Accounting for Share Capital

This page contains the CBSE accountancy class 12 chapter Accounting for Share Capital. You can find the questions/answers/solutions for the chapter 6 of CBSE class 12 accountancy in this page. So is the case if you are looking for CBSE class 12 Commerce related topic Accounting for Share Capital. This page contains theretical questions, Test Your Understanding, Do It Yourself, Short Answers and Long Answers. If you’re looking for Numerical Questions Solutions, you can find them at Numerical Questions Solutions

Test your Understanding – I
State which of the following statements are true :
(a)
A company is an artificial person. (✔ TRUE)
(b)
Shareholders of a company are liable for the acts of the company. (❌ FALSE)
(c)
Every member of a company is entitled to take part in its management.(❌ FALSE)
(d)
Company’s shares are generally transferable. (✔ TRUE)
(e)
Share application account is a personal account. (✔ TRUE)
(f)
The director of a company must be a shareholder. (✔ TRUE)
(g)
Paid up capital can exceed called up capital.(❌ FALSE)
(h)
Capital reserves are created from capital profits. (✔ TRUE)
(i)
At the time of issue of shares, the maximum rate of securities premium is 10%.(❌ FALSE)
(j)
The part of capital which is called up only on winding up is called reserve capital. (✔ TRUE)

Do It Yourself – I
On April 01, 2019, a limited company was incorporated with an authorised capital of ₹ 40,000 divided into shares of ₹ 10 each. It offered to the public for subscription of 3,000 shares payable as follows:
On Application
₹ 3 per share
On Allotment
₹ 2 per share
On First Call (One month after allotment)
₹ 2.50 per share
On Second and Final Call
₹ 2.50 per share
The shares were fully subscribed for by the public and application money duly received on April 15, 2019. The directors made the allotment on May 1, 2015 2019.
How will you record the share capital transactions in the books of a company if the amounts due have been duly received, and the company maintains the combined account for application and allotment.

Journal
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
2019
Apr 15
Bank A/c
Dr.
9,000
To Share Application and Allotment A/c
9,000
(Being Money received on applications for 3000 shares @ ₹ 3 per share)
Share Application and Allotment A/c
Dr.
9,000
To Share Capital A/c
9,000
(Being Transfer of application money to Share Capital Account 3000 Share @ ₹ 3 per share)
Share Application and Allotment A/c
Dr.
6,000
To Share Capital A/c
6,000
(Being money due on allotment of 3,000 shares @ ₹ 2 per share)
Bank
Dr.
6,000
To Application and Allotment A/c
6,000
(Being money received on allotment of 3,000 shares @ ₹ 2 per share)
May 1
Share First Call A/c
Dr.
7,500
To Share Capital A/c
7,500
(Being money due on first call for 3,000 shares @ ₹ 2.50 per share)
Bank A/c
Dr.
7,500
To Share First Call A/c
7,500
(Being money received on first call for 3000 shares @ ₹ 2.50 per share)
Share Second and Final Call A/c
Dr.
7,500
To Share Capital A/c
7,500
(Being money due on second and final call for 3000 shares @ ₹ 2.50 per share)
Bank A/c
Dr.
7,500
To Share Second and Final Call A/c
7,500
(Being money received on second and final call for 3000 shares @ ₹ 2.50 per share)
Note: Usually the Share application account and share allotment account are maintained separately. However, sometimes a combined account for share application and share allotment called ‘Share Application and Allotment Account’ is opened in the books of a company (as we did in this problem). The combined account is based on the reasoning that
a.
Allotment without application is impossible
b.
While application without allotment is meaningless.
These two stages of share capital are closely inter-related.

Do It Yourself – II
1. 1. A company issued 20,000 equity shares of ₹ 10 each payable ₹ 3 on application, ₹ 3 on allotment, ₹ 2 on first call and ₹ 2 on second and the final call. The allotment money was payable on or before May 01, 2015; first call money on or before August Ist, 2015; and the second and final call on or before October Ist, 2015; ‘X’, whom 1,000 shares were allotted, did not pay the allotment and call money; ‘Y’, an allottee of 600 shares, did not pay the two calls; and ‘Z’, whom 400 shares were allotted, did not pay the final call. Pass journal entries and prepare the balance sheet of the company.
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Bank A/c
Dr.
60,000
To Share Application A/c
60,000
(Being application money received on on 20,000 shares @ ₹ 3 each)
Share Application A/c
Dr.
60,000
To Share Capital A/c
60,000
(Being application money transferred to share capital)
2015
May 01
Share Allotment A/c
Dr.
60,000
To Share Capital A/c
60,000
(Being allotment money due on 20,000 shares @ ₹ 3 each)
Bank A/c
Dr.
57,000
Call in Arrears A/c
Dr.
3,000
To Share Allotment A/c
60,000
(Being allotment money received except Calls in Arrears i.e., 1,000 shares of X)
Aug 01
Share First Call A/c
Dr.
40,000
To Share Capital A/c
40,000
(Being First call money received will calls in arrears for 1,000 shares)
Bank A/c
Dr.
36,800
Calls in Arrears A/c
Dr.
3,200
To Share First Call A/c
40,000
(Being first call money due on 20,000 shares @ ₹ 2 each)
Oct 02
Share Second and Final Call A/c
Dr.
40,000
To Share Capital A/c
40,000
(Being first call money received with calls in arrears for 1,600 shares i.e. 1,000 shares of X and 600 shares of Y)
Bank A/c
Dr.
36,000
Calls in Arrears A/c
Dr.
4,000
To Share Second and Final Call A/c
40,000
(Being money received on second and final call except Calls in Arrears for 2,000 shares i.e. 1,000 shares of X, 600 shares of Y and 400 shares of Z)
Balance Sheet as on December 31, 2015
Liabilities
Amount
Assets
Amount
Share Capital
Current Assets
20,000 Shares @ ₹ 10 each
2,00,000
Cash at Bank
1,89,800
Calls in Arrears
(10,200)
1,89,800
1,89,800
1,89,800
Working Notes:
During Allotment:
Total Allotment Money
= 20,000 × ₹ 3
= ₹ 60,000
Calls in Arrears for X
= 1000 × ₹ 3
= ₹ 3,000
During Share First Call:
Share First Call Money
= 20,000 × ₹ 2
= ₹ 40,000
Calls in Arrears for X
= 1000 × ₹ 2
= ₹ 2,000
Calls in Arrears for Y
= 600 × ₹ 2
= ₹ 1,200
Total of Calls in Arrears
= ₹ 2,000 + ₹ 1,200
= ₹ 3,200
Share First Call Money
= 20,000 × ₹ 2
= ₹ 40,000
Calls in Arrears for X
= 1000 × ₹ 2
= ₹ 2,000
Calls in Arrears for Y
= 600 × ₹ 2
= ₹ 1,200
Calls in Arrears for Z
= 400 × ₹ 2
= ₹ 800
Total of Calls in Arrears
= ₹ 2,000 + ₹ 1,200 + ₹ 800
= ₹ 4,000

