For Privare circulation only Symbiosis Law School Prof.

Swati Magikar A) MEANING OF COMPANY AND ITS FORMATION

What is a company A company is an association of persons who contribute money or moneys worth to a common stock and use it for a common purpose. It is created by law and effected by law. It is a legal person just as much as an individual, but with no physical existence. Section 3(1) (i) of the Companies Act defines a company as a company formed and registered under this Act, or an existing company. An existing company means a company formed and registered under any of the previous Companies Acts. A company has the following essential characteristics. a) It is a voluntary association of persons. No law can compel persons to form a company. It is their own creation and a voluntary act. b) A company is a separate legal entity. Company can hold, purchase and sell properties, can open bank account in its name and can enter into contracts. It is independent of members and its existence is not affected by the coming in and going out of its members. It can be sued without suing its members. The separate legal entity of company distinguishes it from a partnership firm where by suing the firm, partners are sued. c) A company has a common seal. Being an artificial person it can act only through natural persons, called directors, and its distinct existence is evidenced by a common seal. Any document prepared by directors can be said to belong to the company only when it contains the common seal. d) A company has a perpetual succession because of its peculiar status of a separate legal entity. Its continuity is not affected by the changes in the membership. e) Most of the companies are limited companies. In such cases the liability of a member is limited to the amount he has agreed to pay to the company, either by purchasing shares in the company, or by giving a guarantee. The Distinction Between Partnership and Limited Liability Company a) Act - A company is governed by the Companies Act, 1956, while partnership business is regulated by the Indian Partnership Act, 1932. b) Entity - Company is a separate legal entity which is not affected by the changes in its membership. Partnership organization is not stable, since it has no separate existence apart from its members. Whenever there are changes in the partners or one or more of them become insolvent or of unsound mind, technically the old partnership breaks and a new partnership comes into existence. c) Number The minimum number in a public company is seven and in case of a private company two. But in case of a partnership the minimum number of partners is two. There is no limit on the maximum number of members in case of a company, except in case of a

private company where the number should not exceed 50, but in case of a partnership the number should not exceed twenty ( in case of a banking business ten). d) Liability In the case of partnership, the liability of the members cannot be limited but in case of a limited company the liability of a shareholder is limited to the amount he has agreed to pay. e) Capital The amount of capital of the partnership firm depends upon the financial status of the partners. The capital of the firm can be changed by increasing or decreasing it. The maximum capital of a limited company is fixed by the Memorandum of Association and can be changed only after performing legal formalities. The issued capital of the company can be increased at any time until it reaches the authorized capital by issuing fresh shares. The reduction of capital is not allowed in the normal course. There is more scope for a company to raise large capital for the following reasons. i) It is collected from large number of investors. ii) The denomination of a share is convenient for any one to subscribe. iii) Variety of shares can be issued to suit the different tastes of investors. iv)The shares are easily marketable because they can be bought and sold in stock exchanges. f) Profits The profits of the partnership business are distributed among the partners in the agreed ratio or equally in the absence of any specified agreement. The profits of the partnership firm when not withdrawn can be merged with the capital of the partners, but those of a limited company cannot be merged unless they are capitalized by issuing bonus shares. g) Management All the partners of a firm are entitled to take part in the management of business, inspect books of accounts, but in a limited company the management of the business is vested in the board of directors who are elected by the members. Members of a limited company neither inspect books of account nor can take part in the management of the business but are entitled to have copies of annual accounts, i.e., balance sheet and profit and loss account. h) Audit Audit of accounts of a partnership firm is not compulsory but in case of a limited company the audit is compulsory by a practicing chartered accountant or a certified auditor. i) Winding up Firm can be wound up at any time, if it is at will, without legal formalities. In the case of a company, winding up is done in full legal form and it is possible in various ways. j) Insolvency In case of financial difficulties partnership firm can be declared insolvent but a company cannot be declared insolvent. k) Books of accounts Partnership firm is not required to keep specified account books as there is no legal direction to this effect. In the case of a limited company there are legal requirements for keeping books and a company has to observe those regulations carefully. l) Registration A partnership firm may or may not be registered but in the case of a company registration is essential.

m) Transfer of interest A partner cannot transfer his interest to some other person without the consent of all other partners. In the case of a private limited company the transfer of shares is restricted among members and in the case of a public company transfer of shares from one to another can be done freely without restriction. n) Income tax Income tax of a partnership firm is paid by the firm in case it is unregistered, by the partners in case it is registered. But in the case of a limited company, tax is paid by the company. o) Commencement of business A partnership firm is not required to fulfill legal formalities to start a business but in case of a limited company, it has to perform various legal formalities and has to file with the registrar various documents.

Kinds of Joint Stock Companies

Kinds of companies may be put in the form of a diagram given in the next page. Chartered companies These were companies that came into existence through Royal Charter. Before the advent of company legislation, it was common for kings to borrow money from groups of merchants and in return give them the privilege of carrying on business either within the country or outside the country. This privilege was conferred through a Royal Charter. A charter is nothing but a Royal Decree that conferred certain rights and privileges on a group of persons. Thus a chartered company in many cases is a trading company acting under the charter from the crown. A chartered company has to conduct its business in accordance with the stipulations in the charter. East India Company, South Sea House are examples of chartered companies. Statutory companies - Statutory companies are formed by the special Act passed by the Central or State legislature. These companies are not required to frame their Memorandum or Articles of Association nor are they required to use the word limited as a part of their name. Its working is controlled, checked, and reviewed by Parliament. The Comptroller and Auditor General of India normally conducts the annual audit of the final accounts of such companies. Reserve Bank of India, State Bank of India, State Finance Corporations, Life Insurance Corporation are some of the examples of statutory companies. Registered companies Companies registered under the Companies Act are known as registered companies. These companies may be registered with limited liability or with unlimited liability and may be private or public companies. Thus a registered company can be i) unlimited public company ii) unlimited private company iii) limited public company; and iv) limited private company. Limited companies can be limited by share or by guarantee. A description of all such registered companies has been given below:

Unlimited companies In this case the liability of the members is unlimited and the members are personally liable to the creditors of the company. There are no restrictions on such a company regarding the increase or decrease of its capital. The company can if it so desires purchase its shares. The company need not have any share capital at all. Company limited by shares In this type of company the liability of every member is limited to the amount of shares he has agreed to contribute. Once he has paid the full amount of shares he has taken up there is no further liability devolving on him. Such companies must add the word limited after the name. Such addition is a warning to the creditors dealing with such a company. Guarantee companies In this type of company the members liability is limited to the guarantee fixed by the Memorandum. Such a company need not have any share capital. However if it has share capital it cannot be reduced and it cannot buy its own shares. The articles must mention the number of members with which the company is to be registered. The company limited by shares is different from the company limited by guarantee only in one respect, that is, in the former case the liability is decided by the number of shares a member has purchased while in the latter case it is decided by the amount of guarantee. Private and public companies On the basis of the number of members, a company can be a) a Private company, or b) a Public company. According to Sec.3(1) (iii) a private company means a company which has a minimum paid up capital of one lakh rupees or such higher capital as may be prescribed and by its Articles: a) Restricts the right to transfer its shares if any; b) Limits the number of its members to fifty excluding past and present employees who became members when they were employees; c) Prohibits any invitation to the public to subscribe for any shares in or debentures of the company and d) Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. Notes: 1. Where two or more persons hold one or more shares in a company jointly, such persons will be counted as a single member for the purpose of this definition. 2. The minimum capital of one lakh of rupees has been inserted by the Companies (Amendment) Act, 2000. Companies which have less than this capital on the commencement of this Act are required to acquire the capital within two years, failing which they will be treated as defunct companies and their names will be struck off from the register. 3. A private limited company has a minimum of two members and a minimum of two directors. A private company is registered with minimum two members and is required to add words private limited as a part of its name unless it has unlimited liability. A private company has to get its accounts audited by a practicing chartered accountant or certified auditor and has to file the copies of final accounts with the Registrar of Joint Stock

Companies. However, it is not required to hold statutory meeting, file prospectus or a statement in lieu of prospectus, and can have only two directors. A public company means a company whicha) is not a private company; b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital as may be prescribed; c) is a private company, which is a subsidiary of a company, which is not a private company. Notes: 1. The restriction on private limited company on transferability of shares, maximum membership, making public issues does not apply to a public limited company. 2. The minimum capital of five lakh rupees was inserted by the Companies (Amendment) Act, 2000. Such of those companies which do not satisfy this requirement must obtain the required capital within a period of two years from the commencement of the Act, failing which such companies would be treated as defunct companies and struck off from the register. 3. While the private limited company has a minimum of two members, there must be at least seven to form a public limited company. There is no cap (ceiling) on the maximum number of members. Public limited company must have at least three directors and a maximum of 12 directors. The maximum can be increased with the permission of Central Government.

Other Kinds of Companies

Foreign company - Any company incorporated outside India but which has set up a place of business in India. The business in India might have been set up before or after the commencement of the Companies Act, 1956. However, a foreign company may be treated as a company incorporated in India if 50 per cent of its paid-up share capital (whether equity preference or partly equity and partly preference) is held by one or more citizens of India or by one or more bodies incorporated in India, and must comply with the provisions of the Act as may be prescribed with regard to the business carried on by it in India. Government company According to Sec 617, a company of which not less than 51% of the paid- up share capital is held by the Central Government or be any State Government or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government Company as thus defined. Private company deemed to be a public company Under Sec 43 (a) a company is deemed to be a public company under any one of the following circumstances: i) Where one or more body corporates holds 25% or more of the paid-up share capital of such a private company. The body corporate holding 25% or more should be a public limited company or a deemed public company. If such a holding is by a pure private company deeming provision is not applicable.

