Tag: provisions and reserves

Questions Related to provisions and reserves

____________are available for Distribution of Dividends.

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

  1. Capital Reserve

  2. Revenue Reserve

  3. Both

  4. None

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Correct Option: B
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.

Revenue reserves are also known as ___________.

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

  1. Free Reserves

  2. Non Free Reserves

  3. Owners reserves

  4. None

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Correct Option: A
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. Revenue reserves are also nown as free reserves as they can be freely distributed.

___________ is used to writing off capital losses or issue of bonus shares in case  of a company.

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

  1. Revenue Reserve

  2. Capital reserve

  3. Both

  4. None of the Above

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Correct Option: B
Explanation:

Capital Reserve is the part of the profit or surplus, maintained as an account in the Balance Sheet that can be used only for special purposes. It is made out of capital profits earned due to the sale of fixed assets at a price greater than its cost or profit on the reissue of forfeited shares. So Capital reserve is created when there is capital profit i.e. profit on sale of assets or upward revaluation of assets. 

Following are the uses of capital reserve :
  • To meet future capital losses
  • To issue as fully paid bonus shares
  • To strengthen the financial position of the business.

Reserves arising from capital receipts are known as _________.

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

  1. Capital Reserves

  2. Reserve Fund

  3. Secret Reserve

  4. General Reserve

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Correct Option: A
Explanation:

Capital reserves.

Capital Reserves are set aside out of capital profits and are normally not available for distribution as dividend. In other words, reserves created out of capital profits and which are not readily available for distribution of dividend among the shareholders is called Capital Reserves.
Example of capital reserves are Profit prior to incorportion,  profit on redemption of debentures, profit on slae of fixed assets, etc.

Capital Reserves are not freely distributed as profits.

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

  1. True

  2. False

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Correct Option: A
Explanation:

Capital reserves are those reserves which are not created out of operating profits and whicha re not free for distribution by way of profit. 

Reserve is created for__________.

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

  1. known liabilities

  2. unknown liabilities

  3. for legal compliance

  4. none of the above

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Correct Option: B
Explanation:

They are the portion of profits set aside to strengthen the financial position of a business. Generally, reserves are created to meet unknown future obligations which may arise due to miscellaneous business reasons.

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

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

  1. True

  2. False

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Correct Option: B
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. 

Bonus shares are issued by companies because _____________.

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

  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

Show answer
Correct Option: B
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.

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?

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

  1. At least $2.5$ $\%$

  2. At least $5$ $\%$

  3. At least $10$ $\%$

  4. None of the above

Show answer
Correct Option: A
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.

Reverse capital is ______.

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

  1. that part of uncalled capital which has to be called up in the event of winding up of the company

  2. same as capital reserve

  3. created out of revenue profit

  4. created out of capital profits

Show answer
Correct Option: A
Explanation:

Reserve Capital - A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the company. Such ncalled amount is called 'Reserve Capital' of the company. It is available only for the creditors on winding up of the company.