2. Alfa Company Ltd. issued 10,000 shares of ₹ 10 each for cash payable ₹ 3 on application, ₹ 2 on allotment and the balance in two equal instalments. The allotment money was payable on or before March 31, 2015; the first call money on or before 30 June, 2015; and the final call money on or before August, 31. 2015. Mr. ‘A’, to whom 600 shares were allotted, paid the entire remaining face value of shares allotted to him on allotment. Record journal entries in company’s books and also exhibit the share capital in the balance sheet on the date.
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Bank A/c
Dr.
30,000
To Share Application A/c
30,000
(Being application money received on 10,000 share @ ₹ 3 each)
Share Application A/c
Dr.
30,000
To Share Capital A/c
30,000
(Being application money transferred to the share capital account)
2015
Mar 31
Share Allotment A/c
Dr.
20,000
To Share Capital A/c
20,000
(Being money due on allotment of 10,000 shares of ₹ 2 each)
Bank A/c
Dr.
23,000
To Share Allotment A/c
20,000
To Calls in Advance A/c
3,000
(Being allotment money received and also calls in advance received on 600 shares @ ₹ 5 each)
Jun 30
Share First Call A/c
Dr.
25,000
To Share Capital A/c
25,000
(Being First call money due on 10,000 shares @ ₹ 2.50 each)
Bank A/c
Dr.
23,500
Calls in Advance A/c
Dr.
1,500
To Share First Call A/c
25,000
(Being First call money received for shares excluding the Calls in Advance)
Aug 31
Share Second and Final Call A/c
Dr.
25,000
To Share Capital A/c
25,000
(Being share second and final call money due on 10,000 shares @ ₹ 2.50 each)
Bank A/c
Dr.
23,500
Calls in Advance A/c
Dr.
1,500
To Share Second and Final Call A/c
25,000
(Being second and final call money received on all except the shares for calls in advance)
Balance Sheet as on August 31, 2015
Liabilities
Amount
Assets
Amount
Share Capital
Current Assets
10,000 Shares @ ₹ 10 each
1,00,000
1,00,000
Cash at Bank
1,00,000
1,00,000
1,00,000
Working Notes
During Allotment:
Total Allotment Money
= 10,000 × ₹ 2
= ₹ 20,000
Calls in advance
= 600 × ₹ 5
(Paid by A)
= ₹ 3,000
During Share First Call:
Share First Call Money
= 10,000 × ₹ 2.50
= ₹ 25,000
Calls in advance
= 600 × ₹ 2.50
(Paid by A in advance)
= ₹ 1,500
During Share Second and Final Call:
Second and Final Call Money
= 10,000 × ₹ 2.50
= ₹ 25,000
Calls in advance
= 600 × ₹ 2.50
(Paid by A in advance)
= ₹ 1,500

Test your Understanding – II
Choose the correct answer
(a)
Equity shareholders are
(i)
creditors
(ii)
owners
(iii)
customers of the company
(iv)
none of the above
(b)
Nominal share capital is
(i)
that part of the authorised capital which is issued by the company
(ii)
the amount of capital which is actually applied for by the prospective shareholders
(iii)
the maximum amount of share capital which a company is authorised to issue
(iv)
the amount actually paid by the shareholders
(c)
Interest on calls in arrears is charged according to “Table F” at :
(i)
10%
(ii)
6%
(iii)
8%
(iv)
11%
(d)
Money received in advance from share holders before it is actually called-up by the directors is :
(i)
debited to calls in advance account
(ii)
credited to calls in advance account
(iii)
debited to calls account
(iv)
none of the above
(e)
Shares can be forfeited :
(i)
for non-payment of call money
(ii)
for failure to attend meetings
(iii)
for failure to repay the loan to the bank
(iv)
for which shares are pledged as a security
(f)
The Profit on reissue of forfeited shares is transferred to :
(i)
general reserve
(ii)
capital redemption reserve
(iii)
capital reserve
(iv)
revenue reserve
(g)
Balance of share forfeiture account is shown in the balance sheet under the item :
(i)
current liabilities and provisions
(ii)
reserves and surpluses
(iii)
share capital
(iv)
unsecured loans
1. A company forfeited 100 equity shares of ₹ 10 each issued at a premium of 20% for non-payment of final call of ₹ 5 including the premium. Show the journal entry for forfeiture of shares.
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
1,000
Securities Premium A/c
Dr.
200
To Share Final Call A/c
500
To Share Forfeited A/c
700
(Being 100 equity shares of ₹ 10 each with ₹ 2 premium forfeited for non-payment of final call of ₹ 3)
Working Notes:
Forfeited Shares
Forfeited share capital
= 100 × ₹ 10
= ₹ 1,000
Premium on each share
{= ₹~10 × \dfrac{20}{100}}
= ₹ 2
Forfeited share premium
= 100 × ₹ 2
= ₹ 200
Forfeited share
= 100 × ₹ 5
Final Call money
= ₹ 500
Payment before
= ₹ 1000 + ₹ 200 – ₹ 500
Final Call
= ₹ 700
2. A company forfeited 800 equity shares of ₹ 10 each issued at a discount of 10% for non-payment of first and final calls of ₹ 2 each. Calculate the amount forfeited by the company and pass the journal entry for forfeiture of the shares.
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
8,000
To Calls in Arrears A/c
1,600
To Discount on Issue A/c
800
To Share Forfeiture A/c
5,600
Working Notes:
Forfeited Shares:
Share Capital amount
= 800 × ₹ 10
= ₹ 8,000
Call in Arrears
= 800 × ₹ 2
= ₹ 1,600
Discount on each share
{= ₹~10 × \dfrac{10}{100}}
= ₹ 1
Discount on 800 shares
= 800 × ₹ 1
= ₹ 800
Amount paid so far
= ₹ 8,000 – ₹ 1,600 – $ 800
= ₹ 5,600