Under this provision every subsidiary of a public limited company is a deemed public company. ii) Where the average annual turnover of the company in the three preceding consecutive financial years is more or equal to a specified amount. At present if the turnover is more than Rs. 25 crores it is deemed to be public limited company. iii) Where a private company holds 25% or more shares in a public company having a share capital. iv) Where the private company invites or accepts deposits from the public through an advertisement. Any company which by virtue of the above stipulations becomes a deemed public company it should inform the registrar of companies within three months and the registrar would delete the word private of such a company. The intention of these provisions is to regulate companies which appear to be private but employ public funds. The regulation is to curb big companies from enjoying the privileges of a private limited company. Depending on the applicability or otherwise of the conditions, a company will be deemed to be a public company and also reverts to the position of private company. In every situation the registrar is to be informed. If the company attains the character of a deemed public company, it has delete the words Private before the word limited. When it reverts to the position of a private company it has to substitute the words private limited for public limited company. The registrar makes the necessary alterations in the Memorandum of Association and Articles of Association.

Conversion from Private to Public and back to Private

A private limited can be converted into a public limited company, by passing a special resolution to remove the articles required under Sec 3(1) (iii) of the Companies Act. There are other formalities like filing the special resolution with the Registrar of Companies, filing the prospectus, raising the minimum members to seven and deleting the word private before the word limited in the name. Likewise a public limited company can be converted into a private company by amending the articles so as to incorporate the restrictions under Sec.3(1) (iii) of the Companies Act and deleting any other articles inconsistent with such restrictions. The Central Government must approve such conversion and the company should add the words Private Limited after its name. Within 30 days from such approval, the company must file with the Registrar, a printed copy of the amended articles.

Holding and subsidiary company

The Companies Act defines the subsidiary company and by implication points out the characteristics of a holding company. Sec 4 of the Companies Act says that A company shall, subject to the provisions of Sub-section(3), be deemed to be a subsidiary of another if, but only if,a) that other controls the composition of its board of directors; or b) that other i) When the first mentioned company is a existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same

voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company. ii) Where the first mentioned company is any other company holds more than half of the nominal value of its share capital; or c) The first mentioned is a subsidiary of any company, which is that others subsidiary. Example : Company B is a subsidiary of company A and company C is a subsidiary of company B. Then by virtue of clause above company C becomes subsidiary of company A. Continuing the example if company D is a subsidiary of company C, then D will become a subsidiary of company B as well as company A. A company shall be deemed to be the holding company of another if that other is its subsidiary. A private company which is a subsidiary of a public company shall be treated at par with a public company and shall be subject to all regulations and restrictions which are applicable to a public company. A private subsidiary of a foreign public company will also be regarded as a subsidiary of a public company if the entire share capital of the private company is not held by the company either alone or with other foreign companies.

Formation of a Company
After having examined the future prospects of the company and after having ascertained from the Registrar of Companies that the proposed name of the company is available, the promoter makes himself busy with the preparation and registration of Memorandum of Association, Articles of Association and many other documents. He finds the first directors of the company, accumulates funds and arranges for its advertisement. Thus formation of a company involves three important stages: i) Preparation and filing of necessary documents; ii) Payment of necessary fees, and iii) Registration of a company and obtaining the certificate of incorporation. These three stages have been explained in the following paragraphs: Filing of documents For the formation of a company following documents are filed with the Registrar of Joint Stock Companies of the State in which registered office of the company is intended to be located; a) Memorandum of Association duly stamped, signed and witnessed; b) Articles of Association duly stamped, signed and witnessed; c) the agreement, if any which the company proposes to enter into with any individual for appointment as its managing or whole time director or manager (Sec. 33(1) ; (d) A list of the directors who have agreed to become the first-directors of this company and their consent to act as such and also take up the qualification shares (Sec.266); (e) A declaration by a competent person that all the requirements of this Act and the rules thereunder have been complied with in respect of registration and matters precedent and incidental thereto (Sec. 33(2)). Such a declaration may be given by any of the following persons: i) an advocate of the Supreme or High Court. ii) An attorney or a pleader entitled to appear before High Court. iii) A Secretary or a Chartered Accountant in whole-time practice and engaged in the

formation of the company. iv) A person named in the Articles as director or manager or secretary of the company. Payment of fees and issue of certificate of incorporation The Registrar, on being satisfied, registers the Memorandum and Articles and will certify under his hand that the company is incorporated and in the case of a limited company that the company is limited. Before registration the payment of fees is a formality. The certificate of incorporation is an important document in as much as it evidences the existence of the company from the date on which the certificate has been issued and also it is the conclusive evidence of the fact that the company has been duly registered. The effect of the certificate is to give the company a distinct and separate entity, perpetual existence, common seal, and make all members a body corporate. The certificate of incorporation is the conclusive evidence of the registration of the company and cannot be cancelled afterwards even if some irregularities are subsequently detected. The only remedy for undoing the effect of registration is to wind up the company in accordance with the provisions of the Companies Act.

Commencement of Business (Sec. 149)

A public limited company which has issued prospectus inviting the public to subscribe for its shares cannot commence business unlessa) The minimum number of shares which have to be paid for in cash has been subscribed and allotted; b) Every director of the company has paid in cash the application and allotment money on the shares in the same proportion as others; c) No money is, or may become, liable to be repaid to applicant for any shares or debentures which have been offered for public subscription by reason of any failure to apply for, or to obtain, permission for the shares or debentures to be dealt in on any recognized stock exchange; and d) A duly verified declaration in the prescribed form by the secretary or where the Company has not appointed a secretary, a secretary in whole time practice or one of the directors that the aforesaid requirements have been complied with is filed with the Registrar. If a public company does not issue prospectus inviting the public to subscribe for its shares, then in order to commence business it must file with the Registrar i) a statement in lieu of prospectus, and ii) a declaration by one of the directors or the secretary or where the company has not appointed a secretary, a secretary in whole-time practice to the effect that requirements under clauses (b) and (d) have been fulfilled. If the Registrar is satisfied that everything has been properly done then he issues a certificate which entitles the company to commence the business. Such a certificate is the conclusive evidence that the company is so entitled.

B) SHARES
Definition
Total capital of the company is divided into units of small denomination. One of the units into which the capital of the company is divided is called a share. For example, in one company the total capital of Rs. 4,00,000 is divided into 40,000 units of Rs. 10 each then each unit of Rs. 10 is called a share of Rs. 10 each. Thus, in the above case, the company is said to have 40,000 shares of Rs. 10 each. According to Sec. 2(46) of the Companies Act, 1956 share has been defined as a share in the share capital of the company; and includes stock except where a distinction between stock and shares is expressed or implied. Shares must be numbered so that they may be identified; they are movable property and are transferable in the manner provided by the Article of Association.

Classes of Shares
Companies usually issue three classes of shares, namely equity shares, preference shares and deferred shares. However, after the Companies (Amendment) Act, 2000 the share capital of a company limited by shares shall be of two kinds only, namelya) equity share capital i) with voting rights; or ii) with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed. b) preference share capital (S.86)

Preference shares
The Act defines a preference share as that part of the share capital of the company which enjoys preferential right as to a) the payment of dividend at a fixed rate during the lifetime of the company; and b) the return of capital on winding up of the company. It should be noted that a share to be called a preference share must enjoy both the preferential rights. A preference shareholder cannot compel the company to pay his dividend. He can only prevent the company from paying dividend to others (equity shareholders) without his dividend being paid first. Preference shareholders have voting rights only with respect to resolutions directly concerning their rights. However they obtain the right to vote on all resolutions placed before the company at any meeting, if the dividend on such capital or any part of such capital remained unpaidi) in the case of cumulative preference shares, in respect of an aggregate period of not less than two years preceding the date of commencement of the meeting; and ii) in the case of non-cumulative preference shares, either in respect of a period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of meeting or in respect of an aggregate period of not less than three years comprised in the six years ending with expiry of the financial year at which time the meeting is held.

Types of Preference Shares

a) From the point of view of dividend they may be divided as cumulative and noncumulative. In the case of cumulative preference shares dividends accumulate when not paid. So when the company wants to pay any dividend to equity shareholders, it must 9

first pay arrears of such dividend to cumulative preference shareholders. If the company goes into liquidation, arrears of dividend are not payable unless they are either declared or Articles of Association, contain express provision in this regard. A non cumulative preference share is that share where the arrears of dividend do not accumulate. If a dividend is not declared in any year then it lapses. b) from the point of view of participation in profits, they may be called participating and non-participating. A participating preference shares is a share which carries the right of sharing profits left after paying equity and preference dividends at specified rates. The right of participation may also extend to surplus assets available at the time of liquidation, after, paying off all equities. A non-participating preference share is that share which does not carry the right of sharing in the surplus after paying specified dividend to equity shareholders. Unless otherwise stated in the articles, Preference shares are deemed to be non participating. c) From the point of view of convertibility they may be classified as convertible and nonconvertible. A convertible preference share is one which can be converted into an equity share. When it cannot be so converted, it is called a non-convertible preference share, unless the articles or terms of issue provide otherwise, preference shares are deemed to be non-convertible.

Convertible Cumulative Preference Shares

Joint stock companies have been permitted by the Central Government to issue convertible cumulative preference shares, called CCP shares, for which guidelines have been framed. Such shares can be issued for the purpose of raising finance for new projects, expansion of old projects, schemes of modernization and also to meet the requirements of working capital. The entire issue of CCP shares would be convertible into equity shares between the end of 3 years and 5 years as may be decided by the company and approved by the Controller of Capital Issues. Ten per cent dividend can be paid on such shares and they should be ordinarily of the denomination of Rs. 100 each. Somehow, these shares have not been popular with the companies, and the latter prefer issue of convertible debentures to CCP shares. d) From the point of view of redemption they may be classified as irredeemable and redeemable preference shares. Irredeemable preference shares are those which can be redeemed only in the event of companys liquidation. However, after the amendment of Companies Act in 1996, companies are not permitted to issue irredeemable preference shares or are redeemable after the expiry of a period of 20 years from the date of its issue. The Act also provides for the redemption of irredeemable shares issued prior to the amendment of the Act in 1988. Redeemable preference shares are those which are redeemable within a stipulated period in accordance with the terms of issue. After the amendment in 1996 such shares must be redeemed within a period of 20 years. A more detailed discussion on the manner or redemption follows in the next chapter.

