COMPANY FINAL ACCOUNTS SPECIMEN QUESTIONS WITH ANSWERS

SPECIMEN QUESTIONS WITH ANSWERS

Question 1:

D Ltd. has authorised capital of Rs. 4,00,000. The company issues 20,000 equity shares of Rs. 10 each at a premium of Rs. 5 per share payable as :

On application — Rs. 6 (including premium Rs. 3) On allotment — Rs. 5 (including balance of premium) Balance in two calls.

Applications were received for 35,000 shares. The applicants were divided in the following groups :

Group A — Applying for 5,000 shares allotted fully.

Group B — Applying for 20,000 shares are made prorata allotment for 15,000 shares. Group C — Applying for total 10,000 shares are refunded.

Directors while making allotment adjust the excess amount received on application against allotment money due. When second and final calls were made shareholders holding 500 shares failed to pay the final call money. The directors forfeited these shares. All the forfeited shares were reissued at Rs. 9 per share. It is agreed that brokerage @ 3% and underwriting commission @ 3% will be paid for this issue. Claims of brokers and underwriters are satisfied by issuing to them additional equity shares of Rs. 10 each at a premium of Rs. 5 per share (without any cash payment).

Show Journal Entries and the Balance Sheet of the company in the books of the company.

Answer :

In the books of D Ltd.

JOURNAL ENTRIES

Date		Particulars			L.F.	Rs.(Dr.)	Rs.(Cr.)
	Bank Account				Dr.	2,10,000
	To Equity Share Capital Account						2,10,000
	(being the application money received on 35,000
	shares @ Rs. 6 per share)
	Equity Share Application Account				Dr.	60,000
	To Bank Account						60,000
	(being the application on 10,000 shares refunded)
	Equity Share Application Account				Dr.	1,20,000
	To Equity Share Capital						60,000
	To Equity Share premium						60,000
	(being the application money on 20,000 shares
	transferred to share premium and share capital)
	Equity Share Application Account				Dr.	30,000
	To Equity Share Allotment Account						30,000
	(being excess of application money adjusted against
	allotment money due)
	Equity Share allotment account				Dr.	1,00,000
	To Equity Share Capital Account						60,000
	To Share Premium Account						40,000
	(being the amount due on allotment @ Rs. 5 per share
	including a premium of Rs. 2 as per board’s resolution
	no. ..... dated....)
	Bank Account				Dr.	70,000
	To Equity Share Allotment Account						70,000
	(being balance of allotment money received in full
	for 14,000 shares)
	Equity Share First Call Account				Dr.	40,000
	To Equity Share Capital Account						40,000
	(being the call money due on 20,000 shares @ Rs. 2
	per share)

Bank Account			Dr.	40,0000
To Equity Share First Call Account				40,000
(being the first call money received)
Equity Share Final Call Account			Dr.	40,000
To Equity Share Capital Account				40,000
(being the call money due on 20,000 shares @ Rs. 2
per share)
Bank Account			Dr.	39,000
To Equity Share Final Call Account				39,000
(being the call money on 19,500 shares received)
Equity Share Capital Account			Dr.	5,000
To Equity Share Final Call Account				1,000
To Share Forfeiture Account				4,000
(being 500 shares forfeited)
Bank Account			Dr.	4,500
Share Forfeiture Account			Dr.	500
To Equity Share Capital Account				5,000
(being 500 shares reissued @ Rs. 9 per share)
Share Forfeiture Account			Dr.	3,500
To Capital Reserve Account				3,500
(being profit on forfeiture transferred to capital
reserve account)
Brokerage Account			Dr.	6,000
Commission Agent			Dr.	6,000
To Equity Share Capital Account				8,000
To Share Premium Account				4,000
(being brokerage and commission paid)

 Balance Sheet of D Ltd.

