Accountancy and Financial Management IV PDF

S.Y.B.COM. SEMESTER - IV (CBCS) ACCOUNTANCY FINANCIAL MANAGEMENT - IV SUBJECT CODE: UBCOMFSIV.1  © UNIVERSITY OF MUMBAI Prof. Suhas Pednekar Vice-Chancellor, University of Mumbai Prof....

S.Y.B.COM. SEMESTER - IV (CBCS) ACCOUNTANCY FINANCIAL MANAGEMENT - IV SUBJECT CODE: UBCOMFSIV.1  © UNIVERSITY OF MUMBAI Prof. Suhas Pednekar Vice-Chancellor, University of Mumbai Prof. Ravindra D. Kulkarni Prof. Prakash Mahanwar Pro Vice-Chancellor, Director, University of Mumbai IDOL, University of Mumbai Programme Co-ordinator : Prof. Rajashri Pandit Asst. Prof. in Economic, Incharge Head Faculty of Commerce, IDOL, University of Mumbai, Mumbai Course Co-ordinator : Mr. Vinayak Joshi Assistant Professor, IDOL, University of Mumbai, Mumbai Course Writer : Dr. Madhura Kulkarni Deputy Director, IDOL, University of Mumbai, Mumbai : Dr.Saraswathi Moorthy Assistant Professor, R. J. College, Ghatakopar, Mumbai : CA Kevin Miranda Assistant Professor, St. Andrews College,Bandra, Mumbai : Dr. Sanchita Roy Assistant Professor, Smt. K. G. Mittal College, Malad, Mumbai : Dr. Vinit Joshi Assistant Professor, Amity University, Panvel March 2022, Print - 1 Published by : Director, Institute of Distance and Open Learning , University of Mumbai, Vidyanagari, Mumbai - 400 098. DTP Composed & : Mumbai University Press Printed by Vidyanagari, Santacruz (E), Mumbai  CONTENTS Unit No. Title Page No. MODULE - I 1. Introduction to Company Accounts - I 01 2. Introduction to Company Accounts, Issue of Debentures 22 MODULE- II 3. Redemption of Preference shares 33 MODULE - III 4. Redemption of Debentures 47 MODULE- IV 5. Profit Prior to Incorporation 82   Module I 1 INTRODUCTION TO COMPANY ACCOUNTS - I Unit structure 2.0 Objectives 2.1 Introduction 2.2 Formation of Company 2.3 Shares 2.4 Share Capital 2.5 Format of Balance Sheet 2.6 Issue of Shares 2.7 Is sue of Shares on Preferenti al Basis 2.8 Emplo yee Stock Opt ion (ESO) 2.9 Sweat Equit y Shares 2.10 Escrow Account 2.11 Issue of Shares at Par, At Premium and At Discount 2.12 Exercise 2.0 OBJECTIVES After studying the unit students will be able to:  Know the meaning, features and types of company  Understand the procedure of Formation of the company.  Discuss about the meaning, types of shares.  Know the meaning and classification of share capital.  Explain the Balance sheet of the company  Understand the meaning of forfeiture of shares 2.1 INTRODUCTION  Meaning and Definition Company is a type of commercial organisation, Lord Justice Hanay had said company is an artificial person created by law having perpetual 1  Accountancy and succession and a common seal. It is owned by shareholders and managed Financial Management IV by directors. Definition: Sec 2(20) of the Companies Act 2013 states that, “A company means a company formed and registered under that Act or under any previous Companies Act.”  Features of Company: From above meaning and definition we can identify following features of the company: i. Registered / Incorporation: The company need to be formed and registered under the Companies Act, this process is known as Incorporation of the company. Without such incorporation company cannot come into existence. ii. Artificial Person: The Company is considered as artificial person so it has power to acquire, hold and sale all types of properties, it can enter into legal agreements, it can file a case or case can be filed against the company. iii. Separate Legal Entity: A company is considered as separate legal entity hence its existence is not affected due death, insolvency of its members or transfer of shares by the members. A member of company is not liable for act of the company and vice versa. iv. Perpetual Succession: A company is created by following process of law and it cease to exist only upon the process of law. It enjoys perpetual (permanent) existence. Companies existence is independent of death, insolvency or changes in membership of the company. v. Common Seal: It is the most important property, common seal act as signature of company and use to authenticate the documents. If the common seal if affixed on any document by the authorised person it becomes a legal document  Types of Companies There are various types of companies which are described in following diagram. 2 Companies are basically classified as Chartered Company, Statutory Introduction to Company Company and Registered Company. Accounts - I 1. Chartered Companies: These companies come into existence by Royal Charter which is issued by Head of State. For eg. East India Company. 2. Statutory Companies: These are formed under special statute of the parliament or the state legislature. These are public undertakings and form with main objective to serve social need not earn profit. For eg. RBI, LIC, SBI UTI etc. 3. Registered Companies: These are the companies which are registered under Indian Companies Act 2013, or any other previous Indian Companies Act. These companies are divided on the basis of Constitution Control and Other Liability.  On the basis of Constitution a) Associate Company S2(6): A company is said to be associate company of other, if other company had control on 20% of total voting power in the company or have control over business decisions of the company under an agreement. However an Associate Company is not subsidiary company. b) Dormant Company S455: Where a company is formed for future projects or to hold an asset or intellectual property and do not have significant financial transactions for atleast 2 years may obtain status of Dormant Company by applying to Registrar. c) One Person Company S2 (62): It is a new type of company introduced in the Companies Act 2013. It can be formed with only one member and have only one director. However the Act prescribed maximum in respect of amount of Share Capital and Turnover if One Person Company is exceeding that limit it need to be converted into Private or Public Company. d) Private Company : It is a types of company which is formed with minimum two shareholders and two directors, Another crucial condition of a private limited company is that it by its articles of association restricts the right to transfer its shares & also prohibits any invitation to the public to subscribe for any securities of the company. A private company is exempted from various provisions of the Companies Act 2013 in comparison with the public company. e) Public Company S2 (71): A company which is not a Private Company is a Public Company. A Public Company had minimum 7 members; there is no any restriction for minimum paid up capital for Public Company. Its shares are freely transferable. It can also invite public to subscribe its shares. f) Small Company S2(85): Small company means a company other than a public company and should fulfil the following criteria: 3  Accountancy and a. Paid-up share capital of which does not exceed 50 Lakh Rupees or Financial Management IV anything higher than that as may be prescribed will not be more than five crore rupees, and; b. Turnover of last profit and loss statement should not exceed 2 Crore Rupees or such higher amount as may be prescribed.  On the basis of Liability: a) Company Limited by Guarantee S2(21): Each member promises to pay a fixed sum of money, specified in Memorandum of Association in the event of liquidation or payment of debt. This promised amount is called as guarantee. If a company insert such clause in its Memorandum the said company is Limited by Guarantee. b) Limited Company: In these types of companies shareholders are bound to pay a fixed amount per share i.e. face value of shares either at the time of subscription or in instalments. c) Unlimited Liability Company: If a company does not have any limit for liability of its members then such company is called as unlimited company. In this case members are liable to pay full amount of debt at the time of winding up of the company.  On the basis of Control a) Foreign Company: It is a company which is incorporated outside India and having its place of business in India has a place of business in India whether by itself or through an agent, physically or through electronic mode; and conducts any business activity in India in any other manner. b) Government Company: It is the company whose minimum 51% paid up capital is held by government, i.e. State or Central Government or subsidiary of Government Company. c) Holding Company: It is the company which has control over other company. If any company held more than 51% of the share capital of another company then it is called as holding company. d) Subsidiary Company: It is the company which is controlled by another company i.e. Holding Company.  