Do it Yourself – III
Excel Company Limited made an issue of 1,00,000 Equity Shares of ₹ 10 each, payable as follows :
On Application
₹ 2.50 per share
On Allotment
₹ 2.50 per share
On First and Final Call
₹ 5.00 per share
X, the holder of 400 shares did not pay the call money and his shares were forfeited. 200 of the forfeited shares were reissued as fully paid at ₹ 8 per share. Draft necessary journal entries and prepare Share Capital and Share Forfeiture accounts in the books of the company.
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Bank A/c
Dr.
2,50,000
To Equity Share Application A/c
2,50,000
(Being application money rececived on 1,00,000 equity shares @ ₹ 2.50 each)
Equity Share Application A/c
Dr.
2,50,000
To Equity Share Capital A/c
2,50,000
(Being application money transferred to share capital)
Equity Share Allotment A/c
Dr.
2,50,000
To Equity Share Capital A/c
2,50,000
(Being allotment money due on 1,00,000 shares @ ₹ 2.50 each)
Bank A/c
Dr.
2,50,000
To Share allotment A/c
2,50,000
(Being allotment money received)
Equity Share First and Final Call A/c
Dr.
5,00,000
To Equity Share Capital A/c
5,00,000
(Being First and Finall call money due on 1,00,000 equity shares @ ₹ 5 each)
Bank A/c
Dr.
4,98,000
To Equity Share First and Final Call A/c
4,98,000
(Being first and final call money received except for 400 shares)
Equity Share Capital A/c
Dr.
4,000
To Equity Share First and Finall Call A/c
2,000
To Share forfeiture A/c
2,000
(Being 400 equity shares forfeited as the first and final call money was not received)
Bank A/c
Dr.
1,600
Share Forfeiture A/c
Dr.
400
To Equity Share Capital A/c
2,000
(Being 200 forfeited equity shares reissued as fully paid at ₹ 8 per share)
Share Forfeiture A/c
Dr.
600
To Capital Reserve A/c
600
(Being profit on reissue of forfeited equity shares transferred to capital reserve)
When a part of the forfeited shares are reissued (in this case, there were 400 forfeited shares and only 200 shares were reissued), the whole balance of share forfeiture account will not be transferred to the capital reserve. Only the proportionate amount of balance that relates to the forefeited shares reissued which should be transferred to capital reserve. Thus the remaining balance in share forefeiture account is proportionate to the amount forefeited on shares not yet reissued.
Working Notes:
Equity Share Application:
Application Money
= 2,00,000 × ₹ 2.50
= ₹ 5,00,000
Equity Share Allotment:
Allotment Money
= 2,00,000 × ₹ 2.50
= ₹ 5,00,000
Equity Share First and Final Call
Call Amount
= 2,00,000 × ₹ 5
= ₹ 5,00,000
No. of forfeited shares
= 400
Equity share forfeiture money
= 400 × ₹ 5
= ₹ 2,000
Issue of shares at discount
No. of equity shares reissued
= 200
Payment received
= 200 × ₹ 8
= ₹ 1,600
forfeited value
(of 200 shares)
= 200 × (₹ 2.50 + ₹ 2.50)
= 200 × ₹ 5
= ₹ 1,000
Transferred to Share Capital
= 200 × ₹ 2
= ₹ 400
Transferred to Capital Reserve
= ₹ 1,000 – ₹ 400
= ₹ 600

Test Your Understanding – III
(a) If a share of ₹ 10 on which ₹ 8 is called-up and ₹ 6 is paid as forfeited. State with what amount the Share Capital account will be debited.
The share capital account should be debited with the called up amount of ₹ 8
(b) If a Share of ₹ 10 on which ₹ 6 has been paid is forfeited, at what minimum price it can be reissued.
The discount on the reissued share should not exceed the forfeited value of ₹ 6. In otherwords the price should always be more than ₹ 10 – ₹ 6 i.e. It should be more than ₹ 4. In otherwords, the minimum price is ₹ 4.
(c) Ahluwalia Ltd. issued 1,000 equity shares of ₹ 100 each as fully paid-up in consideration of the purchase of plant and machinery worth ₹ 1,00,000. What entry will be recorded in company’s journal.
The following will be the journal entries.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Plant and Machinery A/c
Dr.
1,00,000
To Seller A/c
1,00,000
(Being plant and machinery purchased and the amount is due to the seller)
Seller A/c
Dr.
1,00,000
To Share Capital A/c
1,00,000
(Being seller is fully paid-up with equity shares)