	Liabilities	Rs.	Assets	Rs.
	Share Capital –		Fixed Assets –
Authorised Capital :
40,000 shares on Rs. 10 each		4,00,000	Investments :
Issued, Subscribed and Paid-up Capital			Current Assets, Loans and Advances :
20,800 Equity Shares of Rs. 10 each			Bank	3,03,500
(800 shares issued for consideration
	other than cash)	2,08,000	Miscellaneous expenditure :
Reserve & Surplus :			Brokerage on issue of shares	6,000
Capital Reserve		3,500
Share Premium		1,04,000	Commission on issue of shares	6,000
		3,15,500		3,15,500

Question 2 :

Sun Ltd. issued 20,000 Equity Shares of Rs. 10 each payable as follows :

On Application	Rs. 5	(including Rs. 2 as premium)
On Allotment	Rs. 5
On Call	Rs. 2

Applications were received for 36,000 Shares of which the application money on 6,000 Shares were refunded and allotment was made to the rest of the applicants on pro-rata basis. All the money due on Shares was received in full with the exception of allotment money on 200 Shares and Call Money on 500 Shares (including those on which allotment money was due). These 500 Shares were forfeited by the Company. Subsequently, 400 of these shares of which 200 were those Shares on which allotment money was not paid, were reissued at Rs. 7 per Share.

Show the Journal entries (including the Cash transactions) relating to the forfeiture and reissue of the Shares.

Answer :

In the books of Sun Ltd. JOURNAL

(All figures are in Rs.)

			Particulars			L/F	Dr.	Cr.
i)	Bank A/c				Dr.		1,80,000
	To Share Application A/c (36,000×5)							1,80,000
	(Being application money received)
ii)	Share Application A/c				Dr.		30,000
	To Bank (6000×5)							30,000
	(Being application money refunded)
iii)	Share application A/c				Dr.		1,50,000
	To Equity Share Capital							60,000
	To Equity Share Premium A/c							40,000
	To Equity Share Allotment A/c							50,000
	(Being application money transferred to Capital A/c
	and Premium A/c after adjusting excess application
	money with allotment as per Bond Resolution No.
	...... dt. ...... )
iv)	Share Allotment A/c				Dr.		1,00,000
	To Equity Share Capital A/c (20,000×5)							1,00,000
	(Being allotment money due for 20,000 equity shares
	as per Bond Resolution No. ...... dt. ......)
v)	Bank A/c				Dr.		49,500
	Call in Arrear A/c				Dr.		500
	To Equity Share Allotment A/c							50,000
	(Being allotment money received except 200 shares)
vi)	Share Call Money A/c				Dr.		40,000
	To Equity Share Capital A/c (20,000×2)							40,000
	(Being Call money due as per Board's Resolution
	No. ...... dt. ......)
vii)	Bank A/c				Dr.		39,000
	Call in Arrear A/c				Dr.		1,000
	To Share Call Money							40,000

(Being Call money received except 500 Shares)

viii)	Equity Share Capital A/c			Dr.	5,000
	To Call in Arrear A/c				1,500
	To Share Forfeiture A/c (1100 + 2400)				3,500
	(Being 500 Non payment shares forfeited as per
	Board's Resolution No. ...... dt . ......)
ix)	Bank A/c (400×7)			Dr.	2,800
	Share Forfeiture A/c			Dr.	1,200
	To Share Capital A/c				4,000
	(Being 400 Forfeiture shares revised @ Rs. 7 per share
	as per Board's Resolution No. ...... dt. ......)
x)	Share Forfeiture A/c			Dr.	1,500
	To Capital Reserve A/c				1,500

(Being Profit on revised transferred to Capital Reserve as per Board's Resolution No. ...... dt. ......)

Working Note :

1)        Due on allotment money for 200 shares.

Shares applied for  =  200 x 30,000 / 20,000  =  300 Shares.

Application Money Received Rs. 1,500
Excess Money received in application  =	(300 – 200)×5  =  500
Due for allotment ....... Rs..200×5 =	1,000
Less : Excess Received	(-500)
Allotment money failed to pay (200×2.50)	500

Out of application money Rs.1500. Amount of Premium is Rs.400 for 200 Shares allotted and Balance 1100 for application and Partly allotment.

2)  Profit on Reissue 400 shares.
For 200 Share forfeiture amount	=	Rs. 1,100
Now For 300 Share forfeiture amount			=  Rs. 2,400
For 200 Share forfeiture amount is		=	2,400 x 200 /300	=  1,600
Profit on Reissue =  (2700 – 1200)		=	1,500
Balance of Forfeiture A/c will be	=	(3500 – 2700)  =		Rs. 800.

Question 3 :

The following Ledger balances are extracted from the books of QR Ltd. as on 30.9.98 :

	Rs.
9% Debenture issued @ Rs. 95	9,50,000
Debenture Redemption Reserve Fund A/c	9,37,000
Discount on issue of Debentures	26,000
Investment against Debenture Redemption Reserve Fund	9,37,000

Following further information is given :

(a)       Investments include debentures of the face value of Rs. 2,00,000 purchased on 1.8.98

@ Rs. 99.