Equity shares
The Act defines an equity share in a negative way. An equity share is one which is not a preference share. These are normally risk-bearing shares. In lean years equity shareholders do not receive any dividends. But in years of prosperity they receive

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substantial dividends. During liquidation of a company they are paid out but are usually entitled to all the surplus assets after the payment of creditors and preference shareholders. The value of these shares in the market fluctuates with the fortunes of the company. A wise investor in equity shares not only receives regular dividend but is also assured of capital appreciation.

Sweat equity shares

These are not different from equity shares. However the peculiarity of these shares is that, the company issues these to employees or directors at discount. These are not issued for cash but for consideration such as providing know-how or making available rights in the nature of intellectual property rights or value addition. The issue of these shares must be authorized by a special resolution passed by company in general meeting, giving details about number of shares, current market price and consideration.

Deferred shares
These are also known as founders shares or management shares. These are usually allotted to promoters and their friends at the time of formation of the company. These shares usually carry disproportionate voting rights and right to substantial dividends from the profit left after paying off preference and equity dividend. Public Limited Companies, subsidiaries of such Companies and Private Companies deemed to be Public Limited Companies cannot issue such shares after the commencement of the Companies Act, 1956. However, after the Companies (Amendment) Act, 2000 companies are permitted to issue equity shares with disproportionate voting rights.

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For Privare circulation only Symbiosis Law College Prof. Swati Magikar
Shares Presentation of Information Relating to Share Capital in the Balance Sheet
Part I of Schedule VI of the Companies Act deals with this aspect. Share capital is shown in the balance sheet under the following categories:

Authorised capital
This is the maximum capital that the company is authorized to raise and this amount is stated in the Memorandum of Association. This is also described as Registered capital or Nominal capital.

Issued capital
This represents the capital which is offered to public for subscription. The difference between authorized capital and the issued capital represents the unissued capital. The form requires the statement of different classes of capital under the head issued capital. Further particulars of buyers of preference shares, terms of redemption or conversion in the case of redeemable preference shares and particulars of any option on unissued share capital are to be specified.

Subscribed capital
Subscribed capital refers to that part of the issued capital which has been subscribed by the public and also allotted to the directors of the company. Under this heading also the company should give particulars of different types of share capital. Information must also be given regarding shares allotted for consideration other than cash and shares allotted as fully paid-up by way of bonus shares. The sources from which bonus shares are issued must also be stated.

Called-up capital
It refers to that part of the subscribed capital which has been called up by the company for payment. For example, if 1,00,000 shares of Rs. 100 each have been subscribed by the public of which Rs. 50 per share has been called up, the subscribed capital of the company works out to Rs. 1,00,00,000 (Rs. 100 x 1,00,000) of which the called-up capital is Rs. 50,00,000 (Rs. 50 x 1,00,000). Paid-up capital is the figure that forms part of the total of the balance sheet and for determining that, called-up capital is the basis, as we shall see later.

Paid-up Capital
It refers to that part of the called-up capital which has been actually paid up by the shareholders. Some of the shareholders might have defaulted in paying the allotment or call money. Such amount defaulted is known as calls in arrears. From the called-up

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capital, calls-in-arrears is deducted to obtain the paid-up capital. Calls-in-arrears due from directors have to be stated separately

Forfeited shares
When shares are forfeited for non-payment of calls, the amount already paid is credited to forfeited shares account. The amount standing to the credit of this account is to be added to paid-up capital in the balance sheet.

Uncalled Capital
The amount of capital not called by the company is called uncalled capital. Taking the previous example given under called-up capital, the uncalled capital would be Rs. 50,00,000. This is obtained by multiplying Rs. 50 uncalled for each share by the number of shares, that is, 1,00,000. Expressing another way uncalled capital is equal to the difference between subscribed and called-up capitals. However uncalled capital will not figure separately in the balance sheet.

Reserve Capital
A company can reserve part of its capital to be called up only in the event of winding up. A special resolution has to be passed for this purpose. Such capital to be called up only in the event of winding up is called reserve capital. A specimen showing how capital appears in the balance sheet is shown below: Share Capital Rs. 000 omitted Authorised: 5,00,00,000 Equity shares of Rs. 10 each 5,00,000 15,00,00,000, 10.5% Redeemable Preference Shares of Rs. 10 each 15,00,000 20,00,000 Issued and Subscribed: 3,50,00,000 Equity shares of Rs. 10 each 3,50,000 10,00,00,000 Redeemable preference shares of Rs. 10 each 10,00,000 13,50,000 Called up Capital : 3,50,00,000 Equity shares of Rs. 10 each Rs. 5 called up 1,75,000 10,00,00,000 Redeemable Preference shares fully called up 10,00,000 11,75,000 Paid-up Capital: Called-up Capital 11,75,000 Less : Calls-in-arrears 25,000 11,50,000 (Of the above 15,00,000 Redeemable Preference Shares of Rs.10 each were allotted as fully paid-up pursuant to a contract without payment being received in cash.)

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C) RAISING OF CAPITAL BY COMPANIES

Company is a convenient institution to raise capital by the issue of shares. A Company can raise its share capital in any one of the following three ways: 1. Private placement Capital in this case is raised by persuading friends, relatives of promoters to subscribe to the shares. 2. Public issue This is by far the most important method. The company invites the public to subscribe to its share capital through the issue of prospectus. As noted already only public limited companies can go in for this mode of raising the capital. The focus of this chapter is on public issues.

Rights issues
In this issue, shares are offered to existing shareholders in proportion to their equity shareholding. An issue is called a composite issue when shares are offered to public as well as existing shareholders. The capital of a company can also increase in other ways. They are 1. By issue of bonus shares Bonus shares are issued to shareholders by converting reserves into equity capital. This does not result in flow of cash to the company. 2. By issue of convertible debentures Convertible debentures are instruments, which can be converted partly or fully into shares according to the terms of issue. This may be done at the option of the holder or without his applying for such conversion. In this case also there is no flow of cash. It is a process by which an external liability is converted into capital, an internal liability. 3. By conversion of loans into shares A loan is converted into shares in accordance with a clause in the loan agreement. This is similar to item(2). 4. By issue of shares for consideration other than cash Shares may be issued in exchange for tangible or intangible assets acquired by a company. In this mode a company can may acquire tangible assets such as plant, buildings, etc. or intangible assets like copyrights or patents. In this mode the company allots shares instead of paying cash.

Regulation of Public Issues

Public issues are well regulated by the provisions of the Companies Act as well as SEBI guidelines with a view to protect the investors money and their interests in general. We will first deal with the provisions in the Companies Act having a bearing on public issues and later deal with SEBI guidelines on the same aspect.

Companies Act on Public Issues

The following are some of the salient provisions in the Companies Act having bearing on public issue: 1. A company issuing shares to the public has to file a prospectus with the registrar of joint stock companies. 2. Issuing a prospectus is an invitation to offer. When this is responded to by an investor in the form of a duly-filled share application sent to the company or its bankers, it amounts to the acceptance. In the case of over-subscription, the company reserves the right of allotment to select investors in accordance with SEBI guidelines. 14

3. A minimum of 5% of the nominal amount of share must be paid along with the application (Sec 69(2)). Companies quite often collect the full amount of share with the application and in many cases much more than the 5% stipulated in the Act. 4. The issue must be kept open for at least three days. The monies payable on application are collected through the bankers to the issue. 5. Application for shares should not be made in a fictitious name. 6. All the money received on application should be kept in a separate bank account till the application money in respect of shares constituting minimum subscription is received. In the case of a new company money must be so kept till a certificate to commence business is issued by the Registrar of companies. 7. If the company is not able to obtain listing, money received on application must be refunded to the applicants. 8. If the minimum subscription is not received within 120 days after the first issue of prospectus, money received from the applicants must be refunded without interest. If the money is not so refunded within 130 days from the date of issue of prospectus, the directors are jointly and severally liable to repay such money with interest at 6% per annum after 130 days. While the Companies Act makes this condition applicable to the first issue, SEBI makes it obligatory for all public issues. 9. Excess application money received must be refunded within 8 days after it is due for refund. If such refund is not made, every director responsible for the delay is liable to pay the amount along with interest at 15% per annum. 10. Unrefunded application money must be retained for a period of 7 years. If it is not claimed within this period, it must be transferred to investor education and protection fund. This fund is set up by Central Government for promotion of investors awareness and protection of investors. 11. A company is permitted to pay brokerage and underwriting commission on every public issue. Such commission and brokerage should not exceed 5% of the price of shares or the lower amount as prescribed by the Articles. No other commission is payable directly or indirectly for agreeing to subscribe to shares or debentures.

Prospectus
When shares are issued to public for cash, it should satisfy the provisions of the Companies Act and the SEBI guidelines stated in the preceding pages. Every public issue must be accompanied by an issue of prospectus and every private placement by a statement in lieu of prospectus. The prospectus accompanied by share application is an invitation to offer. It gives detailed information about the company, the details of the issue, issue highlights, risk factors, terms of the present-issue, history of the company, main object and present-business financial performance in the case of an existing company, details of the projects for which the finance is raised, prospectus, and profitability, market-price of the share and justification for premium, previous issues, companies under the same management, minimum subscription and such other details as stated in the Companies Act and SEBI guidelines. The share application form also gives the details regarding the procedure to apply for the shares.

