Caap Practice Manual Executive Prog

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EXECUTIVE PROGRAMME

MODULE 2, PAPER 5

Company Accounts

and

Auditing Practices


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NOVEMBER 2015

Price : Rs. 300/-

© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

No part of this Publication may be translated or copied in any form or by any means

without the prior written permission of The Institute of Company Secretaries of India.

The PRACTICE MANUAL has been prepared by competent persons and the

Institute hopes that it will facilitate the students in preparing for the

Institute's examinations. It is, however, to be noted that the answers are to be

treated as model answers and not as exhaustive and there can be alternative

solutions available for a questions provided in this practice manual. The

Institute is not in any way responsible for the correctness or otherwise of the

answers.

The Practice Manual contains the information based on the Laws/Rules

applicable at the time of preparation. Students are expected to be well versedwith the amendments in the Laws/Rules made upto six months prior to the

date of examination.

ISBN No. : 978-98-82207-60-3

Printed at : Samrat Offset Works/500/November 2015


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PREFACE

With the continuous developments in the external environment, the role of Company

Secretaries is being continuously redefined, which demand that our students - the

prospective Company Secretaries, are better prepared, developed and trained by providing

regular quality academic inputs, so that they are equipped to face the challenges ofdynamic environment with ease and efficiency. To become competitive, a student need not

only be aware of the basic theoretical provisions of subjects but also be conversant with the

practical aspects of it.

Developing competency in practical papers is a little more challenging as mastering these

subjects requires practicing more problems based on them. Although the study materials of

the Institute contains a lot of numerical and scenario based problem solving inputs but

nevertheless they can be supplemented further.

With the intent of developing our students in practical oriented subjects, the Institute has

brought out “Practice Manual”, a repository of solved questions, to build competency in

practical oriented subjects by providing the students with a pool of solved practicalproblems. I am proudly presenting this practice manual prepared specifically for the

subject “Company Accounts and Auditing Practices” to the students of professional

programme.

Students learn best when they are shown how practical questions are framed and solved

on variety of topics, in a step by step method with proper explanation. With this

consistency, students would be able to see the underlying patterns clearly and will learn

better. The manual has adopted an easy-to-understand method of providing solutions so

that students can understand themselves without an aid of a teacher. It will prove to be a

significant preparation resource for the students and will also serve as a self assessment

tool in the preparation for examination.

I acknowledge with thanks all those experts authors and institutions whose material has

been consulted and referred in preparation of this Practice Manual.

I place on record my sincere appreciation to Ms. Khusbu Mohanty, Assistant Education

Officer in the Academic Team at the Institute headed by Ms. Sonia Baijal, Director for this

new initiative under the overall supervision of CS Sutanu Sinha, Chief Executive and

Officiating Secretary.

I will urge my students to take maximum benefit out of it by meticulously practicing the

questions given therein. Practicing more will develop better understanding of the concepts

and provide stronger grip on the subject, for which Practice Manual will certainly serve as a

means.

My best wishes to you all!

New Delhi CS Atul H. Mehta

4th November, 2015 President, ICSI

(iii)


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I N D E X

Sl. No. Subject Page Nos.

1. Share Capital 1

2.

Debentures 64

3.

Final Accounts of Companies 102

4. Corporate Restructuring 151

5. Consolidation of Accounts 243

6.

Valuation of Shares and Intangible Assets 324

7. Liquidation of Company 347

8.

Corporate Financial Reporting 362

9.

Accounting Standards 382

10. Auditing Concepts 417

11.

Types of Company Audit 430

12.

Internal Audit 447

13.

Internal Control 454

14. Review of Internal Control 462

15.

Audit Engagement and Documentation 469

(v)


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Question 1

On 1st April, 2014, A Ltd. issued 45,000 shares of Rs.100 each payable as follows:

Rs. 30 on application;

Rs. 20 on allotment;

Rs. 25 on 1st October, 2014; and

Rs. 25 on 1st February, 2015.

By 20th May, 2014 40,000 shares were applied for and all applications were accepted.

Allotment was made on 1st June. All sums due on allotment were received on 15th July;those on 1st call were received on 20th October. Journalise the transactions when

accounts were closed on 31st March, 2015.

Answer

Case of under subscription

Shares issued by the company 45000

Shares applied by the public 40000

A Ltd. Journal

Date Particular Amount

(Dr.)

Amount

(Cr.)

May 20 Bank A/c (40000 x Rs. 30) Dr.

To Share Application A/c

(Application money received on 40,000

shares at Rs. 30 per share.)

Share Application A/c Dr.

To Share Capital A/c

(Application money transferred to Share capital)

Note : Share Application A/c will be transferredto share capital A/c on the date of Allotment.

12,00,000

12,00,000

12,00,000

12,00,000

June 1

1

Share Capital


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June 1 Share Allotment A/c (40000 x Rs. 20) Dr.


(Amount due on allotment on 40000 shares

@ Rs. 20 per share)

Bank A/c Dr.

To Share Allotment A/c

(The amount due on allotment received)

Share First Call A/c (40000 x Rs. 25) Dr.


(Amount due on First call on 40000 shares

@ Rs. 25 per Share)

Bank A/c Dr.

To Share First Call Account

(Amount received on First call)

Share second and final Call A/c Dr.

(40000 x Rs. 25)


(Amount due on Second and Final call on

40000 shares @Rs. 25 Per share)

Bank A/c Dr.

To Share Second & Final Call A/c

(Amount received on Second and Final

call)

800000

800000

10,00,000

10,00,000

10,00,000

10,00,000

800000

800000

10,00,000

10,00,000

10,00,000

10,00,000

July 15

Oct. 1

Oct. 20

Feb. 1

Mar. 31

Question 2

Pioneer Equipment Limited received on October 1, 2014 applications for 60,000 Equity

Shares of 100 each to be issued at a premium of 25 per cent payable at thus:

On Application Rs. 30

On Allotment Rs. 75 (including premium)

Balance Amount on Shares as and when required

The shares were allotted by the Company on October 20, 2014 and the allotment money

was duly received on October 31, 2014.

Record journal entries in the books of the company to record the transactions in

connection with the issue of shares.


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Answer

Pioneer Equipment Limited

Journal

Date Particulars Amount Dr. Amount Cr.

Oct. 1 Bank A/c (60000 x 30) Dr.

To Equity Share Application A/c

(Share Application money received

on 60000shares @ Rs. 30 per Share)

18,00,000

18,00,000

Oct. 20 Equity Share Application A/c Dr.

To Equity Share Capital A/c

(Share application money transferred

to share capital)

18,00,000

18,00,000

Oct. 20 Equity Share Allotment A/c (60000 x 75) Dr.

To Equity Share Capital A/c (60000 x 50)

To Securities Premium A/c (60000 x 25)

(Amount due on allotment of 60,000 Shares @

Rs. 75 per share including premium of Rs. 25)

45,00,000

30,00,000

15,00,000

Oct. 31 Bank A/c Dr.

To Equity Share Allotment A/c(Amount received on allotment)

45,00,000

45,00,000

Question 3

X Ltd. invited applications for 10,000 shares of Rs. 100 each payable as follows :

On Application Rs. 25

On Allotment (on 1st May, 2014) Rs. 25

On First Call (on 1st Oct., 2014) Rs. 25

On Final Call (on 1st Feb., 2015) Rs. 25

All the shares were applied for and allotted. A shareholder holding 200 shares paid the

whole of the amount due along with allotment. Journalise the transactions, assuming all

sums due were received. Interest was paid to the shareholder concerned on 1st February,

2015.


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Answer

Journal of X Ltd.


May 1 Bank A/c (10000 x 25) Dr.

To Shares Application A/c

(Amount of share application received for

10,000 shares @ Rs. 25 per share.)

2,50,000

2,50,000

May 1 Share Application A/c Dr.


(share application money transferred to share

capital)

2,50,000

2,50,000

May 1 Share allotment A/c Dr.

To Share capital A/c

(Share allotment money due on 10,000 shares

@Rs. 25 per share)

2,50,000

2,50,000

May 1 Bank A/c Dr.

To Shares Allotment A/c

To Calls in Advance A/c

[Receipt of money due on allotment, also thetwo calls (Rs. 25 and Rs. 25) on 200 shares.]

2,60,000

2,50,000

10,000

Oct. 1 Share First Call A/c Dr.


(The amount due on 10,000 shares @ Rs. 25

on first call.)

2,50,000

2,50,000

Oct.1 Bank A/c Dr.

Calls in Advance A/c

Dr.

To Share First Call A/c

(Receipt of the first call on 9,800 shares, the

balance having been previously received and

now debited to call in advance account.)