Other Companies: a) Investment Company: It is the company whose main business is to acquire shares, debentures, or other securities. b) Non Trading Company: This is also called “association not for profit or charitable companies” These companies are registered under special license issued by government. The object of the company is to promote arts, science, sports, education, research, social welfare, religion etc. 4 c) Producer Company: In generic terms, producer companies can be Introduction to Company said to be a way to improve the standard of living of those involved in Accounts - I the agricultural sector. Such companies are deemed to possess the goodness of co-operatives and the dynamicity of companies. A producer company is a company incorporated under Companies Act 2013 (formerly the Companies Act 1956) and shall carry on prescribed activities as mentioned in Section 581B of Companies Act 1956, to name few, Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import goods for their benefit. Processing including preserving, drying, distilling, brewing, venting, canning and packaging of produce of its members. Manufacture, sale or supply of machinery, equipment or consumables mainly to its Members. Promoting mutual assistance, financial services and welfare measures of producers or their primary produce. 2.2 FORMATION OF COMPANY Company is generally formed by the promoters. Promoter is a person who conceives a business idea and to bring it into reality he take initiative to Form and Register the company.  Steps in formation Following Steps are taken in respect of registration of company. 1. Name: The promoter may propose name of the company for registration, they can propose up to six names. If name is available further process is carried out. 2. Memorandum of Association and Articles of Association: Promoter should prepare Memorandum of Association and Articles of Association. Promoters should sign both and submit it to Registrar of Companies. 3. Filling of Documents: Following documents need to be filled with registrar for the purpose of registration a) Memorandum of Association and Articles of Association b) A declaration by advocate or practicing professional (CA, CS etc) regarding compliance. c) Affidavit from each subscriber from each person named as first director. d) Address for correspondence till its registered office is not established e) Details of each subscriber f) Details of first director 5  Accountancy and g) Required amount of registration fees and any other document if Financial Management IV required 4. Incorporation Certificate: Once all these required documents are received Registrar of the company will issue Incorporation Certificate for the company. 2.3 SHARES  Meaning & Definition: Share is the smallest part of the share capital of the company. As per section 2(84) of the Companies Act “A Share in the share capital of a company and includes stock except where a distinction between stock and share is expressed or implied.” Shares are considered as movable property and can be transferred as per procedure laid down in Articles of the company. Each and every share has a predetermined value which is called as face value.  Shareholder: The owner of the shares is called as shareholder. Company issues a share certificate to the holder having his name along with other details such as no of shares and their distinct no. The share holders are co-owners of the company he has right to attend meeting and to receive dividend. He has right to receive back his capital at the time of winding up of the company.  Stock: Stock is a bundle of fully paid shares. A limited can company can convert its fully paid shares into stock. Stock can be divided into any fractions and subdivisions regards to the face value.  Types of Shares There are two types of shares, 1. Equity Shares, 2. Preference Shares 1. Equity Shares: Explanation to section 43 It is that part of share capital which is not preference share capital. Equity shares are of two types: a) With voting rights: These are normal equity shares having equal rights regards to voting at meeting, dividend and same rights in each and every aspect. b) With differential voting rights: Company can issue equity shares with differential rights as to dividend, voting rights etc. However such must can be done subject to Rule 4 of Companies (Share Capital and Debentures) Rules 2014. 2. Preference Shares: These are the shares having preferential rights in respect of dividend and receiving back their capital at the time of 6  winding up of the company. Preference Shares will receive dividend Introduction to Company at fix rate before any dividend is paid to equity shares and receive Accounts - I back their capital before equity shares. Types of Preference Shares: a) Cumulative and Non-cumulative Preference Shares: If any year company does not pay dividend Cumulative preference shares will receive dividend for that year from the profits of following year. However Non-cumulative preference shares do not enjoy such benefits. b) Participating and Non-participating Preference Shares: Participating Preference Shares are entitled to participate in surplus profits remaining after payment of dividend of both types of shares. c) Convertible and Non-convertible Preference Shares: Convertible Preference Shares can be converted into equity shares whereas non- convertible preference shares are not converted into equity shares. d) Redeemable and Non-redeemable Preference Shares: Redeemable preference shares are redeemed (paid back) during life time of the company whereas Non-redeemable Preference shares are not redeemed during life time of the company they are redeemed at the winding up of the company. 2.4 SHARE CAPITAL Capital of the company is collected by issue of shares, there is no any limit for maximum no of members / shareholders of the company and shares are freely transferable so it’s impossible to have separate capital account for each shareholder. The company maintain a share capital account in its books representing amount collected from all shareholders.  Classification of Share Capital 1. Authorised Capital: Authorised Capital or Nominal Capital is capital which is mentioned in memorandum and company cannot issue shares exceeding this amount. 2. Issued Capital: It is the no shares issued by the company for subscription. Company can issue full or part of its authorised capital. 3. Subscribed Capital: It is the part of issued capital, it refers to the no of shares actually subscribed or taken u by general public. 4. Called up Capital: Called up capital is the amount of subscribed capital which is actually called by the company. (demanded by the company) 5. Paid up Capital: Paid up capital is the amount received against called up capital amount by the company. 7  Accountancy and 6. Reserve Capital: It is the uncalled amount of share subscribed capital Financial Management IV which company will demand at the time of emergency or liquidation of company.  Dividend Dividend is part of profit distributed among shareholders by the company. Dividend can be classified as final dividend and Interim dividend. The dividend can be paid as % of paid up capital or at a fixed amount per share. 1. Final Dividend: Final dividend is proposed by directors and declared at annual general meeting of the company. It should be noted that proposed dividend will be considered as contingent liability and will not be recorded in balance sheet. Once the dividend is declared it will be considered as liability and should be paid off in stipulated time. 2. Interim Dividend: Interim dividend is declared by board of directors in between two annual general meetings. Any dividend declared over and above the final dividend will be considered as Interim dividend. 