Do it Yourself – IV
Journalise the following :
(a) The directors of a company forfeited 200 equity shares of Rs.10 each on which ₹ 800 had been paid. The shares were reissued upon payment of ₹ 1,500.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
2,000
To Calls in Arrears A/c
1,200
To Share Forfeiture A/c
800
(Being 200 shres forfeited by the company due to defaulted payments)
Bank A/c
Dr.
1,500
Share Forfeiture A/c
Dr.
500
To Share Capital A/c
2,000
(Being 200 forfeited shares reissued for ₹ 1,500)
Share Forfiture A/c
Dr.
300
To Capital Reserve A/c
300
(Being balance of reissued share forfeiture money transferred to capital reserve)
Working Notes:
Share Capital
= 200 × ₹ 10
= ₹ 2,000
Forfeiture
= ₹ 800
Discount Share Value
= ₹ 1,500
Transferred from Forfeiture account
= ₹ 2,000 – ₹ 1,500
= ₹ 500
Forfeiture amount transferred to capital reserve
= ₹ 800 – ₹ 500
= ₹ 300
(b) A holds 100 shares of ₹ 10 each on which he has paid ₹ 1 per share on application. B holds 200 shares of ₹ 10 each on which he has paid ₹ 1 on application ₹ 2 on allotment. C holds 300 shares of ₹ 10 each who has paid ₹ 1 on applications, ₹ 2 on allotment and ₹ 3 on first call. They all failed to pay their arrears and second call of ₹ 4 per share as well. All the shares of A, B and C were forfeited and subsequently reissued at ₹ 11 per share as fully Paid-up.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
6,000
To Calls in Arrears A/c
3,500
To Share Forfeiture A/c
2,500
(Being shares forfeited due to non paymenent)
Bank A/c
Dr.
6,600
To Share Capital A/c
6,000
To Share Premium A/c
600
(Being the 600 forfeited shares reissued @ ₹ 11 at a premium of ₹ 1)
Share Forfeiture A/c
Dr.
2,500
To Capital Reserve A/c
2,500
(Being all the share forfeiture money transferred to capital reserves)
Working Notes:
Application Phase:
A
= 100 × ₹ 1
= ₹ 100
B
= 200 × ₹ 1
= ₹ 200
C
= 300 × ₹ 1
= ₹ 300
Total
= ₹ 100 + ₹ 200 + ₹ 300
= ₹ 600
Allotment Phase:
A
B
= 200 × ₹ 2
= ₹ 400
C
= 300 × ₹ 2
= ₹ 600
Total
= ₹ 400 + ₹ 600
= ₹ 1,000
First Call Phase:
A
B
C
= 300 × ₹ 3
= ₹ 900
Reissue of Shares:
Share Capital
= 600 × ₹ 10
= ₹ 6,000
Premium
= 600 × ₹ 1
= ₹ 600
Total
= ₹ 6,000 + ₹ 600
= ₹ 6,600

Short Answer Questions
1. What is public company?
A public company is defined as a company which
(a)
is not a private company
(b)
is a company which is not a subsidiary of a private company
(c)
has a paid up capital of more than ₹ 5,00,000
A public company’s shares are available for purchase to the general public without any restrictions. In addition, a public company can be classified as:
1. Listed Company: A company whose shares are listed on the stock exchanges and can be traded. Examples: Asian Paints, TCS etc.
2. Unlisted Company: Its shares are not listed on the stock exchanges and hence they are not available for trading in the stock exchanges.
Thus, a public company allows the general public to possess a part of the ownership in the form of shares.
2. What is a private company?
As per the section 3 (1) (iii) of Companies Act 1956, a private company is defined as a company which
(i)
restricts the rights to transfer its shares
(ii)
has at least 2 persons, except in case of one person company.
(iii)
limits the number of its members to 200 (excluding its employees)
3. When can shares be Forfeited?
When some shareholders fail to pay one or more instalments of allotment money/call money, their shares are forfeited. In such circumstances, the company cancels the alloted shares and treat the amount already received from the shareholders as forfeited to the company within the framework of the provisions in its articles.
These provisions authorise the directors to forfeit the shares when the shareholders fail to pay upon calls. These provisions laid down in this regard have to be strictly followed when forfeiting the shares.
4. What is meant by Calls in Arrears?
After the shares are alloted to the share holders, the company calls for the payment of the called up capital. If any of the shareholders have not paid the amount on calls, it is called as “Calls in Arrears”. Thus
Calls in Arrears
= Called up Capital – Paid up Capital
5. What do you mean by a listed company?
A public company listed in any recognised stock exchange and whose shares are available for the public for trading is called as a listed company. Examples are TCS, Asian Paints etc. The investors can watch the rise or fall of the share prices and can ascertain the worth of their investments at any given instant. The demand for the shares is a measure of the goodwill of the company. Also, the stock price movement will help the investors to take important decisions about their investments in the company.
6. What are the uses of securities premium?
The securities premium can be used by the company only for the following five purposes.
1.
to issue fully paid bonus shares. This amount should not exceed the unissued share capital of the company.
2.
to write-off preliminary expenses of the company.
3.
to write-off the expenses of, or commission paid, or discount allowed on any securities of the company
4.
to pay premium on the redemption of preference shares or debentures of the company.
5.
to purchase its own shares (buy-back its own shares)