2,45,000

5,000

2,50,000


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The interest on calls in advance paid @ 12% on :

Rs. 5,000 (first call) from 1st May to 1st Oct., 2014–5 months 250

Rs. 5,000 (final call) from 1st May, 2014 to 1st Feb., 2015–9 months 450

700

Question 4

X Ltd. Invited applications for 11,000 shares of Rs.10 each, issued at 20% premium payableas :

Application Rs. 3 (including Re.1 premium)

Allotment Rs. 4 (including Re.1 premium)

Ist call Rs. 3

IInd call Rs. 2

Applications were received for 24,000 shares

Category I :- One fourth of the shares applied for allotted 2000 shares

Category II :- Two fourth of the shares applied for allotted 9000 share

Category III :- Remaining applications were rejected

Excess amount received is to be adjusted towards allotment and any amount beyond that

shall be refunded.

Mr. Remo, holding 300 shares out of category II failed to pay allotment and two calls and

his shares were forfeited and re-issued @ Rs.11 fully paid up.

Pass journal entries.

2015

Feb. 1 Share Final Call A/c Dr.


(The amount due on Final Call on 10,000

shares@ Rs. 25 per share.)

2,50,000

2,50,000

Feb. 1 Bank A/c Dr.

Calls in Advance A/c Dr.

To Share Final Call A/c

(Receipt of the moneys due on final call on

9,800 shares, the balance having been

previously received.)

2,45,000

5,000

2,50,000

Feb. 1 Interest A/c Dr.To Bank A/c

700700


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Answer

Journal of X Ltd.

Particulars Amount Dr. Amount Cr.

Bank A/c Dr.


(Application money received on 24,000 shares @ Rs.3)

72,000

72,000



To Securities Premium A/c


To Bank A/c

(Amount transferred to share capital on 11,000

shares and excess amount adjusted & refunded)

72,000

22,000

11,000

17,000

22,000

Share Allotment A/c Dr.



(Amount due on allotment on 11,000 shares @ Rs.4

including premium of Rs.1)

44,000

33,000

11,000

Bank A/c Dr.


(Amount received on allotment)

26,100

26,100

Share First Call A/c Dr.


(Amount due on Ist call on 11,000 shares @ Rs.3)

33,000

33,000

Bank A/c Dr.


(Amount received on Ist call on 10,700 share @ Rs.3)

32,100

32,100

Share Second Call A/c Dr.


(Amount due on IInd call on 11,000 shares @ Rs.2)

22,000

22,000


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Bank A/c Dr.

To Share Second Call A/c

(Amount received on IInd call on 10,700 shares @ Rs.2)

21,400

21,400

Share Capital Account A/c Dr.

Securities Premium A/c Dr.

To Share Forfeiture A/c



To Share Second Call A/c

(300 Shares of Mr. Ram forfeited, who failed to pay his dues)

3000

300

900

900

900

600

Bank A/c Dr.



(Shares reissued @ Rs.11 fully paid up)

3300

3000

300

Share Forfeiture A/c Dr.

To Capital Reserve A/c

(Amount transferred to Capital Reserve)

900

900

Working notes:

Calculation for adjustment and refund

Category No. of

Shares

applied

for

No. of

Shares

allotte

d

Amount

received on

application

Amount

required

on appli-

cation

Amount

adjusted

on

allotment

Refund Amount

due on

allot-

ment

Amount

received

on allot-

ment

I

II

III

6,000

12,000

6,000

2,000

9,000

NIL

18,000

36,000

18,000

6,000

27,000

NIL

8,000

9,000

NIL

4,000

NIL

18,000

8,000

36,000

NIL

NIL

26,100

NIL

Total 24,000 11,000 72,000 33,000 21,000 22,000 44,000 26,100


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Category I

Excess Money Received on (6000-2000)4000 X3= 12000

Allotment due 2000 x 4= 8000

Excess adjusted towards allotment = 8000

Refund = Excess money Received – Excess Adjusted towards allotment

= 12000-8000=4000

Category II

Excess Money Received on (12000-9000) 3000 x 3=9000

Allotment due 9000 x 4= 36000

Excess adjusted towards allotment 9000

Category III

Refund 6000 x 3 = 18000

Mr. Remo

Allotted shares 300

Applied share 400

Excess shares 100

Excess Application money Rs. 300/-

Allotment due

300 shares x Rs. 4 Rs.1,200/-

-excess amount Rs. 300/-

Amount not received Rs. 900/-

First call due

300 shares x Rs. 3 Rs. 900/-

Second call due

300 shares x Rs. 2 Rs. 600/-

Question 5

Runa Limited issued at par 10,000 Equity shares of Rs. 10 each payable Rs. 3.50 on

application; Rs. 4 on allotment; and balance on the final call. All the shares were fully

subscribed and paid except a shareholder having 100 shares could not pay the final call.

Give journal entries to record these transactions.


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Question 6

A limited Company, with an authorized capital of Rs. 2,00,000 divided into shares of Rs.

100 each, issued for subscription 1,500 shares payable at Rs.25 per share on application,

Rs. 40 per share on allotment, Rs. 25 per share on first call three months after allotment

and the balance as and when required.

The subscription list closed on January 31, 2015 when application money on 1,500 shareswas duly received and allotment was made on March 1, 2015.

The allotment amount was received in full but, when the first call was made, one

shareholder failed to pay the amount on 100 shares held by him and another shareholder

with 50 shares paid the entire amount on his shares.

Give journal entries in the books of the Company to record these share capital transactions

assuming that all amounts due were received within one month of the date they were

called.

Answer

Books of the CompanyJournal


Jan. 31 Bank A/c Dr.


(Money received on applications for 1,500

shares @ Rs. 25 per share)

37,500

37,500

March 1 Equity Share Application A/c Dr.


(Transfer of application money on 1,500

shares to share capital)

37,500

37,500

March 1 Equity Share Allotment A/c Dr.


(Amount due on the allotment of 1,500

shares @ Rs. 40 per share)

60,000

60,000

April 1 Bank A/c Dr.

To Equity Share Allotment A/c

(Allotment money received)

60,000

60,000


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June 1 Equity Share First Call A/c Dr.


(First call money due on 1,500 shares@

Rs. 25 per share)

37,500

37,500

July 1 Bank A/c (37,500-2,500+500) Dr.

Calls-in-Arrears A/c Dr.

To Equity Share First Call A/c

To Calls-in-Advance A/c

(First call money received on 1400 shares

and calls-in-advance on 50 shares @ Rs. 10

per share)

35,500

2,500

37,500

500

Question 7

A Ltd forfeited 300 equity shares of Rs. 10 fully called-up, held by Mr. X for non-payment of

allotment @ Rs. 4 each and final call @ Rs. 4 each. However, he paid application money @

Rs. 2 per share. These shares were originally issued at par. Give Journal Entry for the

forfeiture.

Answer

In the books of A Ltd.

Journal


Equity Share Capital A/c (300 x Rs. 10) Dr.

To Equity Share Allotment A/c (300 x Rs. 4)

To Equity Share Final Call A/c (300 x Rs. 4)

To Forfeited Shares A/c (300 x Rs. 2)

(Being the forfeiture of 300 equity shares of Rs. 10

each fully called-up for non-payment of allotment @

Rs. 4 each and final call money@ Rs.4 each)

3,000

1,200

1,200

600

Question 8

X Ltd forfeited 200 equity shares of Rs. 10 each, Rs. 8 called-up for non-payment of

allotment @ Rs. 4 each and first call money @ Rs. 2 each. Application money @ Rs. 2 per

share have already been received by the company. Give Journal Entry for the forfeiture

(assume that all money due is transferred to Calls-in-Arrears Account).


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Answer

Journal of X Ltd.



To Calls-in-Arrears A/c (200 x Rs. 6)


(Being the forfeiture of 200 equity shares of Rs. 10

each, Rs. 8 called-up for non-payment of allotment

@ Rs. 4 each and first call money @ Rs. 2 each )

1,600

1,200

400

Question 9

X Ltd. forfeited 1000 equity shares of Rs. 10 each fully called-up which were issued at a

premium of 20%. Amount payable on shares were:

on application Rs. 2; on allotment Rs. 4 (including premium) on First and Final call Rs.6.

Only application money was paid by the shareholders in respect of these shares. Pass

Journal Entries for the forfeiture.

Answer

Journal of X Ltd.



Securities Premium A/c (1000 x Rs. 2) Dr.


To Equity Share First and Final Call A/c

(1000 x Rs. 6)


(Being the forfeiture of 1000 equity shares of Rs.

10 each fully called-up, issued at a premium of

20%, for non-payment of allotment and call

money)

Note: Mr. X could not pay the amount due on

allotment and as such he could not pay the amount

of premium also. Hence the securities premium

reserve A/c will be debited in the entry of

forfeiture.

10,000

2,000

4,000

6,000

2,000


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Question 10

Mr. Long who was the holder of 300 preference shares of Rs. 100 each, on which Rs. 75 per

share has been called up could not pay his dues on Allotment and First call each at Rs. 25

per share. The Directors forfeited the above shares and reissued 150 of such shares to Mr.

Short at Rs. 55 per share paid-up as Rs. 75 per share.

Give Journal Entries to record the above forfeiture and re-issue in the books of thecompany.

Answer


Preference Share Capital A/c (300 x Rs. 75) Dr.