2.5 FORMAT OF BALANCE SHEET The company need to prepare its financial statements i.e. Profit & Loss A/c and Balance Sheet in the format prescribed by Companies Act 2013. Schedule 3 of Companies Act provide format for the financial statements. Any requirement of Accounting Standard will override the requirements of the schedule 3 of the Companies Act. The balance sheet needs to be prepared in vertical format along with notes to accounts. Part I – Form of Balance Sheet Name of the Company:- ______________________________ Balance Sheet as at:- ________________________________ (Rupees in _________) 8 Particulars Note Figures as Figures as at Introduction to Company No at the end the end of Accounts - I of the the previous current reporting reporting period period EQUITY AND LIABILITIES Shareholders Fund Share Capital Reserves Surplus Money Received against Share Warrants Share Application Money Pending Allotment Non Current Liabilities Long Term Borrowings Differed Tax Liabilities (Net) Other Long Term Liabilities Long Term Provisions Current Liabilities Short Term Borrowings Trade Payable Other Current Liabilities Short Term Provisions Total ASSETS Non-Current Assets Fixed Assets Tangible Assets Intangible Assets Capital work in Progress Intangible Assets under developments Non-Current Liabilities Differed Tax Assets (Net) Long Term Loans and Advances 9  Accountancy and Financial Management IV Other Long Term Assets Current Assets Current Investments Inventories Trade Receivables Cash and Cash Equivalents Short Term Loans and Advances Other Current Assets Total The balance sheet of the company is presented along with relevant notes to accounts providing detailed information regarding the particular item. The notes accounts are presented as follows. Notes to accounts Rs. A. Share Capital  Authorised shares (Par Value per Share : Rs…..)  Issued, subscribed, called up & fully paid shares  Subscribed but not fully paid shares Less : Calls unpaid – By Directors – By Officers – By Others  Forfeited Shares  Forfeited Shares reissued  Reconciliation of Shares Outstanding B. Reserves and Surplus a. Capital Reserves b. Capital Redemption Reserve c. Securities premium d. Debenture Redemption Reserve e. Revaluation Reserve f. Share Options Outstanding Account g. Other Reserves h. General Reserves i. Surplus 10  – Balance b/d Introduction to Company Accounts - I Add : Profit for Year Less : Appropriations C. Long Term Borrowings a. Bonds / Debentures b. Term Loans i. Term Loans from Banks ii. Term Loans from Other Parties c. Deferred Payment Liabilities d. Deposits i. Public Deposits (GN) ii. Inter-Corporate Deposits (GN) e. Loans and Advances from Related Parties f. Long Term Maturities of Finance Lease Obligations g. Other Loans and Advances D. Other Long Term Liabilities a. Trade Payables b. Other Payables i. Trade Deposits (GN) ii. Security Deposits (GN) E. Long Term Provisions a. Provision for Employee Benefits b. Others – Provision for Warranties (GN) F. Short Term Borrowings a. Loans Repayable on Demand i. From Banks ii. From Other Parties b. Loans and Advances from Related Parties c. Deposits d. Other Loans and Advances G. Other Current Liabilities a. Current Maturities of Long Term Debt b. Current Maturities of Finance Lease Obligations c. Interest Accrued but not Due on Borrowings d. Interest Accrued and Due on Borrowings 11  Accountancy and Financial Management IV e. Income Received in Advance f. Unpaid Dividends g. Application Money Refund and Interest Due h. Unpaid Matured Deposits and Interest Accrued thereon i. Unpaid Matured Debentures and Interest Accrued thereon j. Other Payables – Calls-in-Advance (GN) – Non-Trade Payables (GN) – Taxes Payable (GN) H. Short Term Provisions a. Provisions for Employee Benefits b. Others –Provision for Tax (Net of tax payments) (FAQ) I. Tangible Assets a. Land b. Buildings c. Plant and Equipment d. Furniture and Fixtures e. Vehicles f. Office Equipment g. Others (specify nature) J. Intangible Assets a. Goodwill b. Brands / Trademarks c. Computer Software d. Mastheads and Publishing Titles e. Mining Rights f. Copyrights, Patents, etc. g. Recipes, Formulae, Models, Designs and Prototypes h. Licenses and Franchise i. Others (specify nature) K. Non-Current Investments a. Investments in Property b. Investment in Equity Instruments c. Investments in Preference Shares 12  d. Investments in Government or Trust Securities Introduction to Company Accounts - I e. Investments in Debentures or Bonds f. Investments in Mutual Funds g. Investments in Partnership Firms h. Other Non Current Investments L. Long Term Loans and Advances a. Capital Advances b. Security Deposits c. Loans and Advances to Related Parties d. Other Loans and Advances – Advances Tax (Net of provision) (FAQ) – CENVAT Credit Receivable (GN) – VAT Credit Receivable (GN) – Service Tax Credit Receivable (GN) M. Other Non Current Assets a. Long Term Trade Receivables b. Others N. Current Investments a. Investments in Equity Instruments b. Investments in Preference Shares c. Investments in Government or Trust Securities d. Investments in Debentures or Bonds e. Investments in Mutual Funds f. Investments in Partnership Firms g. Other Investments O. Inventories a. Raw Materials b. Work-in-progress c. Finished Goods d. Stock-in-Trade e. Stores and Spares f. Loose Tools g. Others P. Trade Receivables a. Secured, Considered Good b. Unsecured, Considered Good 13  Accountancy and Financial Management IV i. More than 6 months ii. Other c. Doubtful Less : Provision for Bad and Doubtful Debts Q. Cash and Cash Equivalents a. Balances with Banks b. Cheques, Drafts on Hand c. Cash on Hand d. Others (specify nature) – Other Bank Balances – Earmarked (Unpaid Dividend A/c) – Margin Money Deposit – Deposits Maturing After 12 Months R. Short Term Loans and Advances a. Loans and Advances to Related Parties b. Others – Prepaid Expenses (GN) – Tax Refund Receivable vide A.O. (FAQ) S. Other Current Assets  Non-Trade Receivables (GN)  Unamortized Expenditure (GN)  Unbilled Revenue (GN) 2.6 ISSUE OF SHARES Company issue shares for formation of its on capital. There are several modes for issue of shares such as public offer, private placement, right issue etc. However regulations of Companies Act lay don guidelines in respect of these modes. Depending upon type of company modes of issue will be applicable for issue of shares. 14 Issue of Shares Introduction to Company 1. Public Offer: In this case company offer shares to general public for Accounts - I subscription it need to follow a prescribed procedure laid down by companies act and rules in respect of the issue of shares. Public offers are classified as follows. a) Initial Public Offer (IPO): When company offer its shares to public for subscription through prospectus for the first time it is called as initial public offer. Generally such offer is made by unlisted companies. This enables listing and trading of companies shares at stock exchange. b) Further Public Offer (FPO): When an existing listed company makes a fresh issue of securities to the public through an offer document it is called as Further Public Offer. c) Offer for Sale of Securities (OFS): Offer for sale of securities is different from IPO and FPO. It is used to reduce promoters holding or to provide exit route to venture capitalist. In this case shares offered to public are shares held by promoters of the company. In this case balance sheet of the company is not affected as new shares are not issued. 2. Private Placement: In case of private placement company does not offer its shares to general public instead it offers its shares to selected group of persons. Such offer is made through issue of a private placement offer letter. However company need to satisfy various conditions mentioned in section 42 of the Companies Act 2013. 3. Right Issue: Right Issue referrers to offer given by company to its existing equity shares to subscribe for additional shares. However such offer will be given to the shareholder for limited no of shares in proportion to shares already held by him. Section 62(1) (a) of the Companies Act 2013 provide guidelines for right issue. 4. Bonus Shares: Bonus shares are free gift given by company to its existing equity share holders. In this case company allot fully paid shares to its existing equity share holders for free increasing their shareholding and companies share capital. Company can issue bonus shares by utilising its free reserves, securities premium or capital redemption reserve. Section 63 of the Companies Act provides guidelines for issue of bonus shares. 