7. What is meant by Calls in Advance?
There are instances when the shareholders pay a part or the whole of the amount of the calls not yet made. The amount thus received from the shareholders is known as “Calls in Advance”. The amount thus received is a liability of the company and it should be credited to “Call in Advance Account”. This amount is adjusted towards the payment of the calls as and when the call amount becomes due. As per the companies act, the calls in advance are entitled to an interest amount not exceeding 12% per annum.
8. Write a brief note on “Minimum Subscription”.
Once the company issues its prospectus for subscription to its shares by the public, the prospective investors applies for the subscription by submitting their application(s), along with the application money. As per the companies act, the minimum number of applications to be received should not be less than 90% of the issued number of shares. In case the company fails to gather minimum number of subscriptions, it should return the application money to the applicants withing 130 days of the date of issue of the prospectus.
Long Answer Questions
1. What is meant by the word ‘Company’? Describe its characteristics.
The word ‘Company’ means an association of persons who contribute money or money’s worth to a common inventory and use it for a common purpose. A company is regarded as an artificial person who is distinct from its members (also known as shareholders). A company has a common seal used for its signature.
The company has the following special characteristics which distinguish it from other forms of organisation.
1. Body Corporate: A company is formed according to provisions of Law enforced from time to time. In India, the companies are generally formed and registered under Companies Law. However, this Companies Law is not applicable for Banking and Insurance companies. They’re formed under a separate Law.
2. Separate Legal Entity: A company is a separate legal entity which is distinct and separate from its members. A company can hold any property and deal with it. It can even enter into contracts and even open a bank account in its own name.
3. Limited Liability: The liability of the members of the company is limted only to the extent of the unpaid amount of shares held by them. However, if any company is limited by guarantee, the liability of its members is limited to the extent of the guarantee given by them in the event of winding up of the company.
4. Perpetual Succession: As the company is an artificial person created by law, it continues to exist despite the changes in its memberships. It can only be terminated through law. If any of the members of the company die or becomes insane or insolvent, it does not affect the existence of the company. New members can join and existing members go but the company will continue to exist.
5. Common Seal: The company, being an artificial person, cannot sign its name by itself. So, every company is required to have its own seal. This seal acts as official signature of the company. A document is bound on the company only when it carries the common seal of the company. Otherwise it is void.
6. Transferability of Shares: The shareholders can freely transfer the shares of a public limited company. They don’t need the permission of the company or the consent from the members of the company. However, the manner in which the shares can be transferred is governed by the Articles of the company.
7. May Sue or be Sued: As the company is legal person, it can enter into contracts and it can enforce the contractual rights against others. In case there is any breach of any of these contracts, the company can sue and can be sued in its name.

2. Explain in brief the main categories in which the share capital of a company is divided.
The main categories in which the share capital of a company is divided are briefed below, from accounting perspective.
Authorised Share Capital
 
 
Issued Capital
Unissued Capital
 
 
Subscribed
Capital
Unsubscribed
Capital
 
 
Subscribed and Fully Paid up
Subscribed but not Fully Paid up
 
1. Authorised Capital: Authorised capital, also known as the Nominal or Registered Capital, is the amount of share capital which a company is authorised to issue by its Memorandum of Association. The amount of capital to be raised can not be more the amount specified in the Memorandum of Association. This authorised capital can be increased or decreased as per the procedure laid down in the Companies Act. The company may not issue the entire authorised capital for public subscription in one go. The amount of share capital issued depends on the company’s need. But it should never be more than the amount of authorised capital.
2. Issued Capital: The part of the authorised capital which is actually issued for the public subscription is called as the issued capital. This includes the shares alloted to vendors and the signatories of the company’s memorandum.
3. Unissued Capital: The part of the authorised capital which is not yet issued for public subscription is called as unissued capital. Unissued capital may be offered for public subscription at a later date based on the needs of the company.
4. Subscribed Capital: The part of the issued capital which is actually subscribed by the public is called as the subscribed capital. When all the shares issued for subscription are fuly subscribed by the public, the issued capital and the subscribed capital would be equal. In any case, the subscribed capital will always be less than or equal to the issued capital.
(a)
In case the number of shares subscribed by the public is less than the number of shares issued for subscription, the share alloted will be equal to the number of shares subscribed.
(b)
In case the number of shares subscribed by the public is more than the number of shares issued for subscription, the share alloted will be equal to the number of shares issued. In other words, the oversubscription is not reflected in the books.
5. Called up Capital: It is that part of the subscribed capital which has been called up on the alloted shares. This is the amount which the company asks the shareholders to pay. The called up capital may equal to the face value of the shares or a part of it. For instance, if the face value (or nominal value) of the alloted share is ₹ 10 and the company has called up only ₹ 7, then the called up capital is ₹ 7 per share. The remaining ₹ 3 may be called by the company at a later date, depending on the need.
6. Paid Up Capital: This is that part of the called up capital which has actually been received by the company from the shareholders. The called up capital and the paid up capital would be the same when the shareholders pay all the called amount. If any of the shareholders do not pay the amount on calls, this unpaid amunt is termed as calls in arrears. Therefore, paid up capital is equal to the called-up capital minus call in arrears.
7. Uncalled Capital: The portion of the subscribed capital which has not yet been called up is known as Uncalled Capital. The company may call for this uncalled capital at a later date depending on the need.
8. Reserve Capital: The reserve capital is that portion of the uncalled capital, which will be called only in the event of winding up of the company. Such uncalled amount is called Reserve Capital of the company. It is available only for the creditors in the event of winding up of the company.