To Preference Share Allotment A/c (300 x 25)

To Preference Share First Call A/c (300 x 25)

To Forfeited Share A/c (300 x 25)(Being the forfeiture of 300 preference shares Rs. 75

each being called up for non-payment of allotment and

first call money)

22,500

7,500

7,500

7,500

Bank A/c (Rs. 55 x 150) Dr.

Forfeited Shares A/c (Rs. 20 x 150) Dr.

To Preference Share Capital A/c (75 x 150)

(Being re-issue of 150 shares at Rs. 55 per share paid-up

as Rs. 75 )

8,250

3,000

11,250

Forfeited Shares A/c Dr.

To Capital Reserve A/c (W. N. 1)

(Being profit on re-issue transferred to Capital Reserve)

750

750

Working Note:

(1)

Calculation of amount to be transferred to Capital Reserve

Forfeited amount on 300 Shares=7500

Forfeited amount per share = Rs. 7,500/300 = Rs. 25

Forfeited amount on 150 shares = 150 x 25= 3,750

Transferred to capital Reserve =3750 - 3000=750


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Question 11

Be Beautiful Ltd issued 4,000 equity shares of Rs. 10 each payable as Rs. 3 per share on

Application, Rs. 5 per share (including Rs. 2 as premium) on Allotment and Rs. 4 per share

on Call. All the shares were subscribed. Money due on all shares was fully received

excepting Remu, holding 150 shares, failed to pay the Allotment and Call money and Semu,

holding 50 shares, failed to pay the Call Money. All those 200 shares were forfeited. Of theshares forfeited, 125 shares (including whole of Shemu’s shares) were subsequently re-

issued to Jadu as fully paid up at a discount of Rs. 2 per share.

Pass the necessary entries in the Journal of the company to record the forfeiture and re-

issue of the share. Also prepare the Balance Sheet of the company.

Answer

In the books of Be Beautiful Ltd.

Journal





To Equity Share Call A/c (200 x Rs. 4)

To Forfeited Shares A/c

(Being forfeiture of 200 equity shares for nonpayment of

allotment and call money on 150 shares and for non-payment of call money on 50 shares.)

Note : Mr. Remu could not pay the amount due on

allotment and as such he could not pay the amount of

premium also. Hence the securities premium reserve A/c

will be debited in the entry of forfeiture.

2,000

300

750

800

750

Bank A/c (125x8) Dr.

Forfeited Shares A/c (125x2) Dr.

To Equity Share Capital A/c (125x10)

(Being re-issue of 125 shares @ Rs. 8 each )

1,000

250

1,250

Forfeited Shares A/c Dr.

To Capital Reserve A/c

(Being profit on re-issue transferred to Capital Reserve)

275

275


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Particulars Notes No.

EQUITY AND LIABILITIES

Shareholders’ funds

Share capital 1 39,475

Reserves and Surplus 2 7975

Total 47450

ASSETS

Current assets

Cash and cash equivalents (bank) 47450

Total 47450

Notes to accounts

1. Share Capital

Equity share capital

Issued share capital

4,000 Equity shares of Rs. 10 each 40,000

Subscribed, called up and paid up share capital

3,925(4000-200+125) Equity shares of Rs. 10 each 39,250

Add : Forfeited shares 225

39,475

2. Reserves and Surplus

Securities Premium 7700 (8000-300)

Capital Reserve 275

7975

Cash and Cash equivalents = application 12000 + allotment 19250 + calls 15200 +

reissued 1000 = 47450


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Working Note :

Amount received on forfeited shares Amount not received on forfeited shares

Applica-

tion

Allot-

ment

First

Call

Allotment First Call Final Call

A 200 - - 200 200 200

B 400 400 - - 400 400

C 300 300 300 - - 300

TOTAL 900 700 300 200 600 900

Money

Receivableper share

Rs. 2 Rs. 3 Rs. 3 Rs. 3 Rs. 3 Rs. 2

Rs. 1,800 Rs. 2,100 Rs. 900 Rs. 600 Rs. 1,800 Rs. 1,800

Question 13

B Ltd. issued 20,000 equity shares of Rs. 10 each at a premium of Rs. 2 per share payable

as follows: on application Rs. 5(including Re.1 premium), on allotment Rs. 5(including

Re.1 premium); on final call Rs. 2. Applications were received for 24,000 shares. Letters of

regret were issued to applicants for 4,000 shares and were allotted to all the other

applicants. Mr. A, who is the holder of 200 shares, failed to pay the allotment and call

money, the shares were forfeited. Show the Journal Entries and Cash Book in the books of

B Ltd.

Answer

In the Books of B Ltd.

Cash Book

To Equity Share Application A/c 1,20,000

To Equity Share Allotment A/c 99,000 By Equity ShareApplication A/c 20,000

To Equity Share Final Call A/c 39,600 By Balance c/d 2,38,600

2,58,600 2,58,600


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Particular Amount Dr. Amount Cr.

Equity Share Application A/c (20,000 x 5) Dr.

To Equity Share Capital A/c (20,000 x 4)To Securities Premium A/c (20.000 x 1)

(Being application money on 20,000 shares @ Rs. 5 each

transferred to Equity Share Capital Account )

1,00,000

80,00020,000

Equity Share Allotment A/c Dr.

(20,000 x 5)

To Equity Share Capital A/c (20,000 x 4)

To Securities Premium A/c (20.000 x 1)

(Being allotment money due on 20,000 shares @ Rs. 5 each)

1,00,000

80,000

20,000

Equity share final call A/c Dr.

To share capital A/c

(Being share final call money due on 20,000 shares @ Rs. 2

per share)

40,000

40,000



To Equity Share Allotment A/c

To Equity Share Final Call A/c

To Forfeited Shares A/c

(Being forfeiture of 200 shares for non payment of

allotment money and final call money )

Note: Mr. A could not pay the amount due on allotment and

as such he could not pay the amount of premium also.

Hence the securities premium reserve A/c will be debited inthe entry of forfeiture.

2,000

200

1,000

400

800

Question 14

X Co. Ltd. was incorporated with an authorized share capital of 1,00,000 equity shares of

Rs. 10 each. The directors decided to allot 10,000 shares credited as fully paid to the

promoters for their services.


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The company also purchased land and buildings from Y Co. Ltd for Rs. 4,00,000 payable in

fully paid-up shares of the company. The balance of the shares were issued to the public,

which were fully subscribed and paid for.

You are required to pass Journal Entries and to prepare the Balance Sheet.

Answer

Journal


Goodwill A/c Dr.

To Equity Share Capital A/c (10,000 x 10)

(Being the issue of 10,000 shares of Rs. 10 each fully paid

to the promoters for their services )

1,00,000

1,00,000

Land and Buildings A/c Dr.To Y Co. Ltd A/c

(Being the land and buildings purchased from Y Co. Ltd).

4,00,0004,00,000

Y Co. Ltd A/c Dr.

To Share capital A/c (40000 x 10)

(Being 40000 shares issued to the vendor @ Rs. 10 per

share)

400000

400000

Bank A/c Dr.

To Equity Share Capital A/c (50000 x 10)

(Being the issue of 50,000 shares of Rs. 10 each)

5,00,000

5,00,000

Balance Sheet of X Company Limited

Particulars Notes No. Rs.


Shareholders’ funds

Share capital 1 10,00,000

Total 10,00,000


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ASSETS

1. Non-current assets

a Fixed assets

i Tangible assets 2 4,00,000

ii Intangible assets 3 1,00,000

2. Current assets

Cash and cash equivalents 4 5,00,000

Total 10,00,000

Notes to accounts

1. Share Capital


Authorised share capital

1,00,000 Equity shares of Rs. 10 each Issued share

capital

10,00,000

1,00,000 Equity shares of Rs. 10 each

(Out of the above 50,000 shares have been allotted

as fully paid up pursuant to contract(s) without

payment being received in cash)

2. Tangible Assets

4,00,000 Land and Building

3. Intangible Assets

Goodwill 1,00,000

4. Cash and cash equivalents

Balances with banks 5,00,000

Question 15

What is employee stock option plan? Explain the importance of such plans in the modern

time.

Answer

Employee Stock Option Plan is a plan under which the company grants employee stock

options. Employee stock option is a contract that gives the employees of the enterprise the

right, but not the obligation, for a specified period of time to purchase or subscribe the


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shares of the company at a fixed or determinable price which is generally lower than the

prevailing market price of its shares.

The importance of these plans lies in the following advantages which accrue to both the

company and the employees:

1.

Stock options provide an opportunity to employees to participate and contribute in

the growth of the company.

2.

Stock option creates long term wealth in the hands of the employees.

3.

They are important means to attract, retain and motivate the best available talent

for the company.

4.

It creates a common sense of ownership between the company and its employees.

Question 16

X Co. Ltd. has its share capital divided into equity shares of Rs. 10 each. On 1.1.2014 it

granted 15 ,000 employees’ stock option at Rs. 50 per share, when the market price was

Rs. 120 per share. The options were to be exercised between 15th March, 2015 and 31stMarch, 2015. The employees exercised their options for 10,000 shares only and the

remaining options lapsed. The company closes its books on 31st March every year. Show

Journal entries (with narration) as would appear in the books of the company up to 31st

March, 2015.