2.7 ISSUE OF SHARES ON PREFERENTIAL BASIS Section 62(1)(c) of the Companies Act and Rule 13 of Companies (Share Capital and Debentures) Rule 2014 enable the company to issue shares on preferential basis. However the company need to comply with section 42 of the Companies Act while issuing shares on preferential basis. Apart from compliance of various provisions of Companies Act, a special resolution is also required for issue of shares on preferential basis 15  Accountancy and Meaning: “PREFERENTIAL ALLOTMENT” means an issue of shares Financial Management IV or other securities, by a Company to any select person or group of persons on preferential basis and does not include shares or other securities offered through a public issue, right issue, employee stock option scheme, employee stock purchase scheme or an sweet equity issue or bonus issue or depository receipts issued in a country outside India or foreign securities. Price: The price of shares or other securities to be issued on preferential basis shall be determined on the basis of valuation report of a registered valuer or Independent Valuer having 10 year of experience. Consideration other than Cash: Company can issue shares on preferential basis as consideration for other than cash. However valuation of such consideration shall be done by registered valuer who need to submit a valuation report to the company giving justification for the valuation. 2.8 EMPLOYEE STOCK OPTION (ESO) Meaning Section 2(37) of the Companies Act, 2013 Employees Stock Option means the option given to the directors, officers, or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers nor employees the benefit or right to purchase or to subscribe for the shares of the company at a future date at a predetermined price. Section 62(1)(b) of the Companies Act enable the company to offer shares to its employees through Employee Stock Option. A special resolution is required for such issue and company also need to comply with Rule 12 of Companies (Share Capital and Debentures) rules 2014. For this purpose employee means 1. A permanent employee of the company 2. A director of the company excluding independent director 3. A employee (1 or 2 mentioned above) in subsidiary company of Indian Holding Company. Employee does not include following 1. An employee who is promoter of the company or belonging to promoter group 2. A director himself or through his relative hold directly or indirectly more than 10% of share capital of the company. Following are important point in respect of Employee Stock Option 1. Company can offer these shares at any price to its employees 2. There should be time gap of atleast 1 year between granting of option and vesting of option. 16 3. Option granted to employee is non transferable Introduction to Company 4. The company need to maintain a separate register for Employee Stock Accounts - I Option in prescribed form. 5. If company is listed on any recognised stock exchange, then Employee Stock Option Scheme shall be issued in accordance with the regulations made by SEBI. 2.9 SWEAT EQUITY SHARES  Meaning According to Section 2(88) of the Companies Act 2013, SWEAT equity shares means such equity shares issued by a company to its directors, or employees at a discount or for consideration other than cash, for providing their knowhow or making available rights in the nature of intellectual property or value additions, by whatever name called. It should be noted that SWEAT Equity is different from Employee Stock Option Scheme and Employee Stock Purchase Scheme.  Conditions to be fulfilled by the company Section 54 of the Companies Act prescribed conditions to be fulfilled by the company for issue of SWEAT Equity Shares which are as follows 1. A special resolution is required for issue of SWEAT Equity Shares. 2. The resolution must specify no. of shares, market price, consideration and details of directors or employees to whom such shares are issued. 3. The Company must have started its business for at least 1 year not less than that. 4. If the equity shares of the company is listed on recognised stock exchange issue of SWEAT Equity Shares will be done as per guidelines issued by SEBI. If company is not listed it will be issued as per Chapter IV of the Companies Act 2013. 2.10 ESCROW ACCOUNT  Meaning Escrow means depositing funds with third party to be used latter on compliance of certain conditions. Company use this system at the time of IPO, it is used to put Share Application Money received at the time of receiving applications from public for an IPO. Escrow account is the dedicated bank account, it is opened with Escrow Collections Bank which is used for collection of application money at the time of public offer. The company need to enter into escrow agreement. Escrow Agreement is an agreement between issuer company, registrar of issue, and escrow collection bank for collection of application money and its refund whenever applicable. 17  Accountancy and  Escrow Mechanism Financial Management IV 1. Company open one or more escrow account with Escrow Collections Bank for collection of application money. Application money received from public along with applications is deposited in escrow account. The company also open Public Issue Account and Refund Account with Bankers of Issue. 2. The money received will be held by the Escrow Collection Bank on behalf of issuing company till date of allotment. 3. On date of allotment money as per size and terms of issue will be transferred from escrow account to Public Issue Account. 4. The balance left in escrow account will be transferred to refund account. The amount will be refunded to all unsuccessful applicants, and applicants who have paid excess application money after adjusting for allotment money within 15 days from closing date of issue. If it fails to repay on time, company need to pay 15% interest on the amount to the applicants. 2.11 ISSUE OF SHARES AT PAR, AT PREMIUM AND AT DISCOUNT The company can issue shares at any price. It can issue shares at Par, at Premium or at Discount. a. At par: When shares are issued at its face value, they are said to be issued at par. b. At premium: When shares are issued at a price more than its face value, they are said to be issued at premium. c. At Discount: When shares are issued at price less than its face value, they are said to be issued at discount.  Oversubscription and Under subscription Public Company issue shares to general public, for this purpose it invites applications from interested investors by issuing prospectus. Interested investors need to subscribe for the shares as per procedure described in prospectus. Oversubscription or Under subscription relates to the response received from general public for companies offer for issue of shares. Under subscription: It is the situation in which number of shares subscribed by public is less than no of shares offered by company. In this case shares can be allotted only when minimum subscription received. However applications are received more than minimum subscription shares can be allotted. 18  Oversubscription: Introduction to Company Accounts - I When no of applications received are more than shares offered by company then it is called as oversubscription. In case of oversubscription shares can be allotted in following ways: i. Partial Allotment: The directors may decide to fully accept some applications and reject remaining excess applications. ii. Pro-rata Allotment: Pro-rata allotment means proportionate distribution of shares available for allotment among the applicants for the shares. iii. Combination: Company can combine both the above methods where it rejects few applications and allots shares on prorate basis among remaining applicants.  Issue of Shares for Consideration Other than Cash A company can issue shares for consideration other than cash. Such issue can be at par, at premium or at discount. Following are some of the cases in which company can issue shares for consideration other than cash. Vendors: The vendors may be an individual, a firm or company whose business is taken over by the company. The purchasing company may issue its shares to vendors from whom their business is purchased. Promoters: Shares may be issued to promoters of the company as remuneration for the services rendered for the formation of the company. Underwriters: Shares may be issued to underwriters in lieu of underwriting commission payable to them. Directors or Employees: A company can SWEAT Equity Shares to its directors or employees as consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions.  