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Procedure for applying for Shares

On reading the prospectus, the public will have to apply for the shares in the prescribed form. Along with the application, money had to be remitted either by cheque, draft or through stockinvest. SEBI has stipulated that in the case of public issue at par, an application has to be made for a minimum number of two hundred shares of the face value of Rs. 10 each. When the public issue is at a premium or comprises a security, whether convertible or non-convertible or the public issue is of more than one security, the minimum application money payable in respect of each security by each applicant should be for a minimum of Rs. 2,000. This is irrespective of the size of the premium. However the application must be for a multiple of tradeable lots. A tradeable lot is the minimum number of shares or its multiple that can be bought or sold in a stock exchange. What does not constitute as tradeable lot is called an odd lot. In the case of shares of the face value of Rs. 10,100 shares constitute a tradeable lot. However 100 shares are the maximum tradeable lot and are scaled down as shown below according to the offer price. Offer price per share Up to Rs. 100 Rs. 101 to Rs. 400 More than Rs. 400 Minimum tradeable lot 100 shares 50 shares 10 shares

The applicant is required to remit at least 5% of the nominal value of the share with the application as application money (Sec 69 (3)). However, as per SEBI guidelines, the minimum application money to be paid alongwith an application should not be less than 25% of its issue price. While these stipulations stipulate the minimum application money, the company going for a public issue can collect all the money with the application or a higher percentage with the application and the balance on allotment and one or more calls. For example, a share of the nominal value of Rs. 10 may be collected in any one of the following ways: Method Application Allotment First Call Second Call Method I Rs. 2.50 Rs. 2.50 Rs. 2.50 Rs. 2.50 Method II Rs. 5.00 Rs. 5.00 ---------------- ---------------Method III Rs. 5.00 Rs. 2.50 Rs. 2.50 ---------------Method IV Rs. 10.00 -------------------------------------* Since in this case there is no second call, it is termed as first and final call. Total Rs. 10 Rs. 10 Rs. 10 Rs. 10

Where the company has decided to collect the amount in calls, the calls should be so structured as to collect the entire amount within 12 months from the date of allotment. This 12 month period is waived if the size of the issue is above Rs. 500 crores. The public issue must be kept open for at least three working days and not more than 10 working days. In the case of right issues they must be kept open at least for 30 days and not more than 60 days.

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Minimum subscription
If the company does not received the minimum subscription of 90% of the issued amount on the date of closure in the case of a public issue not underwritten, the company has to refund the entire subscription. In the case of a issue underwritten similar refund has to be made if the company does not receive the minimum subscription of 90% of the net offer to public including devolvement of underwriters within 60 days from the date of closure of the issue. The requirements of minimum subscription is not applicable to offer to sale. A public issue can result in under/ or over-subscription. We will discuss the procedure to be followed in each case.

Under subscription
Due to poor response, all the shares offered may not be taken by public. This is a case of under subscription. However shares cannot be allotted if minimum subscription is not received. Under-subscription poses no problem in the matter of allotment. All those who have duly applied will obtain the allotment. Only applications with drawbacks such as incomplete information or absence of signature or the application is not accompanied with sufficient application money, will be rejected. Under subscription also involves automatically allotment in tradable lots.

Over subscription
A company cannot allot more shares than were offered to public through the prospectus. However over-subscription to the extent of 10% of the net offer to the public is permissible for the purpose of rounding off allotment to the near multiple of 100 while finalizing the allotment. Where there is over-subscription the allotment must follow SEBI guidelines to ensure proportional allotment in marketable lots in the following manner. 1) Applications must be categorized on the basis of number of shares applied for. 2) In the next step total number of shares to be allotted to each category on a proportionate basis to be determined. This is done as follows: i) Calculate the ratio of over-subscription to the issue offered to the public. If 2,50,000 shares are offered and 7,50,000 shares have applied, the issue is over-subscribed 3 times. ii) Obtain the inverse (reciprocal) of the over-subscription ratio. In this it is 1/3. iii) Multiply the number of shares applied in each category with this inverse of the oversubscription ratio to arrive at the proportionate allotment to each category. The following example will explain: Total number of applicants in category of 100s 1,500 Total number of shares applied for 1,500 x 100 = 1,50,000 Proportionate allotment to this category = 1,50,000 x 1/3 = 50,000 .

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Redeemable Preference Shares

Introduction
Redeemable preference shares are those that are redeemed by the company in accordance with the terms of issue and the Articles of the company in this regard. The terms of issue generally stipulate the time of redemption and whether the redemption will be at par or premium. Irredeemable preference shares are those that are redeemed only in the event of the company being wound up. Prior to the amendment of the Companies Act, 1988, companies were permitted to issue both redeemable and irredeemable preference shares. For all practical purposes there is not much difference between the equity shares and irredeemable preference shares. But in terms of return, the equity shareholders enjoy a better return than the holders of irredeemable preference shares do. This was considered as an anomaly and the Companies (Amendment) Act, 1988, prohibited the issue of irredeemable preference shares in future and also provided for the redemption of such shares, which were issued prior to the Act of 1988.

Conditions for Issue and Redemption of Redeemable Preference Shares

The conditions are provided in Sec.80 of the Act and are summarized below: 1. A company limited by shares can issue redeemable preference shares subject to the provisions of Sec.80 of the Act. Such an issue must also be authorized by the Articles of the company. 2. With effect from 1st March, 1997 a company cannot issue irredeemable preference shares or shares which can be redeemed beyond a period of 20 years (Amendment Act, 1996) (Sec.80-5 (A)) 3. A company is permitted to carry out redemption from only two sources. They are: a) Profits of the company which would otherwise be available for dividend. b) Proceeds of fresh issue of shares made for the purpose of redemption. The section rules out any other source such as issue of debentures, borrowing from banks and other financial institutions for carrying out redemption. 4. Where shares are redeemed from out of profits otherwise available dividend, a sum equal to the nominal value of the shares redeemed must transferred to a reserve account. Such a reserve account is styled as Capital Redemption Reserve Account. 5. Only fully paid preference shares are to be redeemed. If partly paid shares are to be redeemed, call must be made first and then redemption must be carried out. 6. Redemption may be at par or at premium according to the terms of issue. If redemption is at premium, such premium must be met out of profits or the balance in security premium account. 7. Capital Redemption Reserve Account is available only for the purpose of issue of bonus shares. This reserve must be kept intact unless otherwise sanctioned by the court. 8. Redemption of redeemable preference shares does not result in the reduction of authorized capital of the company. To the extent reduction has taken place, company can issue further shares, as if those shares had never been issued. 9. If new shares are issued for the purpose of redemption, it will not amount to increase in capital. 10. Subject to the provisions of this section, redemption must be carried out in accordance with the terms provided in the Articles of the company.

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Debentures Issue and Redemption

Nature of Debentures
The long-term requirements of capital are raised by any company primarily through issue of shares and debentures. While the shareholders are essentially the owners of the enterprise, those who buy debentures are creditors who have lent long-term funds and do not enjoy voting rights. As per the definition given in Companies Act, debentures include debenture stock, bonds and any other securities of the company whether constituting a charge on the assets of the company or not [ S2(12)]. In brief all securities other than shares issued by a company will come under the term debentures. As the definition states these debentures may be secured with a charge on the assets or unsecured without any charge on such assets. A debenture like a share is also a movable property transferable in the manner provided in the Articles of the company. A commercial definition of the debenture is an acknowledgement of a debt in writing, given under the seal of the company, containing a contract for the repayment of the principal sum at a specified date and for the payment of interest (usually half yearly) at a fixed rate per cent until the principal sum is repayed, and it may or may not give a charge on the assets of the company as a security for the loan. At this stage it is worth noting the differences and similarities between shares and debentures.

Differences between Shares and Debentures

i) While a shareholder is a owner and a member of the company, a debenture holder is not a member but a creditor. ii) A shareholder has voting rights whereas a debenture holder cannot have voting rights. iii) A debenture holder has a right to interest on the amount lent even if the company does not make profit. A shareholder receives dividend only when a company makes a profit. iv) A debenture holder is entitled to a fixed rate of interest while the dividend rate can vary for a shareholder in relation to profit position. v) Debentures are normally redeemable although a company can issue perpetual debentures. In the case of shares, the concept of redemption does not apply. However as per the recent change in the companies Act, a company can buy back shares in accordance with the provisions in the Act. vi) At the time of winding up debenture holders have a priority over the shareholders regarding the return of amount due to them.

Similarities between Shares and Debentures

i) The procedures regarding raising of funds through shares and debentures is common such as the issue of prospectus, application forms etc., Both the securities can be used for a public issue or private placement. ii) Both are movable property transferable in the manner provided in the Articles of the company. iii) For both the securities a register of holders with index has to be maintained. iv) An instrument called certificate issued by a company evidences both. v) The provisions relating to transmission and nomination are identical.

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Purposes of Issuing Debentures

As already stated companies raise substantial amount of long-term funds through the issue of debentures. According to the guidelines issued by the Controller of Capital Issues, the objects of the issue can be among other things: i) Setting up of new projects. ii) expansion or diversification of existing projects. iii) normal capital expenditure for modernization. iv) merger/amalgamation of companies in pursuance of schemes approved by banks, financial institutions and/ or any legal authority. v) to augment long-term resources of the company for working capital requirements.

Types of Debentures
Debentures can be classified according to security, permanence, priority, convertibility and records point of view. 1) Security point of view a) Naked debentures are those which are not secured. Companies of very good standing are able to issue debentures of this type. They are not very common b) Mortgage debentures are those debentures which are secured wither on a particular asset called fixed charge or on the general assets of the company called floating charge. 2) Permanence point of view a) Redeemable debentures are those debentures which are redeemed or the payment of which is made after a specified time. Debentures are redeemable i) at the expiry of a specified period either at par or at premium. ii) by purchasing in the open market at any time at the price prevailing in the market; and iii) by annual drawings b) Irredeemable debentures. In this case the issuing company does not fix any date by which they should be redeemed and the holders of such debentures cannot demand payment from the company so long as it is a going concern. Usually such debentures are repayable after a long period of time or on winding up of the company. 3) Priority point of view a) First debentures are those which are repaid before other debentures are paid out. b) Second debentures are those which are paid after the payment to the first debentureholders is made. a) convertible debentures, the holders of which are given the option to convert the debentures fully or partly into equity shares after a specified time. Those which are fully convertible are called Fully Convertible Debentures or simply FCDs. Those which are partly convertible are called Partly Convertible Debentures or simply PCDs. The nonconvertible portion of the debenture is also called Khoka in market circles. Conversion may be at par or premium. b) Non-convertible debentures, the holders of which have no right to convert them into equity shares. These are called NCDs. 4) Records point of view a) Bearer debentures are those which are transferred by mere delivery and the company does not keep any record of debentureholders names and addresses. Payment of interest is made on production of coupons atrached with the debentures. b) Registered debentures are those which are transferable only by transfer deed. Names, addresses, particulars of the debentures possessed by them are entered in the register. Interest is paid to one whose name appears in the register.