Answer

In the books of X Co. Ltd. Journal Entries


15.03.2015 Bank A/c (10,000 x 50) Dr.

Employee compensation expense A/c Dr.

(10,000 x 70)

To Equity share capital A/c (10,000 x 10)

To Securities premium A/c (10,000 x 110)

(Being shares issued to the employees against

the options vested to them in pursuance of

Employee Stock Option Plan)

5,00,000

7,00,000

1,00,000

11,00,000

31.03.2015 Statement of Profit and Loss A/ c Dr.

To Employee compensation expenses A/c

(Being transfer of employee compensation

transfer to Profit and Loss Account)

7,00,000

7,00,000


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Working Notes:

1. No entry is passed when Stock Options are granted to employees. Hence, no entry will

be passed on 1st April 2014;

2. Market Price = Rs. 120 per share whereas as stock option price = Rs. 50, Hence, the

difference Rs. 120 – Rs. 50 = Rs. 70 per share is equivalent to employee cost or

employee compensation expense and will be charged to P/L Account as such for thenumber of options exercised i.e. 10,000 shares.

Question 17

S Ltd. grants 1,000 options to its employees on 1.4.2014 at Rs. 70. The vesting period is two

and a half years. The maximum exercise period is one year. Market price on that date is

100. All the options were exercised on 31.7.2015. Journalize, if the face value of equity

share is Rs. 10 per share.

Answer

Books of S Ltd.

Journal Entries

Date Particulars Debit Credit

31.3.14 Employees Compensation Expense Account Dr.

To Employees Stock Option Out-standing

Account

(Being compensation expense recognized in

respect of 1,000 options granted to employees at

discount of Rs. 30 each, amortized on straight line

basis over 2½ years)

12,000

12,000

Statement of Profit and Loss Account Dr.

To Employees Compensation Expense Account

(Being employees compensation expense of the

year transferred to P&L A/c)

12,000

12,000

31.3.14 Employees Compensation Expense Account Dr.

To Employees Stock Option Outstanding

Account

(Being compensation expense recognized in

respect of 1,000 options granted to employees at

discount of Rs. 30 each, amortized on straight line

basis over 2½ years)

12,000

12,000


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31.3.15 Profit and Loss Account Dr.




12,000

12,000

Employees Compensation Expense Account Dr.

To Employees Stock Option Outstanding

Account

(Being balance of compensation expense

amortized Rs. 30,000 less Rs. 24,000)

6,000

6,000

Statement of Profit and Loss Account Dr.




6,000

6,000

31.7.15 Bank Account (Rs. 70 × 1,000) Dr.To Equity Share Capital Account

To Securities Premium Account

(Being exercise of 1,000 options at an exercise

price of Rs. 60)

70,00010,000

60,000

31.7.15 Stock Option Outstanding A/c (Rs. 30 x 1,000) Dr.

To Securities Premium Account

(Being the balance in the Employees Stock Option

Outstanding Account transferred to Securities

Premium A/c)

30,000

30,000

Working Notes:

1. Total employees compensation expense = 1,000 x (Rs. 100 – Rs. 70) = Rs. 30,000

2. Employees compensation expense has been written off during 2½ years on straight

line basis as under:

I year = Rs. 12,000 (for full year)

II year = Rs. 12,000 (for full year)III year = Rs. 6,000 (for half year)

Question 18

What are the conditions to be fulfilled by a Joint Stock Company to buy-back its equity

shares as per Companies Act, 2013. Explain in brief.


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Answer

Section 68 to 70 of the Companies Act, 2013 lays down the provisions for a company to

buy-back its own equity shares. The key provisions in this regard are as under:

(a) A company may purchase its own shares or other specified securities out of:

(i) Its free reserves;(ii) The securities premium account;

(iii) The proceeds of the issue of any shares or other specified securities (not being

the proceeds of an earlier issue of the same kind of shares or other specified

securities).

(b) The buy-back is authorized by its articles.

(c) A special resolution has been passed in general meeting of the company authorising

the buy-back (except where the buy back is of less than 10% of the paid up equity

capital and free reserves of the company and the buy back is authorized by the Board

by means of a resolution passed at a duly convened Board Meeting)(d) The buy-back does not exceed 25% of the total paid up capital and free reserves of the

company. Provided that in case of buy back of equity shares in any financial year, the

25% of paid up capital shall be construed as 25% of the total paid up equity capital in

that financial year.

(e) The ratio of the secured and unsecured debt owed by the company after the buy back

is not more than twice the paid up capital and its free reserves.

(f) All the shares and other securities for buy-back are fully paid up.

(g) The buy-back is completed within 12 months of the passing of the special resolution

or a resolution passed by the Board.

(h) The buy-back of the shares listed on any recognized stock exchange is in accordance

with the regulations made by the SEBI in this behalf.

(i) Before making such buy-back, a listed company has to file with the Registrar and the

SEBI a declaration of solvency in the prescribed form.

(i) the buy back may be from;

(i) the existing shareholders or security holders on proportionate basis;

(ii) the open market;

(iii) the shares or securities issued to the employees of the company pursuant to ascheme of Stock Option or Sweat Equity.

(j) Where a company purchases its own shares out of its free reserves or securities

premium account it shall transfer an amount equal to the nominal value of such

shares to Capital Redemption Reserve Account and details of such transfers should be

given in the Balance Sheet.


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Question 19

KG Limited furnishes the following summarized Balance Sheet as at 31st March, 2015,

Liabilities (Rs. in lakhs) Assets (Rs. in lakhs)


(fully paid up shares of Rs. 10 each)

1,200 Machinery 1,800

Securities premium 175 Furniture 226

General reserve 265 Investment 74

Capital redemption reserve 200 Inventory 500

Profit & loss A/c 170 Trade receivables 160

12% Debentures 750 Cash at bank 740

Trade payables 645Other current liabilities 95

3,500 3,500

On 1st April, 2015, the company announced the buy back of 25% of its equity shares @ Rs.

15 per share. For this purpose, it sold all of its investments for Rs. 72 lakhs.

On 5th April, 2015, the company achieved the target of buy back. On 30th April, 2015 the

company issued one fully paid up equity share of Rs. 10 by way of bonus for every four

equity shares held by the equity shareholders.

You are required to:(1) Pass necessary journal entries for the above transactions.

(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares

Answer

In the books of KG Limited

Journal Entries

Date Particulars Dr.

(in lakhs)

Cr.

(in lakhs)

April 1 Bank A/

c Dr.

Loss on sale of Investment A/c Dr.

To Investment A/c

(Being investment sold on loss)

72

2

74


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April 5 Equity share capital A/c Dr.

Premium payable on buy back A/c Dr.

To Equity shares holder A/c

(Being the amount due to equity shareholders on buy

back)

Equity shareholder A/c Dr.

To Bank A/c

(Being the payment made on account of buy back of

30 Lakh Equity Shares)

300

150

450

450

450

April 5 General reserve A/

c Dr.

Profit and Loss A/

c Dr.

To Capital redemption reserve A/c

(Being amount equal to nominal value of buy back

shares from free reserves transferred to capital

redemption reserve account as per the law)

Capital redemption reserve A/c Dr.

To Bonus shares A/c (W.N.1)

(Being the utilization of capital redemption reserveto issue bonus shares)

265

35

300

April 30

225

225

Bonus shares A/

c Dr.

To Equity share capital A/c

(Being issue of one bonus equity share for every four

equity shares held)

225

225

Securities premium A/c Dr.

To Premium payable on buy back A/c

(Being premium payable on buy back adjusted from

securities premium account)

150

150


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Balance Sheet (After buy back and issue of bonus shares)

Particulars Note No Amount

(in Lakhs)

I. Equity and Liabilities

(1) Shareholder's Funds

(a) Share Capital 1 1,125

(b) Reserves and Surplus 2 433

(2) Non-Current Liabilities

(a) Long-term borrowings

- 12% Debentures

750

(3) Current Liabilities

(a) Trade payables 645

(b) Other current liabilities 95

Total 3,048

II.

(1)

Assets

Non-current assets

(a) Fixed assets

(i) Tangible assets 3 2,026

(2) Current assets

(a) Current investments

(b) Inventory 500

(c) Trade receivables 160

(d) Cash and cash equivalents (W.N. 2) 362

Total 3,048

Notes to Accounts

1. Share Capital

Equity share capital (Fully paid up shares of Rs.10 each) 1125


General Reserve 265

Less : Transfer to CRR (265)

Capital Redemption Reserve 200

Add : Transfer due to buy-back of shares from P/L 35


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The company wants to buy back 25,000 equity shares of Rs. 10 each, on 1st April, 2015 at

Rs. 20 per share. Buy back of shares is duly authorized by its articles and necessary

resolution passed by the company towards this. The payment for buy back of shares will be

made by the company out of sufficient bank balance available as part of Current Assets.