Forfeiture and Re-Issue of Forfeited Shares On issue of shares company can collect entire money at the time of application or it can collect it in instalments, at the time of application, allotment and balance in calls. If any shareholder fails to pay allotment or call money, company can forfeit his shares, i.e. take back his shares without paying any compensation. Forfeiture of Shares Forfeiture of shares can be referred as compulsory termination of membership of shareholder by the company die to non-payment of allotment or call money. In this case shareholder ceases to be member of company and company take back its shares and confiscate any amount paid by the shareholder against those shares. Company need to follow the 19  Accountancy and procedure laid down by Articles of Association of the company to forfeit Financial Management IV the shares of any shareholder. Re-Issue of Forfeited Shares A company can re-issue the forfeited shares. Re-issue of shares though called as re-issue it is ‘sale’ of shares not ‘issue’ of shares. Company need to follow the procedure laid down in its Articles of Association in respect of re-issue of shares. The company can re-issue the forfeited shares at par, at premium or at discount; however re-issue of shares cannot have allotment, calls etc. 2.12 EXERCISE Descriptive Questions 1. What is mean by Company? Explain its features 2. Describe different type of companies. 3. Define Shares? Explain different types of Shares 4. Explain different types of Preference Shares 5. Explain Share Capital 6. Explain different modes for issue of shares. 7. Explain Equity & Liabilities of Balance Sheet as per Schedule-III of Companies Act 2013. 8. Explain Forfeiture and re-issue of forfeited shares. Short Notes 1. One Person Company 2. Private Company 3. Public Company 4. SWEAT Equity 5. ESCROW Account 6. Share 7. Bonus Shares 8. Right Shares Objective Questions 1) Fill in Blanks. 1. A Public company may be formed by _______ or more persons. 2. One Person company may have _____ person as director. 3. ___________ Preference Shares are converted into equity shares. 4. Profit distributed by the company among shareholders is called as ___ 20 5. Preference Shareholders are entitled to receive dividend at ______ Introduction to Company rate. Accounts - I 6. Inventories appear under __________ in Balance Sheet. 7. Creditors are recorded under __________ in Balance Sheet. 8. Forfeiture of shares results in _________ termination of membership. 9. SWEAT Equity shares can be issued to directors & ______ of the company. 10. A share denotes a _____ part of company’s share capital. (seven, one, Redeemable, dividend, fixed, Current Assets, Trade Payable, compulsory, employees, smallest) 2. Match Pairs Group A Group B Authorised Capital Creditors of the company One Person Company Receive dividend at fixed rate Debenture holders Can be formed with only 1 member. Preference Shares Compulsory termination of membership Forfeiture of shares Minimum 7 members Public Company Shares issued to vendor for purchase of its business. Shares issued for consideration Memorandum of Association other than cash (a – 7, b – 3, c – 1, d – 2, e – 4, f – 5, g – 6) 3. True or False 1. Only a natural person can form one person company. 2. A stock can be transferred in any fractions. 3. Right issue is made to existing shareholders only. 4. Forfeited shares cannot be reissued. 5. Company can issue bonus shares out of capital reserve. 6. Company has perpetual life. 7. ESCROW is a special bank account used specifically for public offer. 8. Offer for Sale of securities is not fresh issue of shares. (True – 1, 2, 3, 6, 7, 8) (False – 4, 5)   21  2 INTRODUCTION TO COMPANY ACCOUNTS ISSUE OF DEBENTURES Unit Structure: 2.0 Objective 2.1 Introduction 2.2 Types of Debentures 2.3 Issue of debentures at Par, Premium and Discount 2.4 Issue of Debentures with consideration of Redemption 2.5 Issue of debentures for cash receivable in instalments or at a time issue of debentures for consideration other than cash 2.6 Provisions of the Companies Act, 2013 regarding issue of Debentures 2.7 Distinction between Share and Debenture 2.8 Model Journal Entries on Issue of Debentures 2.9 Summary 2.10 Exercise 2.0 OBJECTIVE After studying the unit students will be able to  Understand the provisions regarding issue of debentures under the Companies Act, 2013  Explain the accounting treatment for the same. 2.1 INTRODUCTION  Meaning: Section 2(30) of the Companies Act, 2013 defines a as ‘Debenture’ includes debenture stock, bonds or any other securities of a company evidencing a debt whether constituting a charge on the company’s assets or not. In other words, a debenture is a borrowing or a loan. Schedule III of the Companies Act, 2013 classifies debenture as a Long Term Borrowing. Debentures are issued by the company only if it is authorised by the Articles of Association of the Company. It is in the form of a certificate issued under the common seal of the company and it creates or acknowledges a debt. Debentures are normally secured against the assets 22 of the company and interest is payable on them which is calculated on the Introduction to Company nominal value of the debentures issued by the company. The debenture Accounts Issue of certificate specifies the date of redemption of the debenture. The persons Debentures to whom the debentures are allotted are known as debenture holders  Features of Debentures: a. It is a document which creates or acknowledges debt. b. It is in the form of certificate issued by company under its common seal. c. The certificate will show rate of interest payable. d. Normally debentures are secured against assets of the company. 2.2 TYPES OF DEBENTURES Debentures are classified as follows: 1. Secured debentures and Unsecured debentures: A. Secured debentures: The debentures which have a charge (security) on the assets of the company are called secured debentures. The charge may be fixed charge or floating charge. The charge is on all assets of the company in general. i) Fixed Charge: In case of fixed charged the debentures are secured on specific assets of the company like Land & Building, Plant & machinery etc. The company cannot sell such assets until the debenture holders are repaid. In this case the debenture holder can recover their dues out of the specific asset of the company which is identified in mortgage deed. ii) Floating Charge: In this case debenture holders do not have charge on specific asset of the company. The charge may be on current assets such as stock, debtors etc. of the company. It is very difficult to pinpoint an asset as value of the current assets keeps changing. Hence company can use these assets for normal business operations however the floating charge become fixed in the event of default by company in respect of interest or redemption of debentures. B. Unsecured debentures are also known as ‘simple’ or ‘naked’ debentures. The debentures which do not have a charge (security) on the assets of the company are called unsecured debentures. In the event of the winding up of company, such debentures are treated as unsecured creditors. 2. Registered debentures and Bearer debentures: A. Registered debenture must be compulsorily registered with the company and the details of these debentures are recorded by the company in the Register of Debenture holders which is kept by the company. 23  Accountancy and B. Bearer debentures are not registered with the company. They are Financial Management IV transferred by mere delivery. 3. Redeemable debentures and Irredeemable Debentures: A. Redeemable debentures are redeemed after a specified period of time in future. The date on which the debenture would be redeemed is mentioned on the debenture certificate. B. Irredeemable debentures are redeemed only when the company is liquidated. They continue to remain in existence as long as the company exists. 