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Three stages of debentures There are three stages of accounting for debentures : i) when debentures are issued ii) when provision for its redemption is made; and iii) when ultimately debentures are redeemed. A detailed study of each stage is made in the following pages.

B- ISSUE OF DEBENTURES
Important Provisions in the Companies Act on Issue of Debentures
1. A company cannot issue any debentures carrying voting rights at any meeting of the company, whether generally or in respect of particular classes of business (Sec 117). 2. Whenever debentures are issued, to the public for subscription, it is mandatory to appoint one or more debenture trustees for such debentures. It is the general duty of the debenture trustees generally to protect the interests of debenture holders and to redress their grievances effectively. In particular, the debenture trustees must take the following steps: a) To ensure that the assets of the company issuing debentures and each of guarantors are sufficient to discharge the principal amount at all times. b) To satisfy himself that the prospectus or letter of offer does not contain any matter which is inconsistent with the terms of the debentures or with the trust deal; c) To ensure that the company does not commit any breach of covenants and provisions of the trust deed. d) To take such reasonable steps to remedy any breach of the covenants of trust deed or the terms of issue of debentures; and e) To take steps to call a meeting of holders of debentures as and when the meeting is required to be held. 3. When a company issues debentures it must create a Debenture Redemption Reserve (DRR) for the redemption of such debentures. Such a reserve is created by crediting adequate amounts from out of the profits, until such debentures are redeemed. The company has to pay interest in accordance with the terms and conditions of their issue. 4. Perpetual debenture means debentures that cannot be redeemed. If perpetual secured debentures are issued, the implication is that the borrower can never repay the loan and free the property from the charge. However the Act specifically allows the issue of irredeemable debentures or issue of debentures for a very long period. Debentures can also be issued which are redeemable only on the happening of a contingency which is very remote. Normally companies may issue very long term debentures such as debentures with maturity of 50 or even 100 years but uncommon to issue debentures which are irredeemable. 5. The company has a right to re-issue debentures except when there is a contrary provision in the Articles or a specific resolution had been passed that the debentures will not be re-issued. This will be done by re-issuing the same debentures or by issuing other debentures in their place. Upon such reissue the persons entitled to the debentures will have the same rights and priorities as if the debentures had never been redeemed. Thus, after the re-issued any previous charge on the assets in relation to such debentures, continues and there is no need to make a fresh charge. There is no restriction on the number of fresh debentures to be issued.

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6. The power to issue debentures is to be exercised by the board at a meeting. It cannot be delegated to a committee or the resolution for the issue of debentures cannot be passed by circulation. 7. Technically a company can issue unsecure debentures. However, such debentures will be prepaid as public deposits and all the provisions relating to acceptance of public deposits will apply.

SEBI Regulations on Issue of Debentures

1. Credit rating - It is compulsory in the case of all issues of debenture. If a company has obtained more than one rating, all such ratings must be disclosed. If the issue exceeds Rs.200 crores, rating must be obtained from two agencies. 2. Put and call options If FCDs are to be converted before 18 months, they are considered as quasi-equity. If conversion is after 18 months but before 36 months, it is treated as deferred equity. In the case of deferred equity, the conversion will be optional in the hands of debenture holder. In the case of conversion beyond 36 months, it must be made optional with both put and call options. 3. Security for debentures If secure debentures are issued, a company must obtain certificate from the bankers that the assets are free from encumbrances or no objection certificate from the bank/financial institution for creating a second charge or pari passu charge as per terms of offer of debentures. Normally security must be created within 6 months. If security is not created, within 12 months, a penal interest at 2% is payable to debenture holders. If the security is not created, within 18 months, a meeting of the debenture holders must be called with 21 days notice to explain the reasons for delay in creating the security and the expected date by which security will be created. Trustees to debentures will supervise the creation of security. If security is not created, the debentures will be unsecured. As stand earlier in such a situation, the debentures will be treated as fixed deposits which makes it incumbent to satisfy the requirements of Sec.58(A). 4. Debenture trustees If the maturity of debentures is more than 18 months, the company has to appoint debenture trustees to safeguard the interests of the debenture holders. The trustees should have requisite powers for protecting the interests of the debenture holders including their rights to nominate a director on the board in consultation with institutional debenture holders. The debenture trustees must also ensure the compliance of the following: a) Lead financial institutions/investment institutions should monitor the progress in respect of debentures raised for project finance / modernization / expansion / diversification / normal capital expenditure. b) The lead bank must monitor debentures raised for working capital funds. c) Obtain a certificate from the companys auditors during the implementation period of the projects and in the case of debentures for working capital at the end of each accounting year. d) Debenture issues by companies belonging to the groups for financing replenishing of funds or acquiring shares in other companies should not be permitted. e) The trustees must supervise the implementation of the conditions regarding creation of security for the debentures and debenture redemption reserve.

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Nature of Financial Statements

We have noticed earlier that preparation of four statements is basic to financial accounting. They are also called General Purpose Financial Statements because they serve the purpose of several user groups. We will now discuss each of these and also how they are connected to each other. Income Statement This statement primarily provides information about the performance of the enterprise. This is a statement that matches the revenue and expenses of the period and reports the net position in the form of net profit or loss. In Chapter 4 we will be dealing extensively with respect to this statement. It is important to note that this statement is prepared for a period. Information about the performance of an enterprise, in particular its profitability, is required in order to assess the potential changes in the economic resources it is likely to control in the future. Information about variability of performance is important in this respect. Such a variation reflects the business risk and is an important aspect for investors to invest in such a business. Retained earnings is an important source for growth of business and it depends on profits made by the business. Profits also reflect the capacity of the enterprise to use additional resources.

Balance Sheet
Information about financial position is primarily provided by the balance sheet. Balance sheet is a statement that shows at a point of time the resources commanded by the enterprise and how these assets are financed. The resources are called assets and they are financed by owners and lenders. What owners provide is called equity and the sums the enterprise owes to lenders are called liabilities. Thus balance sheet has three elements. Two elements, namely equity and liabilities, are shown on the left-hand side and the third element, namely assets, are shown on the right-hand side. Chapter 5 discusses in detail about this statement. The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates. Information about the economic resources controlled by the enterprise and its capacity in the past to modify these resources is useful in predicting the ability of the enterprise to generate cash and cash equivalents in future. Information about financial structure is useful in predicting future borrowing needs and how future profits and cash flows will be distributed among those with an interest in the enterprise. It is also useful in predicting how successful the enterprise is likely to be in raising further finance. Information about liquidity and solvency is useful in predicting the ability of the enterprise to meet its financial commitments as they fall due. Liquidity refers to the availability of cash in the near future after taking into financial commitments over this period. Solvency refers to the availability of cash over longer term to meet financial commitments as they fall due.

Statement of Retained Earnings

It is a statement that reports the impact of net income and its distribution as a dividend on the financial position of the enterprise. This statement is a pointer to the dividend policy of the enterprise. Conversely it also indicates as to how earnings are employed for the growth of the business. A firm that has no growth opportunities distribute all the profit in

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the form of dividend. A firm must, however, distribute a portion of the profit in the form of dividend even if all the profits can be retained for growth.

Statement of Cash Flow This statement is prepared with the help of income statement, balance sheet and additional information. This statement which is the last one to be developed in the field of financial accounting has assumed lot of importance. A statement of cash flows primarily summarises the cash inflows and outflows that have taken during a time span as a result of the operating, investing and financing activities of an enterprise. Information concerning changes in the financial position of an enterprise is useful in order to assess its investing, financing and operating activities of the period. This information is useful in providing the user with a basis to assess the ability of the enterprise to generate cash and the needs of the enterprise to use the cash flows. All the statements discussed above are inter-related in preparation and use because they reflect different aspects of the same transactions or other events. Although each statement provides information that is different from the others, none is likely to serve only a single purpose or provide all the information necessary for particular needs of users. For example, a profit and loss account provides an incomplete picture of performance unless it is used in conjunction with the balance sheet and a statement of cash flow.

Objectives of Financial Statements

According to the document Framework for the Preparation and Presentation of Financial Statements issued by the Institute of Chartered Accountants of India, the following are the objectives of financial statements. The objective of financial statement is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making decisions. We have discussed in the previous paragraphs the utility of the components of financial statements. Later we will be discussing how they are made use of by different users. Financial statements prepared for this purpose meet the common needs of most of the users. General purpose statements as these are called have been designed in a manner to meet the needs of most users. However, financial statements do not provide all the information that users may need to make economic decisions since they largely portray the financial effects of past events and do not necessarily provide non-financial information. Financial statements also show the results of stewardship of the management, or the accountability of management for the resources entrusted to it. In fact in the beginning this was the dominant objective of financial accounting. Those users who wish to assess the stewardship or accountability of management do so in order that they may make economic decisions; these decisions may include, for example, whether to hold or sell their investment in the enterprise or whether to reappoint or replace the management. According to Federal Accounting Standards Board (FASB), the following are the objectives of financial reporting: 1) It is helpful to those making investment and credit decisions. 2) It is helpful in assessing the future cash flows of the enterprise.

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3) It identifies the economic resources (assets), the claims to those resources (liabilities) and the changes in those resources and claims. Financial reporting ultimately helps the investors and creditors in the following: 1) Identifying the financial strengths and weaknesses of the enterprise. 2) Asses the liquidity of the enterprise, 3) Assess the solvency of the enterprise, and 4) Evaluate the progress and performance of the enterprise over a period. Many of their decisions (those of the investors and creditors) depend on the analysis of the financial statements on the four objectives of analysis listed above.