(b)       Interest on debentures is payable on 30th June and 31st December.

(c)        All debentures are redeemable at par on 31st December.

(d)       Income from outside investments of Redemption Fund from 30.9.98 to 31.12.98 is Rs. 45,000

Show ledger accounts assuming that the above transactions have been carried out and all outside investments were sold at a gain of 10% over cost.

Solution :
Dr.		Debenture Redemption Fund Investment Account			Cr.
	Particulars		Rs.	Particulars	Rs.
1998			1998
Oct.1st	To Balance	9,37,000	Oct 1st	By (own Debenture Inv. A/c)	1,98,000
				(Transfer to separate A/c)
Dec 31st	To Sinking Fund (Profit on Sales)  73,900		Dec 31st	By Bank	8,12,900
		10,10,900			10,10,900

Dr.		Debenture Redemption Fund (Own Debentures) Investment A/c			Cr.
		Particulars	Rs.	Particulars	Rs.
	1998 Oct 1st		1998 Dec. 31st
		To D.R.F. Investment A/c
		(Transfer)	1,98,000	By 9% Debenture A/c	2,00,000

’’ D.R.R.F. (Profit on

		cancellation)	2,000
			2,00,000				2,00,000
Dr.			Debenture Redemption Reserve Fund				Cr.
		Particulars		Rs.	Particulars		Rs.
	1998 Dec. 31st			1998 Oct. 1st
		To Discount on issue of
		Debentures	26,000		By	Balance b/d	9,37,000
’’		Capital Reserve		Dec 31st
		(Profit on cancellation
		of Debentures)	2,000		By	Debenture A/c	7,500
’’		General Reserve	10,37,400			(on Rs. 2,00,000 for 5 months)
					’’	Int. on D.R.F.
						Investment A/c	45,000
					’’	D.R.R.F
						(Own Deb. Inv. A/c)	2,000
					’’  D.R.F.I. (Profit on Sales)		73,900
			10,65,400				10,65,400
Dr.			Discount on Issue of Debentures				Cr.
		Particulars	Rs.	Particulars			Rs.
	Dec. 31st 1998 To Balance B/D		26,000	Dec. 31st 1998 By D.R.F.			26,000
			26,000				26,000
Dr.			9% Debentures A/c				Cr.
		Particulars	Rs.	Particulars			Rs.
		To  DRF (own
		Debentures Inv. A/c)	2,00,000		By	Balance b/d	9,50,000
’’		Bank	7,50,000
			9,50,000				9,50,000

Question 4 :

Rajesh Ltd. furnishes you with the following balance sheet as at 31st March, 2001:

	(Rs. in crores)
Sources of Funds:
Share Capital
Authorised
Issued	100
10% Redeemable preference shares of Rs.100 each fully paid	75
Equity shares of Rs. 10 each fully paid	25	100
Reserve and surplus
Capital reserves	15
Share premium	25
Revenue reserves	260	300
		400
Funds employed in:
Fixed assets (cost)	100
Less Provision for depreciation	100	Nil
Investment (at cost)
(Market value Rs. 400 crores)		100
Current assets	340
Less Current liabilities	40	300
		400

The company redeemed preference shares on 1st April, 2001. It also bought back 50 lakh equity shares of Rs.10 each at Rs. 50 per share. The payments for the above were made out of the huge bank balances, which appeared as part of current assets.

You are asked to :

(i)       Pass journal entries to record the above and

(ii)      prepare balance sheet.

Answer (i) :

Note: As regards redemption of redeemable preference shares and buy back of shares, section 80 of the Companies Act is on redemption of redeemable preference share and Section 77A, introduced by the Companies (Amendment) Act, 1999 is on buy back of shares. While section 80 provides that redemption of redeemable preference shares can be made either out of proceeds of fresh issue or out of profits available for distribution. Section 77A provides that buy back of shares can be made –

(a)       out of free reserves or

(b)       security premium A/c or

(c)        out of proceeds of fresh issue of capital.

However, section 80 provides that premium on redemption can be provided either out of profits or out of security premium account.