Comment with your calculations, whether buy back of shares by company is within the

provisions of the companies Act, 2015. If yes, pass necessary journal entries towards buyback of shares and prepare the Balance Sheet after buy back of shares.

Answer

Determination of Buy back of maximum no. of shares as per the Companies Act, 2013

1. Shares Outstanding Test

Particulars (Shares)

Number of shares outstanding 1,25,000

25% of the shares outstanding 31,250

2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free

Reserves

Particulars

Paid up capital (Rs.) 12,50,000

Free reserves (Rs.) (15,00,000 + 2,50,000 + 1,25,000) 18,75,000

Shareholders’ funds (Rs.) 1,25,000

25% of Shareholders fund (Rs.) 7,81,250

Buy back price per share Rs. 20

Number of shares that can be bought back (shares) 39,062

Actual Number of shares for buy back 25,000

3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post

Buy Back

Particulars Rs.

(a) Loan funds (Rs.) (18,75,000+10,00,000+16,50,000) = 45,25,000

(b) Minimum equity to be maintained after buy back inthe ratio of 2:1 (a/2) = 22,62,500

(c) Present equity/shareholders fund = 31,25,000

(d) Future equity/shareholders fund

(see W.N.) (31,25,000 – 2,87,500) = 28,37,500


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(e) Maximum permitted buy back of Equity [(d) – (b)] = 5,75,000

(f) Maximum number of shares that can be bought back

@Rs. 20 per share 28,750 shares

(g) Actual Buy Back Proposed 25,000 Shares

Summary statement determining the maximum number of shares to be bought back

Particulars Number of shares

Shares Outstanding Test 31,250

Resources Test 39,062

Debt Equity Ratio Test 28,750

Maximum number of shares that can be bought back [least of the above] 28,750 Company

qualifies all tests for buy-back of shares and came to the conclusion that it can buy

maximum 28,750 shares on 1st April, 2015.

However, company wants to buy-back only 25,000 equity shares @ Rs. 20. Therefore,

buyback of 25,000 shares, as desired by the company is within the provisions of theCompanies Act, 2013.

Journal Entries for buy-back of shares

Debit (Rs.) Credit (Rs.)

(a) Equity shares buy-back account Dr. 5,00,000

To Bank account

(Being buy back of 25,000 equity shares ofRs. 10 each @ Rs. 20 per share)

5,00,000

(b) Equity share capital account Dr. 2,50,000

Securities premium account Dr. 2,50,000

To Equity shares buy-back account(Being

cancellation of shares bought back)

5,00,000

(c) Revenue reserve account Dr. 2,50,000

To Capital redemption reserve account

(Being transfer of free reserves to capital

redemption reserve to the extent of nominal

value of capital bought back through free

reserves)

2,50,000


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As per Section 68 (2) (d) of the Companies Act 2013, the ratio of debt owed by the company

should not be more than twice the capital and its free reserves after such buy-back. Further

under Section 69 (1), on buy-back of shares out of free reserves a sum equal to the nominal

value of the share bought back shall be transferred to Capital Redemption Reserve (CRR).

As per section 69 (2) utilization of CRR is restricted to fully paying up unissued shares of

the Company which are to be issued as fully paid-up bonus shares only. It means CRR is not

available for distribution as dividend.

Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. shares

capital and free reserves, amount transferred to CRR on buy-back has to be excluded from

the present equity.

Balance Sheet of M/s. Competent Ltd. as on 31st March, 2015

Particulars Note No Amount


1 Shareholders' funds

(a) Share capital 1 10,00,000

(b) Reserves and Surplus 2 16,25,000

2 Non-current liabilities

(a) Long-term borrowings 3 28,75,000

3 Current liabilities 16,50,000

Total 71,50,000

ASSETS

1 Non-current assets

(a) Fixed assets 46,50,000

2 Current assets (30,00,000-5,00,000) 25,00,000

Total 71,50,000


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Notes to accounts

1. Share Capital


1,00,000 Equity shares of Rs. 10 each 10,00,000


Profit and Loss A/c 1,25,000

Revenue reserves 15,00,000

Less : Transfer to CRR (2,50,000)

12,50,000

Securities premium 2,50,000

Less : Utilisation for share buy-back (2,50,000)

Capital Redemption Reserves 2,50,000

16,25,000

3. Long-term borrowings - Secured

12% Debentures 18,75,000

Unsecured loans 10,00,000

28,75,000

Working Note

Amount transferred to CRR and maximum equity to be bought back will be calculated

by simultaneous equation method.

Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of

equity is ‘y’.

Then (31,25,000 – x) – 22,62,500 = y (1)

10x20

y= x, or 2x = y

by solving the above equation we get

x = Rs. 2,87,500

y = Rs. 5,75,000


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Question 21

X Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2015:

Equity & liabilities Rs. in ‘000’ Rs. in ‘000

Share Capital

Authorized Capital

Issued and subscribed share capital

2,00,000 Equity shares of 10 each fully paid up

20,000 9% Preference Shares of 100 each

(issued two months back for the purpose of buy back)

2000

2000

5000

4,000

Reserve and Surplus:

Capital reserve

Revenue reserve

Securities premiumProfit and Loss account

10

5,000

5001,800 7,310

Non-current liabilities - 10% Debentures

Current liabilities and provisions

400

40

Total 11,750

Assets

Fixed Assets: Cost

Less: Provision for depreciation

3,000

250 2,750

Non-current investments at cost 4,000

Current assets, loans and advances (including cash and

bank balances)

5,000

Total 11,750

(1) The company passed a resolution to buy back 20% of its equity capital @ 15 per

share. For this purpose, it sold its investments of 30 lakhs for 27 lakhs.

(2) The company redeemed the preference shares at a premium of 10% on 1st April, 2015.

(3) Included in its investments were 'Investments in own debentures' costing 3 lakhs

(face value 3.30 lakhs). These debentures were cancelled on 1st April, 2015.

You are required to pass necessary Journal entries and prepare the Balance Sheet on

01.04.2015.


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Answer

Journal Entries in the books of X Ltd.

Sl. No. Particulars Dr.

(in ‘ 000)

Cr.

(in ‘ 000)

1 Bank a/c Dr.

Profit and Loss A/c Dr.

To Investment Account

(Being investment sold for the purpose of

buy-back of Equity Shares)

2700

300

3000

2 Preference share capital A/c Dr.

Premium on redemption ofPreference Shares A/c Dr.

To Preference shareholders A/c

(Being redemption of preference share

capital at premium of 10%)

2,000

200

2,200

3 Preference shareholders A/c Dr.

To Bank A/c

(Being payment made to preference

shareholders)Revenue Reserve A/c Dr.

To Capital redemption reserve A/c

(Refer Note)

(Being creation of capital redemption

reserve to the extent of nominal value of

preference shares redeemed)

2,200

2,200

4 2,000

2,000

5 Equity share capital A/c Dr.


(Premium payable on buy-back)

To Equity shareholder A/c

(Being the amount due on buy-back of

equity shares )

400

200

600


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6 Equity shareholder A/c Dr.

To Bank A/c

(Being payment made for buy-back of

equity shares)

600

600

7 10% Debentures A/c Dr.

To Own debentures A/c

To Capital reserve A/c

(Profit on cancellation)

(Being own debentures cancelled at

profit)

330

300

30

8 Securities Premium A/c Dr.

To Premium on redemption of

preference shares A/c

(Being premium on redemption of

preference shares adjusted through

securities premium)

200

200

Balance Sheet of the X Ltd. as on 1st April, 2015

Notes No. Rs. in ‘000

Equity and Liabilities

1 Shareholders fundsShare capital 1 1,600

Reserves and Surplus 2 6,640

2 Non-current liabilities

Long term borrowings 3 70

3 Current liabilities 40

Total 8,350

Assets

1 Non-current assets(a) Fixed assets 2,750

(b) Non-current investments 4 700

2 Current assets 5 4,900

Total 8,350


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Notes to Accounts in ‘000 Rs. in ‘000

1. Share Capital

Authorized share capital: 5,000

Issued, subscribed and fully paid up share

capital:

1,60,000 Equity shares of 10 each, fully paid up 1,600

(40,000 equity shares had been bought back

and cancelled during the year)


Capital Reserves

10 Add : Profit on cancellation of debentures 30 40

Securities Premium 500

Less: Premium on redemption of preference

shares(200)

Premium on buy-back of equity shares - (200) 100

Revenue Reserve 5,000

Less: Transfer to Capital Redemption Reserve (2,000) 3,000

Capital Redemption reserve 2,000

Surplus (Profit & Loss Account) 1,800

Less: Loss on sale of investment 1,300 5,340 (300) 1,500

Total 6,640

3. Long term borrowings 10% Debentures (400-

330)70

4. Non-current investmentsBalance as on 31.03. 2013

Less: Investment sold

Own debentures cancelled

Total

4,000

(3,000)

(300)

700


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5. Current assets

Balance as on 31.03.2013

Add : Cash received on sale of investment

Less: Payment made to equity shareholders

Payment made to preference

shareholders for buy back of sharesTotal

5,000

2,700

(600)

(2,200)4,900

Note : In the given solution, it is assumed that buy-back of shares has been done out of the

proceeds of issue of preference shares, therefore, no amount is transferred to capital

redemption reserve for buy-back. However, if it is assumed that buy-back is from sale of

investments and not from the proceeds of issue of preference shares, then, amount of

revenue reserves transferred to capital redemption reserve will be 2,600 instead of 2,000.