Distinguish between Equity Share capital and Preference Share Capital

It can be differentiated in three ways: a) Voting rights b) Dividend c) Refund on liquidation or winding up Equity Shareholders: a) Voting Rights: They are the real owners of the company due to the different powers given to them such as: 1. Appointment and removal of directors. 2. Appointment and removal of auditors. 3. Major decisions regarding the company, resolutions for which are passed by special or ordinary resolutions. b) Dividend: They participate in the profits of the company, the dividend they receive varies from year to year. They will receive no dividend in case of loss. In case of high profit, they will receive a high dividend, perhaps a lot higher than the preference shareholders. c) Liquidation: In case of liquidation or winding up, they will be refunded their dues only after paying all the other creditors, debenture holders, preference shareholders etc. Preference Share Holders a) Voting Rights : They have no voting rights, as they are not the members or owners of the company. They may get voting rights if dividend is not paid to them for 3 years. b) Dividend : They have a preference in relation to dividend. Unless the dividend is distributed to preference shareholders, no dividend can be paid to equity shareholders. c) Liquidation: In case of winding up or liquidation their capital is refunded first and the equity shareholders are repaid later.

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Symbiosis Law School Prof. Swati Magikar LIQUIDATION OF A LIMITED COMPANY

A limited company is an artificial person created by law and hence its existence or life also comes to an end through the process of law it cannot have a natural death. Thus, liquidation means bringing to an end the corporate life of a company under legal proceedings. For liquidation it is not necessary that the company to be liquidated must be insolvent even solvent companies can be liquidated, if found necessary. However, a company cannot be declared as an insolvent under Insolvency laws for its inability to pay its debts. It can simply be wound-up in such a case. An administrator called liquidator is appointed to carry out the work related to liquidation and he is vested with the control of the company. Assets are realized, calls in arrears are collected, uncalled capital, if any, is called up, if necessary, debts are paid off and finally the surplus, if any remained, is distributed among the members in accordance with their rights.

Modes Of Winding Up
A company may be wound up in any of the following three ways: 1. Compulsory Winding Up 2. Voluntary Winding Up 3. Winding up under the supervision of the Court. 1. Compulsory Winding Up When winding up of a company is being done under the order of the court, it is called compulsory winding up. Such order is passed by the court in the following circumstances. 1) When a company passes a special resolution for winding up. 2) Failure to hold the statutory meeting by the company as required under the Companies Act. 3) If a company does not commence its business within a year of its incorporation or if it suspends its business for a year. 4) If the number of members of the company falls below 7 in the case of a Public Ltd. company and 2 in the case of a Private Ltd., company. 5) If the company is insolvent. 6) If the court is of the opinion that it is just and equitable to wind up the company. The petition for winding up to the court can be made by the company itself, or by any of its creditors, a contributory, the Registrar or any person authorized by the Central Government to make such a petition. 2. Voluntary Winding Up Winding up done without any intervention of the court. A company may be wound up voluntarily, i) By passing an ordinary resolution in the general meeting. a)When the period or the duration for which the company was constituted, has expired or

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b)When the event on the happening of which depended the termination of the existence of the company has happened. ii) By passing a special resolution to wind up voluntarily for any reason whatsoever. Voluntary Winding Up is of two kinds: i) Members voluntary winding up, and ii) Creditors voluntary winding up Members voluntary winding up requires the filing of a statutory declaration of solvency by at least two or the majority of the directors, whichever is more, of the company with the Registrar. The declaration of solvency must be made within 5 weeks immediately preceding the date of resolution for winding up. A meeting of the members passes a special resolution that the company be wound up voluntarily. A meeting of the creditors of the company moves the resolution to wind up the company voluntarily. The creditors may appoint a committee for inspection having maximum 5 members. If winding up of a company is not completed within a year, the liquidator should call a meeting of members/ creditors at the end of the year and thereafter every year till it is finally wound up, and lay before the meeting an account of his acts and dealings and of the conduct of winding up. When the affairs of a company are fully wound up, the liquidator must prepare an account of the winding up, call a final meeting of the company and lay the account before the meeting and within one week of this meeting, send a copy of the account and make a return to the Registrar and the official liquidator. In the case of voluntary winding up by creditors a meeting of the company and creditors is called. 3. Winding Up under Supervision of the Court The court may pass an order at any time after having passed a resolution of voluntary winding up that the winding up shall continue subject to the supervision of the court. Such an order is passed by the court on the application of any creditor or contributory or liquidator or the company itself, under the following circumstances. 1) The liquidator under voluntary winding up is prejudiced or is negligent in collecting the assets of the company, or 2) The resolution for winding up was obtained by fraud. Appointment of Liquidator In case of compulsory winding up, the official liquidator attached to the High Court, functions as liquidator of the company. In the case of voluntary winding up, a liquidator is appointed by the members/ creditors as the case may be. The powers of the Board of Directors are terminated and vested in the liquidator. The members of the company will be termed as contributories on the commencement of companys winding up. A liquidator prepares a list of all the contributories who are liable to contribute towards the company on account of deficiency in the assets of the company. A shareholder i.e. member is liable to contribute only to the extent of the face value of the shares held by him. Present contributories are included under list A, whereas past contributories are included under list B. Past contributors are liable to contribute only if the present members could not meet the liabilities in respect of debts incurred when they were members, which means they are not liable for debts incurred by the company after

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they cease to be members. Further, only those past members are liable for such debts who have ceased to be members within a year before winding up of the company. Secured Creditors : A secured creditor may either i) rely on security, or ii) value the security and prove for the balance of his debt or iii) give up his security and prove for the whole amount of his debt. Dues of Workers (Sec. 529) Section 529 provides for application of insolvency rules in winding up of insolvent companies. The legitimate dues of the workers will rank pari passu with secured creditors in the event of liquidation of the company. The security of the very secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of workmens portion therein. If the secured creditor himself realizes security, the liquidator shall be entitled to represent the workmen and enforce such charge. The amount thus recovered by the liquidator is applied rateably for the discharge of workmans dues. So much of the dues to such secured creditor as could not be realized by him due to above provisions or the amount of the workmens portion in his security, whichever is less shall rank pari passu with the workmens dues for his purpose of Section 529A Section 529 A provides as under: 1) Notwithstanding anything contained in any other provisions of this Act or any law for the time being in force in the winding up of a company: a) Workmens dues and b) debts due to secured creditors to the extent such debts rank under section 529 (Last para above) pari passu with such dues, shall be paid in priority to all other debts. 2) The debts payable under clauses (a) and (b) above shall be paid in full, unless the assets are insufficient to meet them, in which case they shall be paid proportionately. Liquidators Final Statement of Account Liquidator is authorized to realize the assets and pay off the liabilities of the company according to priority laid down by the Companies Act. To record daily cash receipts and cash payment, the liquidator maintains a proper Cash book. As required by law, he has to submit from time to time a statement of total receipts and payments made by him during a particular period. In the event of the affairs of the company being finally wound up, he has to submit a final statement of account to the court, members/ creditors as the case may be. This statement is referred to as Liquidators Final statement of Account. Priority or Order of Payment 1) Legal Charges 2) Liquidators Remuneration 3) Liquidation Expenses 4) Preferential Creditors 5) Debentures / Creditors secured by floating charge 6) Unsecured Creditors 7) Preference Shareholders 8) Equity Shareholders

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Statement of Affairs On appointment of a liquidator, a statement of affairs in the prescribed form is required to be submitted to liquidator, showing the assets and liabilities and estimated deficiency/ surplus. This statement must contain the following particulars: a) The assets of the company, stating separately the cash balance on hand and in the bank and the negotiable instruments held by the company. b) The companys debts and liabilities. c) Particulars of creditors stating separately the amount of secured and unsecured debts. d) Debts due to the company together with the names, addresses and occupations of the persons from whom they are due and the amount likely to be realized there from. e) Such other information may be prescribed or as the official liquidator may reauire. Procedure for preparation of Statement of affairs: List A List B List C List D List E List F List G List H Covers all assets which are not specifically pledged & only realizable value of these assets is considered. Covers all assets, specifically pledged Covers amounts due to preferencial creditors. Covers amount due to debenture holders having a floating charge. Covers amounts due to unsecured Creditors Amounts due to Preference shareholders Called up Equity capital Explains how surplus or deficiency has arisen.

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Symbiosis Law School Prof. Swati Magikar

COMPANY FINAL ACCOUNTS

The Balance Sheet and the Profit and Loss Account of a company are to be drawn up in conformity with the provisions of Section 211 and Schedule VI to the Company Act, 1956. The form of a company balance sheet had been prescribed under Part 1 of Schedule VI, but no standard form is prescribed by law for profit and loss account of a company. According to Section 211(2), every profit and loss account of a company shall give a true and fair view of the profit or loss off the company. Before explaining the Balance Sheet form and profit and loss account, it is preferred to explain some items relating to final accounts.

1. Dividend:
The whole of the profit does not belong to shareholders. The share in the profits payable to shareholder is termed as dividend. The recommendation of a dividend is at the direction of the directors. The dividend recommended by the directors cannot be paid unless it is sanctioned by shareholders in the general meeting. The shareholders can reduce, but cannot enhance, the rate of dividend proposed by the directors. The dividend cannot be recommended unless a provision for depreciation of fixed assets is made. This restriction can be relaxed by the Central Government. a) Proposed Dividend (Final Dividend) : Unless otherwise stated, the dividend at given rate is calculated on paid-up capital. The proposed dividend is debited to Profit & Loss Appropriation A/c and shown on the liabilities side of the Balance Sheet under the subheading Provisions. The interim dividend already declared and paid should not be adjusted against the final dividend, unless specifically asked for to do so. b) Interim Dividend : This is a dividend declared and paid by the directors under their authority sometime between the period of two Balance Sheets. It is debited to Profit and Loss Appropriation A/c. c) Unclaimed Dividend : Though the dividend is declared, some shareholders do not claim it and get it for some reason or the other. Such amount is termed as Unclaimed Dividend and it is shown as a liability under the sub-heading Current Liabilities in the Balance Sheet. d) Dividend Equalisation Fund: In order to enable the company to pay the dividend to Equity Shareholders at a certain fixed rate every year, some portion of the profits is set aside every year and credited to Dividend Equalisation Fund. During lean years, when the profits are not sufficient to pay the dividend at the decided rate, the amount is taken from this fund to make up the shortage.

