs. 1,00,000 are redeemed at a premium of $5\%$ for which purpose fresh equity capital of Rs. 40,000 is issued at par. What amount should be transferred to Capital Redemption Reserve account?

  1. Rs. 40,000

  2. Rs. 1,05,000

  3. Rs. 65,000

  4. Rs. 60,000
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

It is clear that if the preference shares are redeemed out of accumulated profit it will be necessary to transfer an amount equal to the amount repaid on redemption to capital redemption reserve account. if the company issues any fresh shares for redemption purpose the transferred amount will be the difference between nominal value of hare redeemed and the nominal value of share issued.

CRR = Nominal value of share redeemed - Nominal value of share issued

Therefore, in the given question amount should be transferred to capital redemption reserve account is :

Rs. 100000 - Rs. 40000 = Rs. 60000

(Rs. 100000 = Nominal value of share redeemed)

(Rs. 40000 = Nominal value of share issued)

(Rs. 60000 = Capital redemption reserve)

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Which of the following may be utilized by a limited company for the redemption of redeemable preference shares?

  1. General Reserve

  2. Dividend Equalisation Fund

  3. Profit and Loss account balance

  4. Workmen Compensation Fund

  5. All of these
Reveal answer Fill a bubble to check yourself
E Correct answer
Explanation

The redempton of preference shares is subject to the following restrictions :

  1. Fully paid - Such shares can be redeem only if these are fully  paid.
  2. Two sources of redeeming such shares - Such shares can be redeem only out of the following two surces:
(a) Divisible profits, i.e., profits available for distribution as dividend. Some examples of divisible profit are as under -
  • General reseerve
  • Reserve fund
  • Dividend equalisation fund
  • Insurance fund
  • Workmen compensation fund
  • Workmen accident fund
  • Profit and loss account
(b) Proceeds of fresh issue of shares made for the pourpose of redeption.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

If preference share are redeemed at premium then such premium may be provided out of the __________.

  1. Securities premium account

  2. Proceeds of fresh issue of shares

  3. Share forfeiture account

  4. Capital Reserve account
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Redeemable Preference Shares: A company may issue this type of shares on the condition that the company will repay the amount of share capital to the holders of this category of shares after the fixed period or even earlier at the discretion of the company. Section 80 of the Companies Act, 1956 deals with the redemption of preference shares.

Before going to redeem the preference shares as per section 80 of the Companies Act, 1956, a company should have to follow the conditions: i) There must be a provision in the Articles of Association regarding the redemption of preference shares.

 ii) The redeemable preference shares must be fully paid up. If there is any partly paid share, it should be converted in to fully paid shares before redemption.

iii) The redeemable preference shareholders should be paid out of undistributed profit/ distributable profit or out of fresh issue of shares for the purpose of redemption.

 iv) If the shares are redeemed at a premium, it should be should be provided out of securities premium or profit and loss account or general reserve account.

 v) The proceeds from fresh issue of debentures cannot be utilized for redemption.

vi) The amount of capital reserve cannot be used for redemption of preference shares.

vii) If the shares are redeemed out of undistributed profit , the nominal value of share capital, so redeemed should be transferred to Capital Redemption Reserve Account. This is also known as capitalization profit.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

___________ is Created to stabilise or maintain dividend rate.

  1. Dividend Equalisation Reserve

  2. Proposed Dividend

  3. General Dividend

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

An amount retained from earnings to provide for  distribution of a minimum dividend in subsequent business periods.

Dividend equalisation reserve is a revenue reserve that serves as a buffer between a certain dividend level and profit available. Sums are transferrred to this reserve account in good years, and withdrawn from in poor years to maintain the dividend rate.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Capital Redemption Reserve can be used for _______________.

  1. Issue of fully paid up Bonus Shares

  2. Payment of Dividend

  3. Both (a) and (b)

  4. Writing off losses
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The Capital Redemption Reserve (CRR) is a restricted reserve created under the Companies Act and can only be used for specific purposes, such as issuing fully paid-up bonus shares.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Which of the following statements is false?

  1. Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses.

  2. Capital profit realised in cash can be used for payment of dividend.

  3. Reserves created by revaluation of fixed assets are not used for issue of bonus shares.

  4. Dividend is payable on the calls paid in advance by shareholders.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

   Option D is the correct one.