2.3 ISSUE OF DEBENTURES  Issue of debentures at Par, Premium and Discount A. Issue of debentures at Par: Debentures are said to be issued at par when their issue price is equal to their nominal value. For example debentures of nominal value of `100 is issued at ` 100. B. Issue of debentures at Premium: Debentures are said to be issued at a premium when their issue price is greater than their nominal value. For example debentures of nominal value of `100is issued at ` 101 or more. In this case `1 is the premium and would be credited to securities premium account. C. Issue of debentures at Discount: Debentures are said to be issued at a discount when their issue price is less than their nominal value. For example debentures of nominal value of `100 is issued at `99 or less. In this case `1 is the discount and would be debited to discount on issue of debentures account.  Issue of Debentures with consideration of Redemption Debentures may be issued with consideration of redemption. Debentures can be redeemed (repaid) at par, premium or discount. A. If debentures are redeemed at an amount equal to their face, they are redeemable at par. B. If debentures are redeemed at an amount greater than their face value, they are said to be redeemable at a premium. Such premium though payable on redemption, must be provided as a liability at the time of issue itself. Such premium payable on redemption is a capital loss for the company. C. If debentures are redeemed at an amount less than their face value, they are said to be redeemable at a discount. Such discount on redemption is a capital profit for the company.  Issue of debentures for cash receivable in instalments or at a time issue of debentures for consideration other than cash 24  A. Debentures can be issued for cash or for consideration other than Introduction to Company cash. In both these cases, debentures can be issued at par, premium Accounts Issue of or at a discount. When debentures are issued for cash, the cash may Debentures be received in instalments such as application, on allotment and balance in calls. The premium or discount, if any, is adjusted at the time of allotment itself. B. Debentures issued for consideration other than cash means that the company issues debenture without receiving money for the debentures issued. Examples: Debentures issued to vendors for purchase of business, debentures issued to suppliers for purchase of machinery. C. Debentures can also be issued to the lender as a collateral security. Collateral security means an additional or parallel security. Such debentures are in the nature of contingent liability. The lender will be the custodian of the debentures. There is no accounting entry (journal entry) passed in the books of accounts of the company for debentures issued as a collateral security, since there is no immediate liability created by the company. Only a note in the balance Sheet has to be given to that effect 2.4 PROVISIONS OF THE COMPANIES ACT, 2013 REGARDING ISSUE OF DEBENTURES Section 71 of the Companies Act, 2013 provides the manner in which debentures are to be issued by the Company. The features of the provisions are: 1. A company cannot issue any debentures carrying voting rights. 2. A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption. Such an issue must be approved by a special resolution at a general meeting. 3. A company shall pay interest and redeem debentures as per the terms and conditions of the issue. 4. Secured debentures shall be issued by a company as per the terms and conditions prescribed in Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 5. The company shall create a Debenture Redemption Reserve account (DRR A/c) out of company’s profits available for dividend and the amount appropriated to DRR account shall be utilised by the company only for redemption of debentures. 25  Accountancy and 6. A debenture trustee shall ensure the protection of Debenture holders’ Financial Management IV interest and redress their grievances as prescribed by the rules. 7. The debenture trustee can approach the Tribunal for an order, if the assets of the company become insufficient or are likely to become insufficient to discharge the principal amount as and when it becomes due. 8. If the company fails to redeem the debentures on due date or it fails to pay the interest on debentures on due date, then the tribunal can direct, by order, the company to redeem the debentures forth with on payment of principal and interest due thereon. 9. If the company fails to comply the tribunal’s order, then every officer of the company who is in default shall be punishable with imprisonment upto three years or a fine of at least rupees two lakhs which can be extended to Rupees five lakhs or with both. 10. The Central Government may prescribe procedure for securing the issue of debentures, the form of trust deed and its inspection and to obtain its copies, the amount of DRR to be created and such other matters. 11. Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 provides that a company shall issue secured debentures on the following terms and conditions: i. Secured debentures can be issued provided its date of redemption shall not exceed ten years from the date of it issue. ii. The following classes of companies can issue secured debentures for a period exceeding ten years but not exceeding thirty years a) Companies who are engaged in setting up infrastructure projects b) Infrastructure Finance Companies c) Infrastructure Debt Fund Non-Banking Financial Companies iii. There shall be a creation of charge on the issue of such debentures. iv. The company shall appoint a debenture trustee before issue of prospectus or offer letter for subscription of debentures. v. The charge or mortgage shall be created in favour of the debenture trustee on any specified movable or immovable property. 26  2.5 DISTINCTION BETWEEN SHARE AND Introduction to Company DEBENTURE Accounts Issue of Debentures Share Debenture 1. It is an owned capital. It is a borrowed capital. 2. A person who holds share is A person who holds debenture is known as shareholder. known as debenture holder 3. The shareholder is the owner of The debenture holder is the the company. creditor of the company. 4. Earnings on share are in the form Earnings on debentures are in of dividend. the form of interest. 5. The rate of dividend fluctuates in The rate of interest is fixed. case of equity shares 6. Shares do not have any security. Debentures may have security. They are unsecured. They are secured. 7. Shareholders enjoy voting rights Debenture holders do not have voting rights 8. Equity shares can never be Debentures can be converted converted 9. Share Trust Deed is not required Debenture Trust Deed is to be executed. required to be executed. 10. Section 53 of the Companies Act There are no restrictions in the 2013 prohibits issue of shares at a Companies Act on issue of discount. debenture at discount 2.6 MODEL JOURNAL ENTRIES ON ISSUE OF DEBENTURES Nature of Transaction Journal Entry Amount 1. When debentures are Bank A/c Dr. Amount Received issued at par and To Debentures A/c redeemable at par 2. When debentures are Bank A/c Dr. Amount Received issued at a premium and To Debentures A/c NV of Debentures redeemable at par To Securities Premium Amount of Premium A/c 3. When debentures are Bank A/c Dr. Amount Received issued at a discount and Discount on issue of Amount of discount redeemable at par Debentures A/c Dr. NV of Debentures To Debentures A/c 27  Accountancy and Financial Management IV 4. When debentures are Bank A/c Dr. Amount Received issued at par and Loss on issue of Premium on redeemable at premium Debentures A/c Dr. redemption To Debentures A/c NV of Debentures To Premium on Premium on redemption of redemption debentures A/c 5. When debentures are Bank A/c Dr. Amount Received issued at a discount and Loss on issue of Disc. allowed & POR redeemable at premium Debentures A/c Dr. NV of Debentures To Debentures A/c Premium on To Premium on redemption redemption of debentures A/c 6. When debentures are Bank A/c Dr. Amount Received issued at a premium and Loss on issue of Premium on redeemable at premium Debentures A/c Dr. redemption To Debentures A/c NV of Debentures To Securities Premium Amount of Premium A/c Premium on To Premium on redemption redemption of debentures A/c NV = Nominal Value POR = Premium on Redemption 2.7 ILLUSTRATION: Ajay Ltd. issues 2,000 8% debentures of 100 each You are asked to give journal entries on issue if: a. the debentures are issued at par and redeemable at par b. they are issued at a premium of 5% but redeemable at par c. they are issued at a discount of 5% but redeemable at par d. they are issued at par but redeemable at a premium of 10% e. they are issued at a discount of 10% but redeemable at a premium of 5% f. they