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The amount to be set aside is debited to Profit & Loss Appropriation A/c and added to the last years balance of Dividend Equalisation Fund in the Balance Sheet under the heading Reserves and Surplus. e) Less Tax Dividend : The tax payable by the shareholders on the income of dividend is deducted at source by the Company and the net amount is paid to shareholders. However, the gross amount of dividend is to be debited to Profit and Loss Appropriation A/c. At the time of payment of dividend the entry is passed, Dividend A/c Dr. To Income-Tax A/c (Amount deducted) To Bank A/c (Net amount paid) (From the A.Y. 1998-1999, no tax is to be charged on Dividend payable to shareholders)

2. Interest on Sinking Fund Investments:

As a matter of fact it is not to be credited to Profit and Loss Account, but it is to be added to Sinking Fund balance in the Balance Sheet. But since the law requires to show all interests in the Profit and Loss Account, it is suggested that this interest man first be credited to Profit and Loss Account and then it may be charged to Profit and Loss (Appropriation) Account and credited (Added) to Sinking Fund.

3. Provisions and Reserves:

The term Provision means any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability, the amount of which cannot be determined with substantial accuracy e.g. provision of Doubtful Debts; provision for Depreciation etc. For the purpose of the Companies Act, 1956, the term provision must only be employed to indicate depreciation or diminution in the value of assets and provision for known liabilities the amount of which cannot be estimated with reasonable accuracy. Then the term Reserve describes amounts set aside out of profits and other surpluses, which are not earmarked in any way to meet any liability, contingency or diminution in the value of assets. The amount is retained in the business to increase the working capital and thereby to strengthen the financial position of the company. The reserve is created by debiting Profit and Loss Appropriation Account, whereas the provision is made by debiting the Profit and Loss Account. Excess Provision: If the provision made for depreciation or for bad and doubtful debts or for a known liability is more than the amount reasonably necessary, that excess amount is to be treated as Reserve and must be shown in the Balance Sheet under the heading Reserves and Surplus.

4. General Reserve:
It is a revenue reserve. It consists of amounts set aside out of profits for general purpose, such as to provide for possible and unknown future contingencies, to increase the working capital, to equalize dividends, or merely to strengthen the financial position of the company. The amount is set aside to Profit and Loss Appropriation A/c and is credited (added) to this reserve.

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Contingency Reserve: It is created out of profits for the purpose of meeting any unknown, unforeseen and unexpected losses or liabilities. Thus, it serves the purpose of General Reserve.

PROFIT AND LOSS ACCOUNT

Important Points
The law does not require the preparation of a separate Trading Account, Profit and Loss Account, and Profit and Loss Appropriation Account. Only one account i.e. Profit and Loss Account would do. However, the splitting up of the account into three sections is not forbidden. To get clear picture of the profit or loss for the year, it is recommended that appropriations of profits may not be mixed up with the expenses chargeable to Profit and Loss Account to arrive at net profit or loss, but they should be shown in the Profit and Loss Appropriation Account. In practice, the Profit and Loss Account is invariably divided into two sections, the second section being the appropriation account, though it is not headed like that. No standard form is prescribed by law for the profit and loss account of company; and according to section 211(2) every profit and loss account of a company shall give true and fair view of the profit or loss of the company for the financial year and shall comply with the requirements of Part II of Schedule VI. The profit and loss account must clearly set out the various items relating to the income and expenditure of the company, arranged under the most convenient heads, and it must disclose separately the information prescribed by law.

1. Some Special Points i) For the purpose of comparison, the corresponding amounts for the preceding financial
year must be given in Profit and Loss account. ii) Money received by Managing Agents, Secretaries and Treasures, Directors, Managing Directors or Managers either from the company or its subsidiaries be shown separately. iii) The law requires the opening and closing stocks of finished products to be shown separately. iv) Debenture Interest: For the full accounting period or for the period for which the debentures are outstanding during such a period is debited to Profit and Loss Account. If the Trial Balance does not indicate the payment of interest at all or in full, the unpaid amount is to be shown in the Balance Sheet along with Debentures, if it is outstanding, or under Current Liabilities if it is accrued. (If the due date of payment of interest is crossed and the amount is not paid, then it is termed as Outstanding and if the due date is not crossed and only the amount is accumulated, it is termed as accrued e.g. if interest is payable on 31st March and 30th Sept., each year, and if accounting year ends on 31st December then interest for the period 1st Oct. to 31st December is termed as accrued as its due date is 31st March in the next year.) If the students do not get the information in the problem regarding the period for which the debentures are outstanding, they are advised not to calculate the interest at their own accord.

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2. Interest on Investments etc.:

Here also interest for the full period, or for the period of investments standing in the books must be provided for and credited to profit and loss account. Such adjustments are called Self evident or implied adjustments, and they are not required to be stated explicitly in the problem.

3. Discount on Debentures, Preliminary Expenses etc.:

The amount asked to be written off is to be charged to profit and loss account, and the remaining balance is to be shown in the Balance Sheet under the heading Miscellaneous Expenditures & Losses on the assets side. In the case of Discount on Debentures, the amount to be written off can be arrived at on the basis of information given regarding the period of debentures.

4. Taxation:
In the absence of any statutory guidance this item is charged by some to profit and loss account, whereas it is charged by some to profit and loss appropriation account. Since the actual amount payable will be known long after the preparation of final accounts, it is required to make a provision on estimated basis. The provision thus made is charged to profit and loss account ( or Profit and Loss Appropriation Account) and credited to Provision for taxation which is shown under the sub-heading Provision in the Balance Sheet on liabilities side. When the assessment is made, the actual amount of tax paid is charged to provision for taxation existing for the purpose. If the difference between the amount of tax paid and the provision made (i.e. Provision less tax paid) is small, it is adjusted against provision for taxation to be made for the year in which the assessment is made. But if the difference is excessive, it is to be disclosed in the profit and loss appropriation section be crediting it to that section. If there Provision for taxation in the Trial Balance and no mention of payment tax is made, this provision plus current years Provision is to be shown in the Balance Sheet under the sub-heading Provisions on the liabilities side.

5. Profit on Sale of Fixed Assets:

It is to be transferred to capital reserve, and is not to be taken into Profit and Loss Account. However, loss is to be charged to profit and loss account.

6. Purchase of a Business:
If any business is purchased, and if the purchase price is less than the value of net assets taken, the difference is to be credited to Capital Reserve, and if the price is more than the value of net assets taken, the excess amount is to be debited to Goodwill. 7. Profits prior to incorporation are to be credited to capital reserve and not to profit and loss account.

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8. Stock-in-trade:
Cost price or Market price whichever is less is to be taken. Mode of valuation is to be stated in the Balance Sheet.

9. Remuneration of Directors:
The remuneration payable to a director shall be inclusive of the remuneration payable for services rendered by a director. A director may receive remuneration by way of a fee for each meeting of the board or of a committee thereof attended by him.

10. Bonus Shares Received:

When free Bonus Shares are received by the company. i) They may only be included in investments without placing any value, thus, leaving the balance of an Investment Account unchanged or ii) The face value of Bonus Shares is to be credited to Investment Reserve Account and debited to Investment Account.

Information acquired after Close of Financial Year

While preparing the final accounts, the information obtained after the closing of the accounting year should not, as a general rule, be taken into consideration. However, the following should be taken into account. i) Events which assist in forming an opinion regarding the correct amount of any item in the balance sheet as the amount was uncertain on the date of Balance Sheet. ii) Where such events arise from legislation affecting any items in the Balance Sheet. The events which do not affect the items appearing in the balance sheet but which may affect the true and fair view of the accounts, should either be mentioned by way of note on the accounts or included in the directors report. iii) Share Premium : If premium amount is not received on any shares, is to be shown by way of deduction from Share Premium as under: Share Premium Less: Calls in arrears. iv) The debit balance on the Profit and Loss Account must be shown as a deduction from Revenue Reserve not earmarked for any specific purpose.

Debentures Redemption Fund

We have seen in the Chapter No.2 that by issuing debentures the company raises loan. There are different ways of repayment of this loan. If the debentures are to be repaid on a fixed date, the company may create a special fund, termed as , Sinking Fund for Redemption of Debentures or Debenture Redemption Fund. Every year a certain fixed amount is set aside from profits and credited to this fund. This amount is invested in securities outside the company. Interest received on these investments i.e. Debenture Redemption Fund Investments is reinvested in the same securities. On the date of repayment of debentures, these investment are sold out and with the sale proceeds the debenture loan is repaid.

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Profit and Loss Appropriation A/c

This is a second section of profit and loss A/c and is shown below the line or shown as separate A/c. The profit and loss A/c shows net profit earned whereas the profit and loss appropriation A/c shows the appropriation of net profit to various reserves, dividend etc. It is credited with last years unappropriated balance of profit, current years net profit and excess provision of taxation over the actual tax. Thus, the form of this account is: Profit & Loss Appropriation Account For the year ended--------Particulars Rs. Particulars To General Reserve By Balance b/f (from last year) To Contingency Reserve Amount By Net Profit b/d ( Current transferred to year) To Dividend Equalisation the Reserves By Saving in provision for Reserve during this taxation made Previously To Debenture Redemption Year. Reserve To Capital Redemption Reserve To Interim Dividend Paid To Proposed Dividend Proposed To Balance c/f Unappropriated amounts.

Rs.

