Tag: sources of business finance - 2

Questions Related to sources of business finance - 2

Which of the following rights may be given to preference shareholder if provided by Articles?

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. To participate in the surplus remaining after the equity shares are redeemed in winding up.

  2. To participate in the surplus profits remaining after payment of equity dividend.

  3. To receive arrears of dividend at the time of winding up.

  4. All of the above.

Show answer
Correct Option: D
Explanation:

If provided by the Articles of Association, the following rights may be given to the shareholders of preferential shares are:
To participate in the surplus profits remaining after payment of equity dividend

To receive arrears of dividend at the time of liquidation
To receive premium on redemption of preference shares.

When shares are issued at a price less than the face value, they are said to be issued at __________.

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. Discount

  2. Premium

  3. Par

  4. None of above

Show answer
Correct Option: A
Explanation:
Issue of shares at discount: When the shares are issued at a price lower than the face value, they are said to be issued at discount.
Any company could not offer the shares at discount when
• It is a new company
• It is a new class of shares even though of an old company
The discount on issue of shares is treated as a loss of capital nature.
For e.g.
Let the share is issued at Rs. 90 then it is called that share is issued at the discount of Rs 10 (Rs 100 –Rs. 90).

The premium on issue of shares must be credited to a separate account 

called ________________.

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. Share Premium Account

  2. Securities Premium Account

  3. Discount on Issue of Shares

  4. Securities Profits Account

Show answer
Correct Option: B
Explanation:
Securities Premium Account:-
When shares are issued at an amount more than the nominal value or par value, it is called shares issued at premium. The premium amount thus received is credited to a separate account called ‘Securities Premium Account’ and is shown on the liabilities side of the company’s balance sheet under the head ‘Reserves and Surpluses’.

When shares are not payable in a lump sum, third instalment is called ______________.

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. Application Money

  2. Allotment Money

  3. First Call Money

  4. Final Call money

Show answer
Correct Option: D
Explanation:

 Final call: The remaining amount of the shares allotted is called up by writing a letter to the shareholders which are known as calls on the share. Such remaining amount is called up after receiving the allotment money. The balance of share money can be called up either in one or two installments. If the entire balance of share is called up at once, it is called ‘first and final call’. However, if the balance of share is called up in two different installments, it is called first call and second and final call respectively.

When shares are issued at a price higher than the face value, they are said to be issued at ____________.

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. Discount

  2. Premium

  3. Par

  4. None of above

Show answer
Correct Option: B
Explanation:
Issue of Shares at Premium: When shares are issued at a price higher than the face value then it is called as the issue of shares at premium. The excess of issue price over the face value is the amount of premium. The premium on issue of shares is treated as revenue profits.
For e.g.
Let the share is issued at Rs. 120 then it is called that share is issued at a premium of Rs 20 (Rs 120 –Rs. 100).

Securities premium account must be shown separately on the liabilities side of the balance sheet under  _______ with the account name  _________. 

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. Share Capital; Shareholders Funds

  2. Reserves & Surplus; Shareholders Funds

  3. Secured Loan; Reserves & Surplus

  4. Unsecured Loan; Profit or Loss

Show answer
Correct Option: B
Explanation:
Reserve and Surplus:-
Reserve means a provision for a specific purpose. There are lots of unknown expenditures which can occur in current year or in future. To meet such type of expenses the business firm has to make the reserves. 
By maintaining the reserves, actual position of the profit and loss of any accounting year does not disturb. For example:- share premium account, provision for bad debts or capital redemption reserves. Capital redemption reserve can be used as bonus shares and converted into share capital. Reserves are also the part of capital of company other than share capital. These reserves can not be distributed among the shareholders as dividend.

Surplus is the credit balance of the Profit and Loss Account after providing for dividends, bonus, provision for taxation and general reserves etc.  Surplus profit may also be earmarked for special purposes such as reserves for obsolescence of plant and machinery. Balance of profit is carried forward in next year as retained earning. General reserve can be used for distribution of dividend among shareholders when profit is insufficient.
Reserves and surpluses are shown in liabilities side of balance sheet.

When shares are not payable in a lump sum, second instalment is called ____________.

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. Application Money

  2. Allotment Money

  3. First Call Money

  4. Final Call Money

Show answer
Correct Option: B
Explanation:

 Allotment Money: The company allots the shares among different applicants after receiving their share application money. The allotment of shares implies that the company has accepted the application of the subscribers and decided to give shares to them. The company sends letters to the applicants intending to subscribe the shares which are called ‘Letter of Allotment’. The letter of allotment provides the information about the number of shares allotted to the subscribers and the amount to be paid by them as the allotment money.

If the number of shares applied for is more than the number of shares issued the shares are said to be ____________.

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. Oversubscribed

  2. Undersubscribed

  3. Minimum subscription

  4. None of above

Show answer
Correct Option: A
Explanation:
Oversubscribed:-
Over subscription of shares refers to the situation when the number of shares applied for is more than the number of shares offered for subscription. But it is also true that company cannot allot shares more than those offered for subscription. In case of over-subscription, a company cannot allot shares more than those offered for subscription.
In the case of over-subscription, the company cannot allot shares to all the applicants in full. To deal with the situation, three alternatives are:

• First Alternatives- Some applications are accepted in full and excess applications are rejected and money is refunded instantly. This is known as Rejection of Applications. For example, company invites application for 60,000 shares. However the application received are for 80,000 shares. In this alternative, the excess application that is 20,000 will be outright rejected.

• Second Alternatives- Applicants may also be allotted shares in fixed proportions. This is known as Pro rata Allotment or Partial allotment. For example, in the above case, allotment of shares in the ratio of 6 shares for 8 applied.

• Third Alternatives- A combination of above two alternatives can also be adopted. In this, a company may accept some applications and reject some. Then proportional allotment may be made to the remaining. Considering above example, instead of rejecting 20,000 applications, company can give shares to 10000 applicants on pro rata basis and reject the remaining applications.

If the numbers of shares issued for is more than the number of shares applied the shares are said to be ___________.

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. Oversubscribed

  2. Undersubscribed

  3. Minimum subscription

  4. None of above

Show answer
Correct Option: B
Explanation:
Undersubscribed:-

The number of shares for which applications were invited and the number of shares for which applications were received are exactly the same. However, in practice, these two figures will rarely coincide. The number of shares for which applications are received may be more or less than the number of shares for which applications are invited.
If the number of shares applied by the public is less, the issue is said to be under-subscribed, if more, then it is said to be over-subscribed; for example if a company invites applications for 10,000 shares and applications are received from public for 8,000 shares the issue is said to be under- subscribed.

Preference share holders have a right to vote on every resolution of a company.

commercial studies sources of business finance - 2 preference shares equity and preference shares equity shares and preference shares

  1. True

  2. False

  3. Partly True

  4. Partly False

Show answer
Correct Option: B
Explanation:
As per section 47 of companies act,2013, Every member of company who is holding any preferential share capital (Preference shareholders) shall in respect of such capital have right to vote only on-
1. Resolutions placed before company which directly affects rights attached to their shares(preference), and
2. Any on resolution for winding-up of the company.