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Questions and Answers
'Interest accrued and due on debentures' appears under which section in the Balance Sheet of a company?
'Interest accrued and due on debentures' appears under which section in the Balance Sheet of a company?
Which type of account is used to transfer profits from the sale of short-term investments?
Which type of account is used to transfer profits from the sale of short-term investments?
Which of the following represents a free reserve?
Which of the following represents a free reserve?
What should the Debt-Equity Ratio not exceed after a buy-back of shares?
What should the Debt-Equity Ratio not exceed after a buy-back of shares?
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What is the consequence of foregone contingent liability in Internal Reconstruction?
What is the consequence of foregone contingent liability in Internal Reconstruction?
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Which accounting standard governs Investment Accounting?
Which accounting standard governs Investment Accounting?
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What classification does 'Livestock' fall under in the Balance Sheet of a company?
What classification does 'Livestock' fall under in the Balance Sheet of a company?
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How much of its paid-up equity capital can a company buy back in any given financial year?
How much of its paid-up equity capital can a company buy back in any given financial year?
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Which term refers to the company that takes over another company during an amalgamation?
Which term refers to the company that takes over another company during an amalgamation?
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Which accounting standard governs investment accounting?
Which accounting standard governs investment accounting?
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What is the correct treatment for dividend received on shares in personal investment accounting for the pre-acquisition period?
What is the correct treatment for dividend received on shares in personal investment accounting for the pre-acquisition period?
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Where is computer software classified in a company's balance sheet?
Where is computer software classified in a company's balance sheet?
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What is the maximum acceptable Debt Equity Ratio after buyback of shares according to legal requirements?
What is the maximum acceptable Debt Equity Ratio after buyback of shares according to legal requirements?
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Which of the following statements is false regarding arrears of preference dividend?
Which of the following statements is false regarding arrears of preference dividend?
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What account is credited when there is an increase in the value of assets during internal reconstruction?
What account is credited when there is an increase in the value of assets during internal reconstruction?
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Which statement about the classification of goodwill is accurate?
Which statement about the classification of goodwill is accurate?
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Under which category are losses from natural calamities like earthquakes and floods recorded?
Under which category are losses from natural calamities like earthquakes and floods recorded?
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What should be transferred to the General Reserve account during a buyback of equity shares?
What should be transferred to the General Reserve account during a buyback of equity shares?
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What is used to calculate profit on sale of short term investments?
What is used to calculate profit on sale of short term investments?
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Which of the following statements is true concerning Non-Current Investments at year-end?
Which of the following statements is true concerning Non-Current Investments at year-end?
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What is the consequence of internal reconstruction of companies?
What is the consequence of internal reconstruction of companies?
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Which of the following is a contingent liability?
Which of the following is a contingent liability?
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What type of security is a debenture?
What type of security is a debenture?
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Which statement is false regarding buybacks of equity shares?
Which statement is false regarding buybacks of equity shares?
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Is the dividend paid considered an expense for a company?
Is the dividend paid considered an expense for a company?
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What is required for capital reduction?
What is required for capital reduction?
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Which statement about public deposits is true?
Which statement about public deposits is true?
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How does capital reserve differ from free reserves?
How does capital reserve differ from free reserves?
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What limitation is imposed on a company concerning the buyback of its own shares?
What limitation is imposed on a company concerning the buyback of its own shares?
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Under what circumstance is the amount from forfeited shares added to paid-up capital?
Under what circumstance is the amount from forfeited shares added to paid-up capital?
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What does ethical behavior in the workplace typically include?
What does ethical behavior in the workplace typically include?
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Which of the following statements about short-term investments is correct?
Which of the following statements about short-term investments is correct?
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Which of the following is true about sundry creditors?
Which of the following is true about sundry creditors?
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What is the requirement for a company regarding corporate social responsibility spending?
What is the requirement for a company regarding corporate social responsibility spending?
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Where is capital reserve shown in a company's balance sheet?
Where is capital reserve shown in a company's balance sheet?
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Which statement is correct regarding the loss on sale of investment?
Which statement is correct regarding the loss on sale of investment?
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What does the term 'surrender of shares' refer to?
What does the term 'surrender of shares' refer to?
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Study Notes
Internal Reconstruction & Buy-Back of Shares
- Internal Reconstruction involves restructuring of a company’s capital structure without creating a new company.
- It often involves consolidation or subdivision of shares, reduction of capital, writing off fictitious assets, and revaluation of assets.
- Consolidation of shares results in the reduction of the number of shares outstanding, while subdivision of shares increases the number of shares outstanding.
- Capital reductions may be necessary to eliminate liabilities, such as fictitious assets, or to write off losses.
- Fictitious assets are assets that do not have real value.
- Capital Reduction Account is used to record the reduction of capital.
- Capital Reserve Account is a reserve account created when capital reduction results in a gain.
- Buy-back of shares is the process of a company repurchasing its own shares from the market.
- Buy-back of shares can be done out of free reserves or security premium.
- Buy-back of shares is subject to certain legal requirements.
Accounting Standards
- AS 13 governs Investment Accounting.
- AS 14 deals with Disclosure of Land and Building.
Key Accounting Items
- Interest accrued and due on debentures and interest accrued but not due on debentures are both classified as Other current liabilities on the balance sheet.
- Computer software is considered an intangible asset.
- Livestock is a tangible fixed asset.
- Licenses are intangible assets.
- Staff welfare expenses are included in Employee Benefit Expenses in the statement of profit and loss.
- Loss from natural calamities is categorized as an Extraordinary Item in the statement of profit and loss.
- Profit on sale of short term investments is calculated as selling price less cost.
- Debentures are a fixed income bearing security.
- Equity shares are variable income bearing securities.
- Dividend on shares is calculated on the face value of shares.
- Arrears of Preference Dividend is not included in Other Current Liabilities on the balance sheet.
Key Ratios
- Debt-Equity Ratio should not exceed 2:1 after a buy-back of shares.
- A company can buy-back no more than 25% of its paid-up equity capital in any financial year.
Other
- Discount on issue of shares not written off is a fictitious asset.
- Increase in the value of building is credited to the Capital Reduction Account.
- Decrease in the value of investments is debited to the Capital Reduction Account.
- Discount on buy-back of shares is debited to Equity Shareholders Account.
- Bonus shares are issued free of cost to existing shareholders.
- IRFS stands for International Financial Reporting Standards.
- Personal investment accounting is governed by AS 13.
- Government bonds are considered fixed income bearing securities.
- Trade receivables are current assets.
- Cum-interest price of investment includes interest.
- Amalgamation Adjustment Reserve is a statutory reserve.
- Net Asset Method is used to calculate the purchase consideration in an amalgamation.
- Increase in the value of an asset during internal reconstruction is credited to the Capital Reduction Account.
- Goodwill is classified as Property, Plant and Equipment under the Companies Act.
- CSR (Corporate Social Responsibility) requires certain companies to spend 2% of their average net profit of the three immediately preceding financial years on CSR activities.
- Public deposits are unsecured loans.
- Bills receivable are shown under Trade Receivables on the balance sheet.
- Internal reconstruction is done as per Section 66 of the Companies Act.
- Surrender of shares means giving up possession of shares.
- Dividend on equity shares is calculated on the basis of paid-up capital.
- Cheque on hand is classified as Cash and Cash Equivalents.
- Ethical views might change over time and place.
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Description
This quiz covers the concepts of internal reconstruction and the buy-back of shares. Explore the intricacies of restructuring a company's capital, including consolidation, subdivision, and capital reductions, as well as the implications of repurchasing shares. Test your understanding of these essential financial mechanisms.