In the given problem the company redeemed the preference shares at par, but buy-back of equity shares at a premium. The company bought back 50 lakh equity shares @ Rs. 50 per share which is equal to security premium account. It is, therefore, presumed that the buy back of shares have been made out of security premium account and redemption of preference shares out of profit available for dividend. There can be other presumptions too, like both redemption of redeemable preference shares and buy back of shares have been made out of profit or out of free reserves as the case may be.

SEBI Guidelines and Rules framed by Company Law Board further requires that in case of buy back of shares, the company must open an escrow account by depositing the requisite amount to a designated bank or by giving guarantee of payment during the book building procedure and also open a separate designated account with its bankers for payment of shareholders.

Journal Entries

		(Rs. in lakhs)
Re. Redeemable Preference Shares :
10% Redeemable Preference shares A/c			Dr.	75
To Redeemable Preference Shareholders A/c				75
(Being the amount transferred to latter A/c as per
Board resolution dated ......)
Redeemable Preference Shareholders A/c			Dr.	75
To Bank				75
(Being the payment made to redeemable Preference
shareholders)
Revenue Reserve A/c			Dr.	75
To Capital Redemption Reserve Account				75
(Being the amount transferred from Revenue Reserve
as per Board Resolution dated ......in terms of s.80 of
the Companies Act, 1956)

Re. Buy Back of Equity Shares:
Escrow Bank A/c			Dr.	5
To Bank A/c				5
(Being amount transferred to Escrow Bank A/c
opened as per Board Resolution dated ...... and for
buy back of equity shares along with authorisation
of payment to be made by merchant bankers for
payment.)
Equity Share Capital A/c			Dr.	5
Premium on buy back of Equity Shares			Dr.	20
To Shareholders A/c				25
(Being the amount of equity share capital bought
back at premium of Rs. 40 per share as per special
resolution dated ..... passed on extra ordinary General
Meeting held on .......)
Bank A/c for Buy-back of shares			Dr.	25
To Escrow Bank A/c				5
To Bank A/c				20
(Being the amount transferred from latter accounts
to former A/c as per Board Resolution dated .....)
Shareholders A/c			Dr.	25
To Bank A/c for buy back of shares				25
(Being the payment made to equity shareholders on
buy back of shares as per special resolution passed
on extra ordinary General Meeting dated ...... held
on...........)
Security Premium A/c			Dr.	5
To Capital Redemption Reserve				5
(Being the transfer of security premium account to
Capital Redemption Reserve A/c for the purpose of
buy-back of 50 lakhs equity shares of Rs. 10 each.)
General Reserve A/c			Dr.	20
To Premium on buy back of equity shares				20
(Being the premium on buy back of equity shares
transferred to General Reserve Account)

Note :

Section 77A, unlike section 80 is silent about treatment of Premium on buy-back of equity shares. No authoritative pronouncement is made available. One school of thought is that the premium may be adjusted against security premium account while other school of thought that it may be adjusted against revenue reserve or may be treated as Deferred Revenue Expenditure account. Accordingly the entry may be passed.

Answer (ii):
	Rajesh Ltd.
	Balance Sheet as on 1.4.2001	Schedule	(Rs. in crores)
(Rs. in crores)
I. Sources of Funds :
Shareholders Funds			300
(a)	Capital	1	20
(b)	Reserves & Surplus	2	280
	Total		300
II. Application of Funds :
Fixed Assets	Gross Block		100
	Less : Depreciation		100  —
Investments (Market value Rs. 400 crores)			100
Current Assets		240
Less : Current liabilities		40	200
	Total		300
Schedules :
Schedule 1:
Share capital —
Authorised
Share Capital –
Authorised			?
Issued, Subscribed and Paid up			20
7,50,000, 10% Redeemable Preference shares
of Rs. 100 each fully paid redeemed at par as
per terms and conditions of issue on 1.4.2001		—
20,00,000 (P.Y. 25,00,000) Equity shares of
Rs. 10 each fully called and paid up		20
		20

Schedule 2 :
(1) Capital Reserve (As per last A/c)		15
(2) Capital Redemption Reserve –	5
Transferred from Security Premium
Transferred from Revenue Reserve	75	80
(3) Security Premium A/c—
As per last A/c	25
Less : Transferred to Capital Redemption Reserve on
account of Buy Back of Equity Shares	5	20
(4) Revenue Reserve —
As per last A/c	260
Less: Premium on Buy-back of Equity Shares	20
		240
Less: Transferred to Capital Redemption Reserve
on redemption of Redeemable Preference Shares	75	165

280