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Class 12 Commerce

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Accounting for Share Capital

Accounting for Share Capital

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Study Action Plan (Sorted by Difficulty)
Types of Companies
Accuracy: 50%
Total Attempted4
Total Correct2
Total Incorrect2
Difficulty Level:
Medium
Features of a Company
Accuracy: 71%
Total Attempted7
Total Correct5
Total Incorrect2
Difficulty Level:
Medium
Accounting for Share Capital
Accuracy: 78%
Total Attempted9
Total Correct7
Total Incorrect2
Difficulty Level:
Low
Calls in Arrears and Calls in Advance
Accuracy: 78%
Total Attempted9
Total Correct7
Total Incorrect2
Difficulty Level:
Low
Issue of Shares at a Premium
Accuracy: 86%
Total Attempted7
Total Correct6
Total Incorrect1
Difficulty Level:
Low
Over Subscription and Under Subscription
Accuracy: 86%
Total Attempted7
Total Correct6
Total Incorrect1
Difficulty Level:
Low
Journal Entries for Share Transactions
Accuracy: 89%
Total Attempted9
Total Correct8
Total Incorrect1
Difficulty Level:
Low
Categories of Share Capital
Accuracy: 100%
Total Attempted7
Total Correct7
Total Incorrect0
Difficulty Level:
Low

Learning Objectives

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Learning Objectives

After studying this chapter, you will be able to:
  • Explain the basic nature of a joint stock company as a form of business organisation and the various kinds of companies based on liability of their members.
  • Describe the types of shares issued by a company.
  • Explain the accounting treatment of shares issued at par, at premium, and at discount including oversubscription.
  • Outline the accounting for forfeiture of shares and reissue of forfeited shares under varying situations.
  • Workout the amounts to be transferred to capital reserve when forfeited shares are reissued.
  • Prepare share forfeited account.

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Revision Notes & Summary

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Accounting for Share Capital

1. Introduction

  • A company is an organization formed by shareholders who contribute capital.
  • Shareholders elect a Board of Directors to manage the company.
  • Governed by the Companies Act, 2013.

2. Features of a Company

  • Artificial person with a distinct legal entity.
  • Has a common seal for signature.

3. Types of Companies

  • Joint Stock Company: Owned by shareholders.
  • Types of Shares:
    • Equity Shares: No preferential rights.
    • Preference Shares: Preferential rights to dividends and capital repayment.

4. Share Capital

  • Share Capital: Raised through issuing shares.
  • Can be issued for cash or consideration other than cash.
  • Stages of Share Issue:
    1. Application for shares
    2. Allotment of shares
    3. Calls on shares

5. Key Terms

  • Calls in Arrears: Amount not received from shareholders.
  • Calls in Advance: Amount paid by shareholders before due.
  • Over Subscription: More applications than shares available.
  • Under Subscription: Fewer applications than shares available.

6. Accounting Treatment

  • Forfeiture of Shares: Shares can be forfeited for non-payment.
  • Reissue of Forfeited Shares: Can be reissued at a discount.
  • Securities Premium: Amount received over the nominal value of shares.

7. Common Mistakes

  • Not maintaining a separate Calls-in-Arrears Account.
  • Failing to comply with legal provisions for issuing shares at a discount.

8. Practice Questions

  • Define a public company.
  • Explain the process of share allotment in case of over subscription.
  • Discuss the conditions for issuing shares at a discount.
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Practice Test – MCQs, True/False

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Multiple Choice Questions

A.

Share Application A/c Dr. To Share Capital A/c

B.

Bank A/c Dr. To Share Application A/c

C.

Share Capital A/c Dr. To Share Application A/c

D.

Share Application A/c Dr. To Bank A/c
Correct Answer: A

Solution:

The correct entry for transferring application money to share capital upon allotment is to debit the Share Application Account and credit the Share Capital Account.

Chapter Concept:

Journal Entries for Share Transactions

A.

Receiving applications for fewer shares than offered

B.

Receiving applications for more shares than offered

C.

Issuing shares at a premium

D.

Issuing shares at a discount
Correct Answer: B

Solution:

Over subscription occurs when applications for more shares are received than the number offered to the public for subscription.

Chapter Concept:

Accounting for Share Capital

A.

It is credited to the Share Capital Account.

B.

It is debited to the Interest on Calls in Advance Account.

C.

It is credited to the Calls in Advance Account.

D.

It is debited to the Bank Account.
Correct Answer: B

Solution:

Interest on 'Calls in Advance' is debited to the Interest on Calls in Advance Account when paid to shareholders.