3. What do you mean by the term ‘share’? Discuss the type of shares, which can be issued under the Companies Act, 2013 as amended to date.
The term Share refers to the unit we get when the total capital of the company is divided into smal equal denominations. These units are then sold to the individual investors, who in turn become the shareholders of the company. These shares are issued to the public so that the company can raise the required capital. The capital thus raised is called as share capital. As the number of shareholders is large, it is not possible to open a separate capital account for each of them. So, the company maintains a common Share Capital Account into which an innumerable streams of capital are merged.
These shares are classified into the following categories:
1. Preference Shares: According to Section 43 of The Companies Act, 2013, a share is called a preference share when it satisfies the following conditions.
(a)
It carries a preferential right to dividend. This dividend can be either fixed amount or calculated based on a fixed rate of nominal value of each share. These dividends are paid to the preference shareholders before paying to the equity shareholders.
(b)
In the event of the company being wound up, the preference shareholders have the right to be paid before anything is paid to equity shareholders.
In addition to the above two conditions, a preference shareholders may have the right to participate fully or to a limited extent in the surpluses of the company, as specified in the Memorandum or Articles of the company. Based on whether they participate or not, they can be classified as
Participating
Non-Participating
They can also be
Cumulative
Non-Cumulative
And can also be
Redeemable
Irredeemable
2. Equity Shares: According to Section 43 of The Companies Act, 2013, a share which is not a preference share is called as an equity share. This implies that the shares that do not have the preferential right in the payment of dividend or repayment of capital are known as equity or ordinary shares. The equity shareholders get a share in the distributable profits of the company only after the dividend is paid to the preference shareholders. The dividend on equity shares is not fixed. The dividend may also change from one year to the other depending on the amount of profits available for distribution.
These equity shares may be
(i)
With voting rights
(ii)
With diffential rights as to votng, dividend or otherwise in accordance with the rules specified or subject to the conditions prescribed in the Articles of Association of the company.
4. Discuss the process for the allotment of shares of a company in case of over subscription.
When the prospectus is issued to the general public, for the subscription of the shares, the company receives the applications for the shares. Oversubscription usually happens when the prospectus of a well-managed and financially strong companies is issued to the public.
When the applications for the shares are over subscribed, the following three alternate options available to the directors of the company.
1. Fully accept some applications and totally reject the others: In this scenario, the directors accept only those many applications as the number of shares. The rest of the applications are rejected. The application money of the rejected shares is fully refunded to the applicants. The following will be the corresponding journal entry.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
…..
To Share Capital A/c
…..
To Bank A/c
…..
For instance, consider a scenario where in a company is offering 1,00,000 shares for subscription @ ₹ 10 per share. The prospective shareholders have to pay ₹ 3 on application, ₹ 4 on allotment and the rest when the first and final call is made. Assume that the company has received 1,50,000 applications. It will accept the application money for 1,00,000 shares and refund the money for the rest 50,000 applications.
2. Allotment of shares to all the applicants on a pro-rata basis: In this case, the directors decide to allot the shares to all the applicants based on the number of applications received by the applicants. Thus every applicant has the option to receive some shares. The excess amount of application money from the applications will be adjusted towards the allotment money for the alloted shares. Thus, the overhead of refunding the money to the applicants on the rejected shares and then asking them to deposit the allotment money is reduced. For some of the applicants, the excess application money is even adjusted towards the call money. The following will be the cocrresponding journal entries.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Application A/c
Dr.
…..
To Share Allotment A/c
…..
(Being excess application money adjusted to the share allotment account)
For instance, if the company is issuing 20,000 shares and the 25,000 applications are received, the company will allot 4 shares for every 5 applications received. The application money for 20,000 shares will be used as application money. The application money of the rest of 5,000 shares will be adjusted towards the allotment money.
3. Allot shares to few applicants on a pro-rata basis and reject the others: This approach is a combination of the above two approaches. Here few applications of the applicants are rejected. For the remaining applicants, the shares are allocated on a pro-rata basis based on the number of shares for which they have applied. Thus for the applicants, for whom the shares are alloted on pro-rata basis, the excess application money is adjusted towards the allotment money. For the rest of the applicants, the application money is refunded. The following will be the corresponding journal entries.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Application A/c
Dr.
…..
To Share Allotment A/c
…..
To Bank A/c
…..
(Being the application money is adjusted to the Share Allotment account after allocating the shares on a pro-rata basis and for the rejected applicants, the application money is refunded)
For instance, if the company is issuing 20,000 shares and 26,000 applications are received, the company might reject 1,000 shares and allot 4 shares for every 5 applications received, for the remaining 25,000 applications.
5. What is a ‘Preference Share’? Describe the different types of preference shares.
According to Section 43 of The Companies Act, 2013, a share is called a preference share when it satisfies the following conditions.
(a)
It carries a preferential right to dividend. This dividend can be either fixed amount or calculated based on a fixed rate of nominal value of each share. These dividends are paid to the preference shareholders before paying to the equity shareholders.
(b)
In the event of the company being wound up, the preference shareholders have the right to be paid before anything is paid to equity shareholders.
In addition to the above two conditions, a preference shareholders may have the right to participate fully or to a limited extent in the surpluses of the company, as specified in the Memorandum or Articles of the company. The following are the various types of classifications of the preference shares based on various factors.
1. Based on Participation:
a. Participating: Shareholders holding the participating preference shares get exclusive right to participate in the surplus of the remaining profit after the dividend is distributed to the equity share holders. Note that this is in addition to the dividend already paid to the preference shareholders.