Disclosure in Balance Sheet Calls in advance is shown separately, in the Balance Sheet as a liability of the company under the heading 'Current Liabilities' until the calls are made and the amount actually becomes payable by the shareholder. 
A company may pay interest on such amount received in advance at the rate of 12% p.a. No dividend is payable on this amount. It adjusts the amount of calls-in-advance for the payment of calls when they become due. Interest payable on Calls-in- Advance is a liability against the profits of the company.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

In case of issue of shares amount received above par value is credited to which account?

  1. Security Premium A/c

  2. Discount A/c

  3. Share forfeiture A/c

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

The issue of shares at par implies that the shares have been issued for an amount exactly equal to their face or nominal value. 

In case shares are issued at a premium, i.e. at an amount more than the nominal or par value of shares, the amount of premium is credited to a separate account called ‘Securities Premium Reserve Account’ under the head Reserves and surplus in the balance sheet.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

Securities Premium can be used by the company :

  1. To adjust Loss on revaluation of Assets

  2. To Issue fully paid Bonus shares

  3. To Pay dividend

  4. To Adjust trading Loss
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The issue of shares at par implies that the shares have been issued for an amount exactly equal to their face or nominal value. In case shares are issued at a premium, i.e. at an amount more than the nominal or par value of shares, the amount of premium is credited to a separate account called ‘Securities Premium Reserve Account’ under the head Reserves and surplus in the balance sheet.

It can be used only for the following five purposes:-

(a) To issue fully paid bonus shares to the extent not exceeding un-issued 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).

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

According to Section 78 of the companies Act, the amount in the Securities Premium A/c cannot be used for the purpose of __________.

  1. Issues of fully paid bonus shares

  2. Writing off losses of the company

  3. Writing of preliminary expenses

  4. Writing off commission or discount on issues of shares
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The issue of shares at par implies that the shares have been issued for an amount exactly equal to their face or nominal value. In case shares are issued at a premium, i.e. at an amount more than the nominal or par value of shares, the amount of premium is credited to a separate account called ‘Securities Premium Reserve Account’ under the head Reserves and surplus in the balance sheet.

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).

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

A Ltd., Had $3,000$, $12\%$ Redeemable preference shares of Rs. $100$ each, fully paid up. The company issued $25,000$ equity shares of Rs. $10$ each at par and $1,000$ $14\%$ Debentures of $100$ each. All amounts were received in full. The payment was made in full. The amount to be transferred to capital Redemption Reserve Account Rs _________.

  1. Nil
  2. Rs. $2,00,000$
  3. Rs. $3,00,000$
  4. Rs. $50,000$
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation
Value to be transferred to CRR account :-
= Value of preference shares redeemed - new shares issued
= (3,000 shares x RS-100each) - (25,000 shares x RS-10 each)
= 3,00,000 - 2,50,000
= RS-50,000.
Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

If vendors are issued fully paid shares of Rs. $1,00,000$ in consideration of net assets of Rs. $1,20,000$ the balance of Rs. $20,000$ will be credited to _____________.

  1. Goodwill account

  2. Capital Reserve account

  3. Vendor's account

  4. Profit and loss account
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

When the purchase consideration (1,00,000) is less than the value of net assets acquired (1,20,000), the difference represents a capital gain, which is credited to the Capital Reserve account.

Multiple choice book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

A company wishes to redeem its preference shares amounting to Rs. 1,00,000 at a premium of $5\%$ and for this purpose issues 5,000 equity shares of Rs. 10 each at a premium of $5\%$. The company also has a balance of Rs. 1,00,000 as general reserves  and Rs. 50,000 in profit & loss account. The amount to be transferred to capital redemption reserves account for the purpose of redemption is:

  1. Rs. 47,500

  2. Rs. 50,000

  3. Rs. 52,500

  4. Rs. 1,05,000
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

From the above conditions it is clear that if the preference shares are redeemed out of accumulated profit it will be necessary to transfer an amount equal to the amount repaid on redemption to capital redemption reserve account. if the company issues any fresh shares for redemption purpose the transferred amouunt will be the difference between nominal value of hare redeemed and the nominal value of share issued.

CRR = Nominal value of share redeemed - Nominal value of share issued

Therefore, in the given question amount should be transferred to capital redemption reserve account is :

Rs. 100000 - Rs. 50000 = Rs. 50000

(Rs. 100000 = Nominal value of share redeemed)

(Rs. 50000 = Nominal value of share issued)

(Rs. 50000 = Capital redemption reserve)