Chapter Concept:

Calls in Arrears and Calls in Advance

A.

The premium amount is credited to the Share Capital Account.

B.

The premium amount is credited to the Securities Premium Account.

C.

The premium amount is credited to the Profit and Loss Account.

D.

The premium amount is credited to the Calls in Advance Account.
Correct Answer: B

Solution:

When shares are issued at a premium, the premium amount is credited to the Securities Premium Account.

Chapter Concept:

Over Subscription and Under Subscription

A.

5% per annum

B.

10% per annum

C.

15% per annum

D.

20% per annum
Correct Answer: B

Solution:

If the Articles of Association are silent, the maximum rate of interest on calls in arrears is 10% per annum as per Table F.

Chapter Concept:

Accounting for Share Capital

A.

Unlimited liability.

B.

Limited to the unpaid amount on their shares.

C.

Limited to the amount they undertake to contribute in the event of winding up.

D.

Limited to the company's assets.
Correct Answer: C

Solution:

In a company limited by guarantee, the liability of its members is limited to the amount they undertake to contribute in the event of the company being wound up.

Chapter Concept:

Types of Companies

A.

Shares that have not been issued to the public.

B.

The amount of share capital that has been called up but not yet paid by shareholders.

C.

Capital that has been reserved for future issuance.

D.

The excess amount received over the nominal value of shares.
Correct Answer: B

Solution:

'Calls in arrears' refers to the portion of the called-up capital that has not been paid by the shareholders by the due date.

Chapter Concept:

Categories of Share Capital

A.

Body Corporate

B.

Separate Legal Entity

C.

Common Seal

D.

Limited Liability
Correct Answer: B

Solution:

A Separate Legal Entity allows a company to own property and enter into contracts independently of its members.

Chapter Concept:

Features of a Company

A.

Companies limited by shares

B.

Companies limited by guarantee

C.

Unlimited companies

D.

Public companies
Correct Answer: A

Solution:

In companies limited by shares, the liability of its members is limited to the nominal value of shares held by them.

Chapter Concept:

Types of Companies

A.

Unlimited liability

B.

Liability limited to the unpaid amount on shares held

C.

Liability limited to the guarantee given

D.

No liability
Correct Answer: B

Solution:

In a company limited by shares, the liability of shareholders is limited to the extent of the unpaid amount on the shares held by them.

Chapter Concept:

Accounting for Share Capital

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Accounting for Share Capital

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True or False

Correct Answer: True

Solution:

The premium amount received from the issue of shares at a premium is credited to a separate account called 'Securities Premium Account'.

Chapter Concept :

Issue of Shares at a Premium

Correct Answer: True

Solution:

A company is considered a separate legal entity, which means it is distinct from its shareholders. This allows it to own property, enter into contracts, and sue or be sued in its own name.

Chapter Concept :

Features of a Company

Correct Answer: False

Solution:

In a company limited by shares, the liability of shareholders is limited to the unpaid amount on their shares.

Chapter Concept :

Accounting for Share Capital

Correct Answer: True

Solution:

Calls in Arrears are amounts that shareholders fail to pay on allotment or on any of the calls. These amounts are recorded as a debit balance in the calls account and appear as a note to accounts.

Chapter Concept :

Calls in Arrears and Calls in Advance

Correct Answer: False

Solution:

In the event of over-subscription, the excess application money received can either be refunded or adjusted towards the amount due on allotment. The directors may decide to make a pro-rata allotment and adjust the excess application money against the allotment amount.

Chapter Concept :

Journal Entries for Share Transactions

Correct Answer: True

Solution:

According to the accounting treatment, any amount received in advance from shareholders for calls not yet made is considered a liability and is credited to the 'Calls in Advance Account'. This is because the company owes this amount back to the shareholders until the call is due.

Chapter Concept :

Calls in Arrears and Calls in Advance

Correct Answer: True

Solution:

In companies limited by guarantee, the liability of its members is limited to the amount they undertake to contribute in the event of the company being wound up.

Chapter Concept :

Types of Companies

Correct Answer: True

Solution:

A company is considered a separate legal entity, meaning it is distinct from its members. This allows it to hold property, enter into contracts, and sue or be sued in its own name.

Chapter Concept :

Features of a Company

Correct Answer: True

Solution:

Reserve capital is indeed a portion of the uncalled capital that a company reserves to be called only in the event of winding up, as per the description provided in the excerpts.

Chapter Concept :

Categories of Share Capital

Correct Answer: True

Solution:

When a company receives applications for more shares than it has offered, it may choose to refund the excess application money to the applicants.

Chapter Concept :

Over Subscription and Under Subscription

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