Question 22

Explain the term “Firm” underwriting.

Answer

‘Firm’ underwriting signifies a definite commitment to take up a specified number of sharesby an underwriter irrespective of the number of shares subscribed for by the public. In

such a case, unless it has been otherwise agreed, the underwriter’s liability is determined

without taking into account the number of shares taken up by him under the “firm”

commitment, i.e. the underwriter is obliged to take up :

1. the number of shares he has applied for ‘firm’; and

2. the number of shares he is obliged to take up on the basis of the underwriting agreement.

Question 23

A joint stock company resolved to issue 10 lakh equity shares of Rs. 10 each at a premium

of Re. 1 per share. Two lakh of these shares were taken up by the directors of the company,

their relatives, associates and friends, the entire amount being received forthwith. The

remaining shares were offered to the public, the entire amount being asked for with

applications.

The issue was underwritten by X, Y and Z for a commission @ 2.5% of the issue price, 65%

of the issue was underwritten by X, while Y’s and Z’s shares were 25% and 10%

respectively. Their firm underwriting was as follows :

X 30,000 shares, Y 20,000 shares and Z 10,000 shares. The underwriters were to submit

unmarked applications for shares underwritten firm with full application money along

with members of the general public. Marked applications were as follows:

X 1,19,500 shares, Y 57,500 shares and Z 10,500 shares.


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Unmarked applications totaled 6,00,000 shares. Accounts with the underwriters were

promptly settled.

You are required to:

(i) Prepare a statements calculating underwriters’ liability for shares other than shares

underwritten firm.

(ii) Pass journal entries for all the transactions including cash transactions.

Answer

Statement showing underwriters’ liability for shares other than shares underwritten

firm

X Y Z TOTAL

Gross liability (Issued shares – purchased by promoters, directors

etc. (8,00,000 shares in the ratio of

65 : 25 : 10)

5,20,000 2,00,000 80,000 8,00,000

Less : Marked applications (1,19,500) (57,500) (10,500) (1,87,500)

4,00,500 1,42,500 69,500 6,12,500

Less : Allocation of unmarked

applications (including firm

underwriting i.e. 7,00,000) in the

ratio 65 : 25 : 10

(3,90,000) (1,50,000) (60,000) (6,00,000)

10,500 (7,500) 9,500 12,500

Surplus of Y allocated to X and Z in the

ratio 65 : 10

(6,500) 7,500 (1,000) -

Additional shares to be purchased by

X & Z

4,000 - 8,500 12,500


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Additional Liability for additional

shares@ Rs. 11

44,000 - 93,500

Underwriting commission payable

on Gross Liability

(Shares underwritten as Gross

liability × 11 × 2.5%)

(1,43,000) (55,000) (22,000)

Net Amount payable/receivables (99,000) (55,000) 71,500

(ii) Journal Entries

Particulars Dr. Cr.

Bank A/c Dr.

To Equity Shares Application A/c

(Being application money received on 2 lakh

equity shares purchased by directors etc. @

Rs. 11 per share)

22,00,000

22,00,000

Bank A/c Dr.


(Application money received on 7,87,500

equity shares @ Rs. 11 per share from general

public and underwriters for shares

underwritten firm)

86,62,500

86,62,500

Equity Share Application A/c Dr.

X’ s A/c Dr.

Z’ s A/c Dr.

To Equity Share Capital A/cTo Securities Premium A/c

(Allotment of 10 lakh equity shares of 10 eachat a premium of Rs. 1 per share)

1,08,62,500

44,000

93,500

1,00,00,00010,00,000


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Underwriting commission A/c Dr.

To X’s A/c

To Y’s A/c

To Z’s A/c

(Amount of underwriting commission payable

to X, Y and Z @ 2.5% on the amount of shares

underwritten)

2,20,000

1,43,000

55,000

22,000

Bank A/c Dr.

To Z’s A/c

(Amount received from Z in final settlement)

71,500

71,500

X’s A/c Dr.

Y’s A/c Dr.

To Bank A/c

(Amount paid to X and Y in final settlement)

99,000

55,000 1,54,000

Question 24

Suprima Ltd. came out with an issue of 45,00,000 equity shares of 10 each at a premium

of Rs. 2 per share. The promoters took 20% of the issue and the balance was offered to the

public. The issue was equally underwritten by A & Co; B & Co. and C & Co. Each

underwriter took firm underwriting of 1,00,000 shares each. Subscriptions for 31,00,000

equity shares were received with marked forms for the underwriters as given below:Shares

A & Co. 8,00,000

B & Co. 7,00,000

C & Co. 13,75,000

Total 28,75,000

The underwriters are eligible for a commission of 3.5% on face value of shares. The entire

amount towards shares subscription has to be paid alongwith application. You are

required to:

(a) Compute the underwriters’ liabilities (number of shares)

(b) Compute the amounts payable or due to underwriters; and

(c) Pass necessary journal entries in the books of Suprima Ltd. relating to underwriting.


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Answer

(a) Computation of liabilities of underwriters (No. of shares)

A & Co. B & Co C & Co.

Gross liability (Total Issue – shares

purchased by promoters, directors,

employees etc)

12,00,000 12,00,000 12,00,000

Less : Firm underwriting (1,00,000) (1,00,000) (1,00,000)

11,00,000 11,00,000 11,00,000

Less : Marked applications (8,00,000) (7,00,000) (13,75,000)

Unmarked applications 3,00,000 4,00,000 (2,75,000)

Less : Unmarked applications distributedto A & Co. and B & Co. in equal ratio

(1,12,500) (1,12,500) Nil

Total unmarked applications 1,87,500 2,87,500 (2,75,000)

Less : Surplus of C & Co. distributed to A &

Co. and B & Co. in equal ratio

(1,05,000) (1,05,000) 2,10,000

Net liability (excluding firm

underwriting)

82,500 1,82,500 Nil

Add : Firm underwriting 1,00,000 1,00,000 1,00,000

Total liability (No. of shares) 1,82,500 2,82,500 1,00,000

Total Subscriptions received for 31,00,000 Shares out of which marked shares were Rs.

28,75,000, Hence unmarked shares received were 2,25,000 shares which will be

distributed between A & Co and B & Co only equally (agreed ratio underwriting). C & Co

has already exceeded the underwriting limit hence will not be required to absorb

unmarked shares.

No of shares purchased by Underwriters collectively will be 5 Lakh shares as under:

Total Shares Issued 45,00,000Less: Purchased by Promoters etc 9,00,000

Shares offered to the Public 36,00,000

Total Subscription received 31,00,000

Shares purchased by Underwriters including firm commitment 5,00,000


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(b) Computation of amounts payable by underwriters:

A & Co B & Co C & Co

Liability towards shares to be

subscribed@ 12 per share

21,90,000 33,90,000 12,00,000

Less : Commission (on Gross

Liability) (3.5% on FV Rs. 10 each

on 12 lakhs shares

(4,20,000) (4,20,000) (4,20,000)

Net amount to be paid by

underwriters

17,70,000 29,70,000 7,80,000

(c) In the Books of Suprima Ltd. Journal Entries

Particulars Dr. Cr.

Underwriting commission A/ c Dr.

To A & Co. A/c

To B & Co. A/c

To C & Co. A/c

(Being underwriting commission on the shares

underwritten)

12,60,000

4,20,000

4,20,000

4,20,000

A & Co. A/ c Dr.

B & Co. A/

c Dr.C & Co. A/c Dr.

To Equity share capital A/c

To Share premium A/c

(Being shares including firm underwritten shares

allotted to underwriters)

21,90,000

26,10,00012,00,000

50,00,000

10,00,000

Bank A/

c Dr.

To A & Co. A/c

To B & Co. A/c

To C & Co. A/c

(Being the amount received towards shares allotted

to underwriters less underwriting commission due

to them)

55,20,000

17,70,000

29,70,000

7,80,000


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Question 25

Jumba Ltd. came up with public issue of 30,00,000 Equity shares of Rs. 10 each at Rs. 15

per share. A, B and C took underwriting of the issue in 3 : 2 : 1 ratio. Applications were

received for 27,00,000 shares. The marked applications were received as under:

A 8,00,000 shares

B 7,00,000 shares

C 6,00,000 shares

Commission payable to underwriters is at 5% on the face value of shares.

(i) Compute the liability of each underwriter as regards the number of shares to be

taken up.

(ii) Pass journal entries in the books of Jumba Ltd. to record the transactions relating

to underwriters.