b. Non Participating: Shareholders holding the non-participating preference shares get preference only in receiving the dividend before the dividend is distributed to equity shareholders. They do not get exclusive rights to participate in the surplus of the profits.
2. Based on Cumulation of Dividend:
a. Cumulative Preference Shares: In addition to preference to get the shares, the cumulative preference shares have the right to claim the accumulated dividends(arrears of dividends) before any dividend is paid to the equity shareholders. By default all the preference shares are cumulative, unless otherwise stated.
b. Non-Cumulative Preference Shares: The non-cumulative preference can claim the accumulated dividends (arrears of dividends) only when there are profits. The preference shares should be explicitly declared as non-cumulative to be called as such.
3. Based on their redeemability:
a. Redeemable Preference Shares: As per the Section 80 of the Companies Act of 1956, certain type of shares can be redeemed after a certain period of time. In otherwords, the compay pays back to the shareholder. Such shares are known as redeemable preference shares.
b. Non-Redeemable Preference Shares: These shares are never paid back by the company during its lifetime. However, the shareholders are paid back in case the company is wound up. As per the Section 8A of the Companies Act 1956, the shares issued by a company can not be non-redeemable i.e. they should always be redeemable. So, in India, we do not find any company issuing non-redeemable shares.
4. Based on their convertibility:
a. Convertible Preference Shares: A convertible preference share is one which can be converted to an equity share.
a. Non-Convertible Preference Shares: A non-convertible preference share is one which can not be converted to an equity share.
6. Describe the provisions of law relating to ‘Calls in Arrears’ and ‘Calls in Advance’.
The provisions of law relating to ‘Calls in Arrears’ and ‘Calls in Advance’ are described below:
Calls in Arrears:
Once their application is accepted by the company, the prospective share holders have to pay the subsequent share price during the allotment and/or other subsequent calls. Sometimes, the shareholders may fail to pay the call amount on the due date. When any sharholder fails to pay the amount due on allotment or any other calls, it is called as Calls in Arrears / Unpaid Calls.
The Articles of Association of a comany may give power to the directors to charge interest at a stipulated rate on calls in arrears. If the articles are silent about the rate of interest, then a rate not exceeding 10% p.a. shall be applicable as per the rule contained in Table F. The shareholders should pay this interest for the period between the day the payment is due until the actual date of payment.
Calls in Advance:
Sometimes, the shareholders may pay a part of the whole amount of the calls that are not yet made. This amount is known as Calls in Advance.. This amount is a liability of the company and this amount should be credited to the Call in Advance Account. Once received, this amount is adjusted towards the payment of the calls amount as soon as the amount on these calls becomes due. Calls in advance is a liability of the company. The company is under obligation to pay interest on such amount from the date of its receipt to the date when the appropriate call is due for payment. This is usually stated in the Articles of the Company. If the Articles are silent about this, as per the Table F of the companies Act, the company should pay interest of not more than 12% p.a. on these calls in advance.
The balance in Calls in Advance account is shown as a separate item under the title Equity and Liabilities in the company’s balance sheet under the head current liabilities as sub-head other current liabilities. It should be noted that it should not be added to the amount of paid-up capital.
Calls in Advance is a liability of the company.
7. Explain the terms ‘Over subscription’ and ‘Under subscription’. How are they dealt with in accounting records?
The terms ‘Over subscription’ and ‘Under subscription’ are explained below:
Over subscription refers to a scenario where in the number of applications received from the prospective share holders exceeds the number of shares issued to the public. Over subscription happens when a well-managed and financially stong companies goes for issuing the shares in the market.
When the applications for the shares are over subscribed, the following three alternate options available to the directors of the company.
1. Fully accept some applications and totally reject the others: In this scenario, the directors accept only those many applications as the number of shares. The rest of the applications are rejected. Thh application money of the rejected shares is fully refunded to the applicants. The following will be the corresponding journal entry.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
…..
To Share Capital A/c
…..
To Bank A/c
…..
For instance, consider a scenario where in a company is offering 1,00,000 shares for subscription @ ₹ 10 per share. The prospective shareholders have to pay ₹ 3 on application, ₹ 4 on allotment and the rest when the first and final call is made. Assume that the company has received 1,50,000 applications. It will accept the application money for 1,00,000 shares and refund the money for the rest 50,000 applications.
2. Allotment of shares to all the applicants on a pro-rata basis: In this case, the directors decide to allot the shares to all the applicants based on the number of applications received by the applicants. Thus every applicant has the option to receive some shares. The excess amount of application money from the applications will be adjusted towards the allotment money for the alloted shares. Thus, the overhead of refunding the money to the applicants on the rejected shares and then ask them to deposit the allotment money is reduced. For some of the applicants, the excess application money is even adjusted towards the call money. The following will be the cocrresponding journal entries.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Application A/c
Dr.
…..
To Share Allotment A/c
…..
(Being excess application money adjusted to the share allotment account)
For instance, if the company is issuing 20,000 shares and the 25,000 applications are received, the company will allot 4 shares for every 5 applications received.
3. Allot shares to few applicants on a pro-rata basis and reject the others: This approach is a combination of the above two approaches. Here few applications of the applicants are rejected. For the remaining applicants, the shares are allocated on a pro-rata basis based on the number of shares for which they have applied. Thus for the applicants, for whom the shares are alloted on pro-rata basis, the excess application money is adjusted towards the allotment money. For the rest of the applicants, the application money is refunded. The following will be the corresponding journal entries.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Application A/c
Dr.
…..
To Share Allotment A/c
…..
To Bank A/c
…..
(Being the application money is adjusted to the Share Allotment account after allocating the shares on a pro-rata basis and for the rejected applicants, the application money is refunded)
For instance, if the company is issuing 20,000 shares and 26,000 applications are received, the company might reject 1,000 shares and allot 4 shares for every 5 applications received, for the remaining 25,000 applications.