are issued at a premium of 5% but redeemable at a premium of 10% 28  Solution: Introduction to Company Accounts Issue of Working Note Debentures On date of On date of Issue Redemption ` ` a. NV 2,000 x of 100 (at par) 2,00,000 2,00,000 b. NV 2,00,000 2,00,000 + Premium on issue 5% +10,000 - c. NV 2,00,000 2,00,000 - Discount on issue 5% -10,000 - d. NV 2,00,000 2,00,000 + Premium on redemption 10% - +20,000 e. NV 2,00,000 2,00,000 - Discount on issue 5% -20,000 - + Premium on redemption 10% - +10,000 f. NV 2,00,000 2,00,000 + Premium on issue 5% +10,000 - + Premium on redemption 10% - +20,000 Journal entries in the books of Ajay on Issue of Debentures Nature of Journal Entry Debit ` Credit ` Transaction a. When issued at par Bank A/c Dr. 2,00,000 and redeemable at par To Debentures A/c 2,00,000 b. When debentures are Bank A/c Dr. 2,10,000 issued at a premium To Debentures A/c 2,00,000 and redeemable at par To Securities Premium A/c 10,000 c. When debentures are Bank A/c Dr. 1,90,000 issued at a discount Disc. on issue of Deb. A/c 10,000 and redeemable at par Dr. 2,00,000 To Debentures A/c d. When debentures are Bank A/c Dr. 2,00,000 issued at par and Loss on issue of Deb. A/c 20,000 redeemable at Dr. 2,00,000 premium To Debentures A/c 20,000 To Prem. on redemption of deb. A/c 29  Accountancy and Financial Management IV e. When debentures are Bank A/c Dr. 1,80,000 issued at a discount Disc. on issue of Deb. A/c 20,000 and redeemable at Dr. 10,000 premium Loss on issue of Debentures 2,00,000 A/c Dr. 10,000 To Debentures A/c To Prem on redemption of deb. A/c f. When debentures are Bank A/c Dr. 2,10,000 issued at a premium Loss on issue of Debentures 20,000 and redeemable at A/c Dr. 2,00,000 premium To Debentures A/c 10,000 To Securities Premium A/c 20,000 To Prem. on redemption of deb. A/c 2.9 SUMMARY: 1. Debenture is acknowledged as a debt 2. Debenture is a long term borrowing 3. It is given in the form of a certificate under the common seal of the company 4. The terms of issue and redemption of debentures are mentioned in the certificate 5. Debenture can be issued at par, premium or discount 6. Debentures can be issued for consideration other than cash. 7. Debenture can be offered as a collateral security 8. Debentures can be secured or unsecured. 9. Interest is payable on nominal value of debentures. 10. Debentures do not carry voting rights 2.10 EXERCISE: 1. Distinguish between a share and debenture? 2. Explain the different types of debentures? 3. What are the provisions of the Companies Act regarding issue of debentures? 4. Write Short Notes on: i. Meaning and features of debentures. ii. Types of Debentures 30  iii. Simple debentures Introduction to Company iv. Fixed charge and floating charge on debentures Accounts Issue of Debentures v. Secured debentures and redeemable debentures vi. Issue of debentures vii. Issue of debentures other than cash viii. Issue of debentures as a collateral security Objective types questions A. State whether the following statements are True or False i. Debenture is a short term borrowing ii. Debenture holders are creditors of the company iii. Interest on debentures is calculated on the cost of the debentures iv. Debentures can be issued as a collateral security v. Debentures can be issued for consideration other than cash vi. Debentures cannot be issued at a discount vii. A charge on all the assets of the company is a fixed charge viii. Unsecured debentures are simple debentures ix. Bearer debentures are registered with the company x. A company cannot issue secured debentures xi. Debentures carry voting rights. Answers: True : ii, iv, v, viii False : i, iii, vi, vii, ix, x, xi B. Fill in the blanks choosing correct alternative i. Debenture holders are the ________of the company (Owners/Creditors) ii. Naked debentures are also known as ______ debentures. (Secured/Unsecured) iii. Debenture is a _______________capital (Borrowed/Owned) iv. Interest is calculated on the __________ of the debentures (Nominal Value/Cost Price) v. A charge on specific assets of the company is a _______ charge. (Fixed/Floating) vi. Collateral security is a ___________ security (Lateral/Parallel) vii. The rate of interest on debenture is_______ (Fixed/Fluctuating) viii. The maximum tenure for debentures issued by Companies engaged in setting up infrastructure project is ______ years (10/30) 31  Accountancy and ix. When debentures of the face value of `100 are issued at `105, the Financial Management IV issue is said to be at______ (Discount/Premium) x. Issue of debentures must be authorised by __________ of Association (Memorandum/Articles) Answers: i. Creditors, ii. Unsecured, iii. Borrowed, iv. Nominal Value, v. Fixed, vi. Parallel, vii. Fixed, viii 30 ix. Premium, x. Articles C. Match the Columns Column A Column B 1. Debenture holders are a. Simple debentures 2. Unsecured Debentures b. Collateral Security 3. Bearer Debentures c. Charge on the assets of the company 4. Secured Debentures d. Creditors of the company 5. Parallel Security e. Transfer by mere delivery Answers: 1- d, 2-a, 3- e, 4-c, 5-b Illustration Varun Ltd. issues 1,000 7% debentures of `100 each You are asked to give journal entries on issue if: i. the debentures are issued at par and redeemable at par ii. they are issued at a discount of 5% but redeemable at par iii. they are issued at a premium of 5% but redeemable at par iv. they are issued at a discount of 10% but redeemable at a premium of 5% v. they are issued at par but redeemable at a premium of 10% vi. they are issued at a premium of 5% but redeemable at a premium of 10%   32  Module II 3 REDEMPTION OF PREFERENCE SHARES Unit Structure 3.0 Objective 3.1 Introduction 3.2 Accounting Procedure 3.3 Questions 3.0 OBJECTIVE After studying this unit students will be able to:  Know the Concept of Redemption and purpose of issuingredeemable Preference Shares.  Understand various provision of the Companies Act regardingredemption of Preference Shares.  Know the sources of redemption including divisible profits andproceeds of fresh issue of shares  Understand the concept of Premium on Redemption & CapitalRedemption Reserve.  Know to prepare Capital Redemption Reserve Account and use.  Know the Methods of redemption of Preference Shares  Understand the Accounting procedure of redemption of Preference Shares.  Prepare the Balance Sheet (Schedule III) of the Company after redemption of Preference Shares. 3.1 INTRODUCTION As studied in the earlier chapter, a share is the part of the amount of the capital of a company. The preference shares are the one’s which have a fixed rate of dividend and enjoy preferential rights of repayment at the time of winding up of the company. 55 of the Companies Act 2013 has laid down various provisions in respect of the issue and redemption of the preference shares which has been briefed as under : 33  Accountancy and 1) With the commencement of the Co. Act 2013 the Companies that are Financial Management IV limited by shares shall issue only redeemable preference shares. 2) Such companies may issue redeemable preference shares for a period of 20 years only. 3) However if the company is undertaking infrastructure projects then such shares may be issued for a period exceeding 20 years subject to certain laid down conditions for issue as well as redemption. 4) The redemption of the preference shares may be carried out by either i) Proceeds of fresh issue of shares ii) Divisible profits of the company. 5) Only fully paid shares can be redeemed. 6) In case the redemption is out of profits, a sum equal to the nominal value (NV) of the shares redeemed must be transferred to the Capital Redemption Reserve (CRR) 7) The redemption may be carried out at par or premium. In case of the premium on redemption, it may be provided out of the security premium A/c. However as per S. 133, the companies that are required to use divisible profits itself for providing the premium on redemption of the preference shares. 8) The redemption require the consent of three fourth of the preference share holders. 9) Incase there are untraceable share holders or the company is unable to redeem the preference shares or pay the dividends, then the company upon the approval of the tribunal may issue further redeemable preference shares to a matching amount. 10) Also for the dissenting shareholders, such redeemable shares may be issue. However such issue of shares under this section does not deem an increase in the share capital of the company. 