Answer

(i) Computation of liability of underwriters in respect of shares (In shares)

A B C

Gross liability (Total Issue – Promoters

etc.) in agreed ration of 3 : 2 : 1

15,00,000 10,00,000 5,00,000

Less : Unmarked applications

(Subscribed shares – marked shares) in

3 : 2 : 1

(3,00,000) (2,00,000) (1,00,000)

Marked shares as per agreed ratio 12,00,000 8,00,000 4,00,000

Less : Marked applications actually

received

(8,00,000) (7,00,000) (6,00,000)

Shortfall / surplus in marked shares 4,00,000 1,00,000 (2,00,000)

Surplus of C distributed to A & B in 3:2

ratio

(1,20,000) (80,000) 2,00,000

Net liability for underwriting shares 2,80,000 20,000 Nil


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Question 26

‘X’ Ltd., issued 1,00,000 equity shares of Rs. 10 each at par. The entire issue was

underwritten as follows:

A – 60,000 shares (Firm underwriting 8,000 shares)

B – 30,000 shares (Firm underwriting 10,000 shares)

C – 10,000 shares (Firm underwriting 2,000 shares)

The total applications including firm underwriting were for 80,000 shares. The marked

applications were as follows:

A- 20,000 shares; B- 14,000 shares; C- 6,000 shares.

The underwriting contract provides that credit for unmarked applications be given to the

underwriters in proportion to the shares underwritten. Determine the liability of each

underwriter.

Answer

Statement showing liability of underwriters

A B C Total

Gross Liability (Total Issue – purchase by promoters etc)

60,000 30,000 10,000 1,00,000

Less : Firm underwriting (8,000) (10,000) (2,000) (20,000)

52,000 20,000 8,000 80,000

Less : Marked applications (20,000) (14,000) (6,000) (40,000)

32,000 6,000 2,000 40,000

Less : Unmarked applications (total

application less firm underwriting

less marked applications) in gross

liability ratio (Unmarked

Applications = (80,000 – 20,000 –40,000)=20,000

(12,000) (6,000) (2,000) (20,000)

Net Liability 20,000 - - 20,000

Add : Firm underwriting 8,000 10,000 2,000 20,000

Total liability of underwriters 28,000 10,000 2,000 40,000

Total Liability in Amount @ Rs.10/- 2,80,000 1,00,000 2,00,000 4,00,000

The solution is given on the basis that ‘the benefit of firm underwriting is given to

individual underwriters.’


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Question 27

Dolly Ltd. issued 25,00,000 equity shares of Rs.10 each at par. 10,00,000 shares were

issued to the promoters and the balance offered to the public was underwritten by three

underwriters P, Q & R in the ratio of 2 : 4 : 4 with firm underwriting of 50,000, 60,000 and

70,000 shares each respectively. Total subscription received 12,88,000 shares including

marked application and excluding firm underwriting. Marked applications were as follows:

P 3,00,000

Q 3,50,000

R 4,50,000

Unmarked and surplus applications to be distributed in gross liability ratio. Ascertain the

liability of each underwriter.

Answer

Calculation of liability of underwriters (In shares)

P Q R Total

Gross Liability (Total Issue –

purchase by promoters etc.)

3,00,000 6,00,000 6,00,000 15,00,000


250,000 540,000 530,000 13,20,000

Less Marked applications (3,00,000) (350,000) (450,000) (11,00,000)

(50,000) 190,000 80,000 220,000


(In gross liability ratio 4:6:8)

_ (94,000) (94,000) (188,000)

Net Liability (50,000) 94,000 (14,000) 32,000

Excess of P and taken over by Q 50,000 62,000 14,000 _

Net liability (other than firm

underwriting)

- 32,000 _ 32,000

Add : Firm underwriting 50,000 60,000 70,000 1,80,000

Total liability of underwriters

including firm underwriting

50,000 92,000 70,000 2,12,000

Total Liability in Amount @ Rs.

10/-

5,00,000 9,20,000 7,00,000 41,20,000


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Question 28

ABC Ltd. came up with public issue of 3,00,000 Equity Shares of Rs.10 each at Rs. 15 per

share. P, Q and R took underwriting of the issue in ratio of 3 : 2: 1 with the provisions of

firm underwriting of 20,000, 14,000 and 10,000 shares respectively.

Applications were received for 2,40,000 shares excluding firm underwriting. The marked

applications from public were received as under:

P - 60,000

Q - 50,000

R - 60,000

Compute the liability of each underwriter as regards the number of shares to be taken up

assuming that the benefit of firm underwriting is not given to individual underwriters.

Answer

Calculation of liability of each underwriter (in shares) assuming that the benefit of firm

underwriting is not given to individual underwriters

P Q R Total



150,000 1,00,000 50,000 3,00,000

Less : Marked applications

(excluding firm underwriting)

(60,000) (50,000) (60,000) (170,000)

Balance 90,000 50,000 (10,000) 1,30,000

Less : Surplus of R allocated to P

and Q in the ratio of 3:2

(6,000) (4,000) 10,000 -

84,000 46,000 - 1,30,000



(Refer W.N.)

(57,000) (38,000) (19,000) (1,14,000)

Net Liability 27,000 8,000 (19,000) 232,000

Less : Surplus of R allocated to P

and Q in the ratio of 3:2

11,400 (7,600) 19,000

Net liability (other than firmunderwriting)

15,600 400 - 16,000


Total liability of underwriters


35,600 1,4,400 10,000 60,000


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Working Note:

Applications received from public 2,40,000 shares

Add : Shares underwritten firm (20,000 + 14,000 + 10,000) 44,000 shares

Total applications 2,84,000 shares

Less : Marked applications (60,000 + 50,000 + 60,000) (1,70,000 shares)Unmarked applications including firm underwriting 1,14,000 shares

Question 29

A company issued 1,50,000 shares of Rs. 10 each at a premium of Rs. 10. The entire issue

was underwritten as follows:

X – 90000 shares (Firm underwriting 12000 shares)

Y – 37500 shares (Firm underwriting 4500 shares)

Z – 22500 shares (Firm underwriting 15000 shares)

Total subscriptions received by the company (excluding firm underwriting and markedapplications) were 22500 shares.

The marked applications (excluding firm underwriting) were as follows:

X – 15000 shares

Y – 30000 shares

Z – 7500 shares

Commission payable to underwriters is at 5% of the issue price. The underwriting contract

provides that credit for unmarked applications be given to the underwriters in proportion

to the shares underwritten and benefit of firm underwriting is to be given to individualunderwriters.

(i) Determine the liability of each underwriter (number of shares);

(ii) Compute the amounts payable or due from underwriters; and

(iii) Pass Journal Entries in the books of the company relating to underwriting.

Answer

(i) Computation of total liability of underwriters in shares (In shares)

X Y Z Total



90,000 37,500 22,500 1,50,000

Less : Marked applications

(excluding firm underwriting)

(15,000) (30,000) (7,500) (52,500)


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75,000 7,500 15,000 97,500

Less : Unmarked applications (In

gross liability ratio 12:5:3)

(13,500) (5,625) (3,375) (22,500)

61,500 1,875 11,625 75,000


Balance 49,500 (2,625) (3,375) 43,500

Less : Surplus of Y and Z adjusted

in X’s balance (2,625+3,375)(6,000) 2,625 3,375

Net liability 43,500 - - 43,500


Total Liability 55,500 4,500 15,000 75,000

(ii) Calculation of amount payable to or due from underwriters

X Y Z Total

Total liability 55,500 4,500 15,000 75,000

Amount receivable @ Rs. 20 from

underwriter (in Rs.)

11,10,000 90,000 3,00,000 15,00,000

Less : Underwriting Commission

payable @ 5% of Rs. 20 (in Rs.)

(90,000) (37,500) (22,500) (1,50,000)

Net amount receivable (in Rs.) 10,20,000 52,500 2,77,500 13,50,000

(iii) Journal Entries in the books of the company (relating to underwriting)

Sl. no. Particular Dr. Cr.

1 X Dr.

Y Dr.

Z Dr.

11,10,000

90,000

3,00,000


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(Being allotment of shares to underwriters)

7,50,000

7,50,000

2 Underwriting commission A/c Dr.

To X

To Y

To Z

(Being amount of underwriting commission

payable)

1,50,000

90,000

37,500

22,500

3 Bank A/c Dr.

To X

To Y

To Z

(Being net amount received by

underwriters for shares allotted less

underwriting commission)

13,50,000

10,20,000

52,500

2,77,500

Question 30

The Balance Sheet of X Ltd. as on 31st March, 2015 is as follows:

Particulars Rs.


1. Shareholders’ funds

a Share capital 2,90,000

b Reserves and Surplus 48,000

2. Current liabilities

Trade Payables 56,500

Total 3,94,500

ASSETS

1. Fixed Assets

Tangible asset 3,45,000

Non-current investments 18,500


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2. Current Assets

Cash and cash equivalents (bank) 31,000

Total 3,94,500

The share capital of the company consists of Rs. 50 each equity shares of Rs. 2,25,000 andRs. 100 each Preference shares of Rs. 65,000 (issued on 1.4.2013). Reserves and Surplus

comprises Profit and Loss Account only.