8. Describe the purposes for which a company can use the amount of Securities Premium.
The shares of the companies which are well-managed and financially strong are commonly issued at a premium. So, the price of the share will be more than the nominal or par value of the shares. The difference between the premium price of the share and its nominal or par value is called as premium. For instance, when a share that has a nominal or par value of ₹ 100 is issued at ₹ 110, then is is said that the share issued at a premium of 10%
When the company issues its shares at a premium, the amount of premium may be technically called at any stage of the issue of shares. However, it is more common to call for the premium along with the amount due on allotment and sometimes it is called along with the application money. In very rare cases, it is called along with the call money. Businesses maintain a separate account called as Securities Premium Account and the premium amount is credited to this account. This account is shown under the title Equity and Liabiltieis of the company’s balance sheet under the head Reserves and Surpluses. In accordance with the Section 78 of the Companies Act 1956, a company can use this premium amount for any of the following purposes:
(a)
To issue fully paid bonus shares to the extent not exceeding unissued share capital of the company.
(b)
To write-off the preliminary expenses of the company.
(c)
To write-off
the expenses of
or commission paid
or discount allowed
on any securities of the company.
(d)
To pay the premium on the redemption of preference shares or debentures of the company.
(e)
Purchase of its own shares. This is also called as buy back of shares,
9. State clearly the conditions under which a company can issue shares at a discount.
A share is said to be issued at a discount when the share price is less than the nominal or par value of the share. As a general rule, a company cannot ordinarily issue shares at a discount. However, as per the provisions of Section 79 of the Compancies Act, 1932, it can do so in cases such as re-issue of forfeited shares or issue of sweat equity shares. This requires following conditions to be fulfilled:
1.
A resolution to authorize the issue of shares must be passed in a general meeting. In addition to this the company Law tribunal should sanction this resolution.
2.
The maximum discount, not exceeding 10% of the nominal value of the shares should be specified in the resolution. Under special circumstances, if the company law tribunal believes and is convinced that a higher rate of discount should be allowed, it can specify a higher rate of discount
3.
The company can issue the shares at a discount only after has completed one year after commencement of the business operations.
4.
Only those shares which are already issued can be re-issued at a discount. In otherwords, the company can not provide a discount on the shares for which the prospectus issued in the market.
5.
After obtaining the sanction from the company law tribunal to issue the shares at a discount, the company should issue them within two months. However, if company law tribunal permits a period beyond two months, the company can issue the discounted shares even after two months after obtaining the sanction.
6.
When the shares are offered at a discount, the propectus for the issue of such shares should clearly and explicitly specify all the details related to the discount allowed on the shares.
10. Explain the term ‘Forfeiture of Shares’ and give the accounting treatment on forfeiture
After issuing the prospectus, the company receives the applications from the prospective shareholders. After the shares are alloted to the prospective shareholders they have to pay the allotment money and/or subsequent call money. When the shareholders fail to pay one or more of these installements, the compeny reserves the right to forfeit or cancel the alloted shares. In such circumstances, the company retains the amount already received from these shareholders as forfeited to the company. This is done as per the framework of the provisions in its articles. These provisions are usually based on Table F. These provisions grant authority to the directors to forfeit the shares when call money is not paid. To carry out the forfeiture of shares, they have to strictly follow the procedure laid down for this purpose.
The following are the steps to be followed to implement this procedure:
1.
Send a notice to the shareholders who have defaulted on the money stating that he/she has to pay the calls-in-arreas together with the accumulated interest on the outstanding allotment/call money and that they should do so within 14 days of receiving the notice. Failing which, the alloted shares will be forfeited.
2.
If the shareholders fail to pay the amount due from them within 14 days of receiving the notice, the company reserves the right to forefeit their shares after passing a resolution.
3.
A notice informing about the forfeiture of shares is issued to the defaulted shareholder(s) and a notice about this forfeiture of shares is published in the newspaper.
4.
The defaulting shareholder(s)’ name is unlisted from the register of members/shareholders.
When the shares are forefeited, all the entries related to the forfeited shares, except those related to the premium, already recorded in the accounting records must be reversed. Accordingly, share capital account is debited with the amount called-up in respect of shares that are forfeited. The amount is credited in the respective unpaid calls accounts or calls in arrears accounts with the amount already received.
The corresponding accounting treatment is as follows:
1. When the forfeitured shares are issued at par:
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
Called-up Amount
To Share Forfeiture A/c
Paid-up Amount
To Share Allotment A/c
…..
To Share Calls A/c
(Individually)
…..
(Being shares forfeited due to non-payment of allotment/call(s) money)
2. When the forfeited shares are issued at premium: This has the following two scenarios i.e. when the premium is already paid and when the premium is not paid.
a. When the premium is already received: In such a case, the accounting treatment is as follows. Note that the share premium account is not touched upon (no changes to this account) in this case.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
Called-up amount
To Share Forfeiture A/c
Paid-up amount
To Allotment A/c
…..
To Share Calls A/c
(Individually)
…..
(Being shares forfeited due to non-payment of allotment/call(s) money)

b. When the premium is not received: In such a case, the accounting treatment is as follows. Note that the share premium account is considered in this case.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
Called-up amount
Share Premium A/c
Dr.
Premium Amount
To Share Forfeiture A/c
Paid-up amount
To Allotment A/c
…..
To Share Calls A/c
(Individually)
…..
(Being shares forfeited due to non-payment of allotment/call(s) money)

3. Forfeiture of shares issued at discount: In this case, the discount at which the shares are issued should be considered.
Date
Particulars
L.F.
Debit
Amount
Credit
Amount
Share Capital A/c
Dr.
Called-up amount
To Share Forfeiture A/c
Paid-up amount
To Allotment A/c
…..
To Share Calls A/c
(Individually)
…..
To Discount on Issue of Shares A/c
…..
(Being shares forfeited due to non-payment of allotment/call(s) money)