11) The balance generated through the CRR may be after the redemption used for the issuance of bonus shares. 3.2 ACCOUNTING PROCEDURE : 1) Making final calls incasethe shares are partly paid. Calls on Preference share A/c or To Preference Capital A/c 2) Receiving money on the call Bank A/c Dr To calls on Preference share A/c 34  Redemption of Preference 3) Share forfeiture on non payment shares i) Preference Capital A/c Dr. To Share forfeiture A/c (Reduction of the shares that are to be forfeited) ii) Share forfeiture A/c Dr To Capital Reserve (Share forfeiture balance transferred) 4) Create the claim of the Preference share holders. Preference Capital A/c Dr. Premium on Redemption A/c Dr. To Preference Share holders A/c (Premium on Redemption will appear only if the shares are redeemed at a premium). 5) Sale of assets to fund redemption Bank A/c Dr. Profit & Loss A/c Dr. To Assets A/c To Profit & Loss A/c (Depending on the gain or loss an the sale value of the asset, Profit and Loss A/c will be either debited or credited) 6) Issue of shares Bank A/c Dr. To Equity Capital A/c To Security premium A/c (Where shares are issued at a premium) 7) Payment to preference share holders Preference share Holders A/c Dr. To Bank A/c 8) A mortising the premium on redumption Profit and Loss A/c Dr. To Premium on Redemption A/c 9) Creating the CRR Profit and Loss A/c Dr. General Reserve A/c Dr. To CRR A/c 35  Accountancy and 10) Declaration of Bonus Financial Management IV Bonus to Equity share holder A/c Dr. To Equity Capital A/c 11) Capitalising the reserves for Bonus CRR A/c / Profit & Loss / General Reserves A/c Dr. To Bonus to Equity share capital A/c Study Note : (A) Bonus For the purpose of calculation of bonus shares, the following steps are to be followed. 1) Calculate the number of equity share = originally in the B/s + Fresh issue made. 2) Look upon the ratio given Eg : 1 bonus for 5 shares held. 3) Calculate the bonus : (for 20,000 equity shares) Eg : Held Bonus 5 1 20,000 2 20, 000 Bonus =  1  40000 shares 5 Refer Q. No. - 4 & 5 in this chapter) B) Divisible Profits : The profits which can be distributed to the shareholders or may be used for any business purpose by the company are called as divisible profits. These include - Profit and Loss A/c, General Reserve, Investment fluctuation Reserve, dividend EqualisationReserve. Also specifically created funds like sinking Fund, Workmen Compensation Fund may be treated as divisible profits subject to the deduction of the liability in respect of that particular fund. II) Practical Questions : Redemption fully out of new issue. Q.1Salman Ltd. has 50,000 8% Preference shares of `100 each fully paid. On 31/12/18, the Company decided to redeem the preference shares at 10% premium. For funding the redemption the Company issued 5,00,000 equity shares of `10 each issued at `12 are. The issue was fully subscribed and the redemption was duly carried out Journalise the transactions in the books of the Company. Ans. Journal of Salman Ltd. 36 1) 8% Preference Capital A/c Dr. 50,00,000 Redemption of Preference Premium on Redeem A/c Dr. 5,00,000 shares To Preference Share Holders A/c 55,00,000 (Being the claim of Preference Share holders created) 2) Bank A/c Dr. 60,00000 To Equity Capital A/c 50,00,000 To Security Premium A/c 10,00,000 (Being equity shares issued at a premium of `2/ share) 3) Profit and Loss A/c Dr 5,00,000 To premium on Redeem A/c 5,00,000 (Being premium on redeem W/off) 4) Preference share holders A/c Dr. 55,00,000 To Bank A/c 55,00,000 (Being the claim of the preference shares holders settled) Redemption fully out of the profits Q.2The following balances are extracted from the books of Katrina Ltd. as on 31/3/18 5,000 10% Preference Shares `100 each 5,00,000 General Reserve A/c 2,80,000 Profit & Loss A/c 3,00,000 The Company decided to redeem at far the preference shares fully out of the available reserves on 1/4/18. Journalise the above transactions. Ans. Journal of Katrina Ltd. 1) 10% Preference share capital A/c Dr. 5,00,000 To Preference share holder A/c 5,00,000 (Being the claim of the preference share holders created) 2) Profit and Loss A/c Dr 3,00,000 General Reserve A/c Dr. 2,00,000 To Capital Redeem Reserve A/c 5,00,000 (Being CRR created for the redemption of preference share capital) 3) Preference share holders A/c Dr. 5,00,000 To Bank A/c 5,00,000 (Being Preference share holders claim settled) Redemption partly out of the fresh issue and partly out of profits. 37  Accountancy and Q.3 Shahrukh Ltd. has 6000 9% Preference shares of `100 each Financial Management IV redeemable at 5% premium. To fund the redemption, the Co. issued 30,000 equity share of `10 each at 10% premium. The divisible profits of the firm included. General Reserve `2,00,000 Profit & Loss A/c `2,00,000 Journalise the transactions. Ans. Journal of Sharukh Ltd. 1) 9% Preference Capital A/c Dr. 6,00,000 Premium on Redeem A/c Dr. 30,000 To Preference share holders A/c 6,30,000 (Being Preference share holders claim created) 2) Bank A/c Dr 3,30,000 To Equity Capital A/c 3,00,000 To Security Premium A/c 30,000 (Being equity shares issued at a premium) 3) Profit and Loss A/c Dr 2,00,000 General Reserve A/c Dr 1,00,000 To CRR A/c 3,00,000 (Being CRR created for redemption of Preference shares) (Balance Amount) 4) General Reserves A/c Dr. 30,000 To Premium on Redeem 30,000 (Being premium on Redeem w/off) 5) Preference share holders A/c Dr. 6,30,000 To Bank A/c 6,30,000 (Being preference share holders claim settled) Redemption then bonus - declaration 38 Q.4 Ranveer Ltd.’s Balance sheet as on 31/12/2018 is as follows Redemption of Preference shares 10% Preference Capital 2,50,000 Bank 1,75,000 Equity capital 5,00,000 Investments 2,00,000 General Reserve 2,00,000 Stock 2,75,000 Profit & Loss A/c 4,00,000 Debtors 3,00,000 11% Debentures 2,00,000 Land & Building 4,00,000 Creditors 2,00,000 Equipments 4,00,000 17,50,000 17,50,000 On the above date, the Company decided to redeem the preference shares at 10% premium. For this purpose, the Co. sold 50% of the investments at 20% Profit and issued 1200 equity share of `100 each at part. The issue was fully subscribed and the redemption was carried out. Post redemption the company insured bonus @ 1 share for 10 shares held by the owners. Journalise all the above transactions. Ans. Journal of Ranveer Ltd. 1) 10% Preference Capital A/c Dr. 2,50,000 Premium on Redeem A/c Dr. 25,000 To preference share holder A/c 2,75,000 (Being the claim of preference share holders created) 2) Bank A/c Dr. 1,20,000 To Investment A/c 1,00,000 To Profit & Loss A/c 20,000 (Being investments sold at a gain, WN1) 3) Bank A/c Dr. 1,20,000 To Investment A/c 1,20,000 To Profit & Loss A/c 20,000 (Being equity share issued at par) 4) Profit and Loss A/c Dr. 1,30,000 To CRR A/c 1,30,000 (Being CRR created for redemption) 5) Profit and Loss A/c Dr. 25,000 To Premium on Redeem A/c 25,000 (Being premium on redeem w/off) 39  Accountancy and 6) Preference share holders A/c Dr. 2,75,000 Financial Management IV To Bank A/c 2,75,000 (Being preference share holders paid) 7) CRR A/c Dr 51,200 Bonus to Equity share Holders 51,200 (Being bonus shares declared) 8) Bonus to Equity share holder A/c Dr. 51,200 To Equity Capital A/c 51,200 (Being bonus shares declared) WN1 - Calculate of sale value of investments MC of investment = 2,00,000 Extent of investment sold = 50% = 1,00,000 Profit = 20% = 20,000  Sale value = 1,00,000 + 20,000 = 1,20,000 WN2 - Calculation of Bonus shares Total no. of equity share = (before bonus) Originally issued + Fresh issue = 50,000 + 1200 = 51,200 Held Bonus 10 1 51200 ? 51200  1 Bonus =  5120 shares of `10 each 10 Redemption with untraceable preference shareholders and Balance sheet. (Comprehensive question) 5) Balance sheet of Adira Ltd. as on 31/3/18 is as follows : 9% Preference share of 4,00,000 Fixed Assets 16,00,000 `100 each Equity share of `100 8,00,000 Investments (M.V. - 1,60,000 each 2,00,000) Security Premium 24,000 Stock 2,80,000 General Reserve 2,40,000 Debtors 2,80,000 Profit & Loss A/c 1,04,000 Bank 80,000 Current Liabilities 8,32,000 24,00,000 24,00,000 40 Adjustments : Redemption of Preference shares 1) The Company decided to redeem all the preference shares at 10% premium. 2) The Company decided to use 2,00,000 from general reserve & 50,00