In order to facilitate the redemption of preference shares at a premium of 10%, the

Company decided:

(a) to sell all the investments for Rs. 14,000.

(b) to finance part of redemption from company funds, subject to, leaving a bank

balance of 14,000.

(c) to issue minimum equity share of Rs. 50 each at a premium of Rs. 10 per share to

raise the balance of funds required.

You are required to pass:

The necessary Journal Entries to record the above transactions and prepare the balance

sheet as on completion of the above transactions.9.69

Answer

Journal

Particulars Dr. Cr.

Bank A/c Dr.


(For application money received on 675

shares@ Rs.60 per share)

40,500

40,500




(For disposition of application money received)

40,500

33,750

6,750

Preference Share Capital A/c Dr.

Premium on Redemption of Preference

Shares A/c Dr.To Preference Shareholders A/c

(For amount payable on redemption of

preference shares)

65,000

6,500

71,500


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To Premium on Redemption of

Preference Shares A/c

(For writing off premium on redemption

firstly out of securities premium and balanceout of profits)

6,250

250

6,500

Bank A/c Dr.

Profit and Loss A/c (loss on sale) A/c Dr.

To Investment A/c

(For sale of investments at a loss of Rs. 4,500)

14,000

4,500

18,500


To Capital Redemption Reserve A/c

(For transfer to CRR out of divisible profits an

amount equivalent to excess of nominal value over

proceeds i.e., Rs. 65,000 – Rs. 33,750)

31,250

31,250

Preference Shareholders A/c Dr.

To Bank A/c

(For payment of preference shareholders)

71,500

71,500

Balance Sheet (after redemption)

EQUITY AND LIABILITIES Notes No. Rs.


a. Share capital 1 2,58,750

b. Reserves and Surplus 2 43,750

2. Current liabilities

Trade Payables 56,500

Total 3,59,000


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ASSETS

1. Fixed Assets

Tangible asset 3,45,000

2. Current AssetsCash and cash equivalents 3 14,000

Total 3,59,000

Notes to accounts

1. Share Capital

5175 Equity share @ Rs. 50 each 2,58,750


a) Capital Redemption Reserve 31,250b) Profit and Loss Account (48,000 – 250 – 4,500 – 31,250) 12,000

c) Securities Premium (6,750-6,250) 500

43,750

3. Cash and cash equivalents

Balances with banks (31,000 + 40,500 +14,000 – 71,500) 14,000

Working Note

Calculation of Number of Shares: Rs.Amount payable on redemption 71,500

Less : Sale price of investment (14,000)

57,500

Less : Available bank balance (31,000 - 14,000) (17,000)

Funds from fresh issue 40,500

No. of shares = 40,500/60 = 675 shares

Question 31

The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December,

2014.


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Share capital : 40,000 Equity shares of Rs. 10 each fully paid – Rs. 4,00,000; 1,000 10%

Redeemable preference shares of Rs. 100 each fully paid – Rs.1,00,000. Reserve & Surplus:

Capital reserve – Rs. 50,000; Securities premium – Rs. 50,000; General reserve – 75,000;

Profit and Loss Account – Rs. 35,000

On 1st January 2015, the Board of Directors decided to redeem the preference shares at

par by utilisation of reserve.

You are required to pass necessary Journal Entries including cash transactions in the

books of the company.

Answer

In the books of ABC Limited Journal Entries

Date Particulars Dr. (Rs.) Cr. (Rs)

Jan 1 10% Redeemable Preference Share Dr.

Capital A/c

1,00,000

To Preference Shareholders A/c 1,00,000


To Bank A/c

1,00,000

1,00,000

(Being the amount paid on

redemption of preference shares)

General Reserve A/c Dr. 75,000

Profit & Loss A/c Dr. 25,000


(Being the amount transferred to Capital

Redemption Reserve Account as per the

requirement of the Act)

1,00,000

Note:

Securities premium cannot be utilised for transfer to Capital Redemption Reserve because

dividend cannot be paid out of Securities Premium Account.


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Question 32

C Limited had 3,000, 12% Redeemable Preference Shares of Rs. 100 each, fully paid up.

The company had to redeem these shares at a premium of 10%.

It was decided by the company to issue the following:

(i) 20,000 Equity Shares of Rs. 10 each at par,

(ii) 1,000 14% Debentures of Rs. 100 each.

The issue was fully subscribed and all amounts were received in full .The payment was

duly made. The company had sufficient profits. Show Journal Entries in the books of the

company.

Answer

In the books of C Limited Journal Entries

Particulars Dr. Cr.

Bank A/c Dr.


(Being the issue of 20,000 equity shares of Rs. 10 each

at par .)

2,00,000

2,00,000

Bank A/c Dr.

To 14% Debenture A/c

(Being the issue of 1,000 Debentures of Rs. 100 each)

1,00,000

1,00,000

12% Redeemable Preference Share Capital A/c Dr.


Shares A/c Dr.

To Preference Shareholders A/c

(Being the amount payable on redemption

transferred to Preference Shareholders Account)

3,00,000

30,000

3,30,000


To Bank A/c

(Being the amount paid on redemption of preference

shares)

3,30,000

3,30,000


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Profit & Loss A/c Dr.

To Premium on Redemption of Preference

Shares A/c

(Being the adjustment of premium on redemption

against Profits & Loss Account)

30,000

30,000


To Capital Redemption Reserve A/c (W. N.1)

(Being the amount transferred to Capital Redemption

Reserve Account as per the requirement of the Act)

1,00,000

1,00,000

Working Note:

Amount to be transferred to Capital Redemption Reserve Account

Face value of shares to be redeemed 3,00,000

Less: Proceeds from new issue (2,00,000)

Total Balance 1,00,000

Question 33

The capital structure of a company consists of 20,000 Equity Shares of Rs. 10 each fully

paid up and 1,000 8% Redeemable Preference Shares of Rs. 100 each fully paid up (issued

on 1.4.2015).

Undistributed reserve and surplus stood as: General Reserve Rs. 80,000; Profit and Loss

Account 10,000; Investment Allowance Reserve out of which Rs. 5,000, (not free for

distribution as dividend) 10,000; Securities Premium Rs. 12,000, Cash at bank amounted

to Rs.98,000. Preference shares are to be redeemed at a Premium of 10% and for the

purpose of redemption, the directors are empowered to make fresh issue of Equity Shares

at par after utilising the undistributed reserve and surplus, subject to the conditions that a

sum of Rs.20,000 shall be retained in general reserve and which should not be utilised.

Pass Journal Entries to give effect to the above arrangements and also show how the

relevant items will appear in the Balance Sheet of the company after the redemption

carried out.


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Answer

Journal Entries

Particulars Dr. Cr.

Bank A/c Dr.To Equity Share Capital A/c

(Being the issue of 2,500 Equity Shares of Rs. 10

each.)

25,00025,000

8% Redeemable Preference Share Capital A/c Dr.


Shares A/c Dr.

To Preference Shareholders A/c

(Being the amount paid on redemption

transferred to Preference Shareholders Account)

1,00,000

10,000

1,10,000


To Bank A/c

(Being the amount paid on redemption of

preference shares)

1,10,000

1,10,000


To Premium on Redemption of

Preference Shares A/c

(Being the premium payable on redemptionprovided out of Securities Premium Account)

10,000

10,000

General Reserve A/c Dr.


Investment Allowance Reserve A/c Dr.


(Being the amount transferred to Capital

Redemption Reserve Account as per therequirement of the Act)

60,000

10,000

5,000

75,000


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Balance Sheet as on ………[Extracts]


a. Share capital 1 2,25,000

b. Reserves and Surplus 2 1,02,000

Total ?

ASSETS

2. Current Assets

Cash and cash equivalents 13,000

Total ?

Notes to accounts

1. Share Capital

22,500 Equity shares of Rs. 10 each fully paid up 2,25,000


General Reserve 20,000

Securities Premium (Rs. 12,000 – Rs. 10,000) 2,000

Capital Redemption Reserve 75,000

Investment Allowance Reserve 5,000

1,02,000

Working Note :

(1) No of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed Rs. 1,00,000

Less : Profit available for distribution as dividend:

General Reserve : Rs. (80,000-20,000) Rs. 60,000

Profit and Loss Rs. 10,000

Investment Allowance Reserve: (Rs. 10,000-5,000) Rs. 5,000 (75,000)

25,000

Therefore, No. of shares to be issued = 25,000/Rs. 10 = 2,500 shares.


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Question 34

The books of B Ltd. showed the following balance on 31st December, 2014:

30,000 Equity Shares of Rs. 10 each fully paid; 15,000 12% Redeemable Preference Shares

of Rs. 10 each fully paid; 4,000 10% Redeemable Preference Shares of Rs. 10 each, Rs. 8

paid up (all shares issued on 1st April, 2012).

Undistributed Reserve and Surplus stood as: Profit and Loss Account Rs. 80,000; General

Reserve Rs. 1,20,000; Securities Premium Account Rs. 15,000 and Capital Reserve Rs.

21,000.

Preference shares are redeemed on 1st January, 2014 at a prem

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