BALANCE SHEET
The form of a Company Balance Sheet, as prescribed in Part I of Schedule VI is reproduced herewith. According to Section 211 (i) every Balance Sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year. Some of the important items appearing in the Balance Sheet are explained below: LIABILITIES SIDE 1. Share Capital i) Where a company has issued different classes of Preference Shares, such as 8% First Preference Shares, 9% Second Preference shares etc., the particulars of such shares should be given separately. If there are any redeemable Preference Shares, the terms of their redemption or conversion and the earliest date thereof must be mentioned. ii) If Bonus Shares are issued, it is necessary to mention the source from which they are issued e.g. Capital Redemption Fund, General Reserve etc. iii) If any shares are issued to vendors for purchase of business etc. without receiving cash, a mention thereof must be made. iv) Forfeited Shares Account: If the forfeited shares are not re-issued, the balance on Forfeited Shares Account is to be shown under Subscribed Capital as addition thereto The balance remaining on this account after re-issue of forfeited shares is to be transferred to Capital Reserve. 35

v) Calls in Advance : The item is stated either under the heading Share Capital or under Unsecured Loans. 2. Reserves & Surplus i) It includes revenue reserves also, such as General Reserve, Dividend Equalisation Reserve, Deferred Taxation Reserve, Special Depreciation Reserve, Contingency Reserve, Investments Reserve, Debenture Redemption Fund, Sinking Fund A/c. ii) In the case of each Reserve, additions to and deductions from it made during the year must be disclosed. 3. Secured Loans i) Debentures: a) The terms of redemption or conversion and the earliest date thereof is to be stated. b) If on the date of the balance sheet there are any debentures redeemed but not paid off, the amounts of such debentures should appear under the heading Current Liabilities. Unless it is specifically stated as unsecured debentures, debentures are to be presumed as secured and to be shown under this heading. ii) Interest accrued and due i.e. outstanding: Interest outstanding on debentures or loans is to be included in the respective items under this heading. However, Interest accrued but not due is to be shown under Current Liabilities. 4. Unsecured Loans Bank Overdraft, unless it is specifically stated as secured, is to be shown under this heading. Short-term loans are those that are due for re-payment within a period of not more than a year from the date of the balance sheet. Interest accrued and due i.e. outstanding is to be included in respective items and interest accrued but not due is to be shown under Current Liabilities. 5. Current Liabilities It includes outstanding creditors for expenses, security deposits of employees, agents etc., advances or income received in advance, unclaimed interest, unclaimed dividend, money received on shares-pending allotment, debentures redeemed but not paid off, bills payable, sundry creditors etc. 6. Provisions It includes provision for bonus to employees, provision for retirement gratuities, provision for repairs and renewals, provision for obsolescence of stock and stores, provision for taxation, proposed dividend, any provision for staff welfare are such as staff pension fund, staff welfare fund etc. 7. Contingent Liabilities These are the liabilities which have not arisen or have already been accrued, but may arise out of transactions pending upon happening of certain event, these are not definite liabilities on the date of Balance Sheet. Thus, a contingent liability may or may not

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involve the payment of money e.g. Bills discounted by the company. This will result into as actual liability if the acceptor dishonours the bill on the due date. Amount payable on investments in partly paid shares, or arrears of dividends of cumulative preference shares, compensation claim by a worker, pending decision of the court etc. are the examples of contingent liabilities. So far as its treatment in the accounts is concerned no entry is passed through the financial books but its existence is disclosed by way of a note on the Balance Sheet.

ASSETS SIDE
1. Fixed Assets These are the assets purchased by the business for its own use and are not for resale such as Land & Building, Machinery, Furniture, Motor car etc. The collective name for the fixed assets of a company is Block Account or Block Expenditure. Original cost of the assets, additions and deductions made, if any during the current year, total depreciation written off from the date of purchase of the asset to the date of Balance Sheet must be shown by way of deduction from its cost in the Balance Sheet. Generally, a schedule of fixed assets giving all such details is attached to the Balance Sheet. The amount of depreciation applicable to the asset sold should be deducted from the total depreciation provided in respect of the relevant fixed asset upto the beginning of the year. If excess depreciation is charged than the reasonable amount, the excess amount is not to be shown by way of deduction from the asset but it is to be shown on the liabilities side under the heading Reserves and Surplus. 2. Current Assets i) Sundry Debtors : This item should include only the sums due in respect of goods sold or services rendered or in respect of the other contractual obligations. Provision for doubtful debts is to be shown by way of deductions from Debtors. If the provision made for doubtful debts exceeds the amount of debts considered doubtful, excess amount is to be shown under Reserves and Surplus. Debts outstanding for more than six months are to be shown separately from other debts. Sundry debtors are classified as under: a) Debts considered good and for which the company is fully secured. b) Debts considered good for which the company holds no security other than the debtors personal security. c) Debts considered doubtful or bad. Debts due by managerial personnel or by firms or companies in which the directors are interested are to be shown separately. ii) Bank Balance : It is to be shown as under: a) With scheduled Banks, stating separately whether on current account, or fixed deposit account etc. b) With other Banks, giving the names of each bank and type of account. 3. Underwriting Commission There are some persons or firms which undertake the responsibility to sell the shares or debentures issued by the company for public subscription. These persons or firms are called underwriters and the commission charged by them for this work is called as

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underwriting commission. If any of the shares or debentures so underwritten are not taken over by the public, the underwriters themselves are required to purchase them. Thus, the company gets guarantee of sale of the shares/debentures issued for public subscription. As a result of underwriting of shares by a new company it gets assured of minimum subscription and gets rid of closing down of the company for want of minimum subscription. The maximum commission that can be given is upto 5% of the issue price of shares and 21/2% of issue price of debentures. This commission is spread over a reasonable number of years and proportionate amount is written off each year. 4. Preliminary Expenses These are the expenses which are required to be incurred at the commencement of a company such as Cost of registration, stamp duty, cost of preparing & printing the Memorandum and Articles of Association, prospectus, cost of preparing and printing Share Certificates, Letters of Allotment/Debentures, Trust Deeds etc. It is of a non-recurring nature and as it results in getting the Share Capital subscribed, it is spread over number of years instead of charging it in full to the Profit & Loss A/c of the first year. However, there is nothing in the Companies Act to compel a company to write it off in certain number of years but it may be permanently capitalized. 5. Profit and Loss A/c If there remains debit balance on Profit and Loss A/c i.e. there is loss and if it cannot be set off against any Revenue Reserve, it is shown as the last item on the assets side.

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Symbiosis Law School Prof. Swati Magikar OLD FORMAT

The Form of A Company Balance Sheet as prescribed in Part I of Schedule VI Balance Sheet of (Name ------ of Company) As at ------- (Date) Liabilities Assets I. Share Capital I. Fixed Assets Authorised Share Capital XXX shares of Rs. xxx each a)Goodwill issued, subscribed, called up Share Capital. xxx shares xxxx b)Land of Rs. xx each. xxx c)Buildings Less : Calls in arrears xxx xxx d)Leaseholders (Out of the above xxx shares of Rs. xxx each have been e)Plant & Machinery issued for consideration other than cash) f)Furniture & Fittings g)Patents, Trade-Marks & Designs h)Live Stock and i)Vehicle etc. II. Reserves and Surplus II. Investments 1.Capital Reserves Showing nature of investments and mode of 2.Capital Redemption Reserve Account. valuation, for example cost or market value, 3.Shares Premium Account. and distinguishing between 4.Surplus, that is balance in Profit & Loss A/c (Profit) a) Investments in Government or Trust 5. Proposed additions to reserves. securities 6. Sinking Fund. b) Investments in shares, debentures or bonds. c) Immovable properties. III. Secured Loans III. Current Assets, Loans & Advances 1. Debentures A. Current Assets 2. Loans & Advances from Banks 1. Interest accrued on Investments 3. Other Loans & Advances 2. Stores and Spare Parts 3. Loose Tools 4. Stock in- Trade 5. Works-in-progress 6. Sundry Debtors a) Debts outstanding for a period exceeding six months b) Other debts Less : Provision 7. Cash in Hand 8. Bank Balance B. Loans & Advances 9. Advances & Loans to Subsidiaries 10. Bills receivable 11. Advances recoverable in cash or in kind or for value to be received e.g. Rates, Taxes, Insurance etc. 39

IV. Unsecured Loans 1. Fixed Deposits 2. Short term Loans & Advances 3. Other Loans & Advances

V. Current Liabilities & Provisions A. Current Liabilities 1. Bills Payable 2. Sundry Creditors 3. Unclaimed Dividends 4. Bank Overdraft 5. Outstanding Expenses 6. Interest accrued but not due on loans. B. Provisions 7. Provision for Taxation 8. Proposed Dividends 9. Provision for Contingencies 10. Provision for Provident Fund Scheme 11. Provision for Insurance, pension & similar Staff benefit schemes. 12. Other Provision VI. Contingent Liabilities

IV. Miscellaneous Expenditure & Losses 1. Preliminary expenses 2. Expenses including commission or brokerage on underwriting subscription of shares or debentures. 3. Discount allowed on the issued shares or Debentures. 4. Other Deferred Revenue Expenditure. V. Profit & Loss Account (Loss)

Format of Vertical Balance Sheet of a Company Sources of Funds I. Owners Funds A) Share Capital B) Reserves & Surplus II. Borrowed Funds: A) Secured Loans B) Unsecured Loans Total Application of Funds I. Fixed Assets II. Investments III. Working Capital Current Assets Less :- Current Liabilities Iv. Misc. Expenditure & Losses V. Profit & Loss A/c (Loss) Total Rs. xxxx xxxx xxxx xxxx Rs. xxxx xxxx xxxx xxxx xxxx xxxx Xxxx xxxx xxxx xxxx xxxx 40

New Format PART I Form of BALANCE SHEET Name of the Company.. Balance sheet as at. (Rupees in..) Figures Figures as at the as at the end of end of current previous reporting reporting period period

Particulars EQUITY AND LIABILITIES 1. Shareholder funds Share Capital Reserves & Surplus Money received against share warrents 2. Share application money pending allotment 3. Non-current liabilities Long term borrowings Deferred tax liabilities (Net) Other long term liabilities Long term provisions 4. Current liabilities Short term borrowings Trade payables Other current liabilities Short term provisions Total ASSETS 1. Non current assets Fixed assets Tangible assets Intangible assets Capital Work in progress Intangible assets under development Non-current assets Deferred tax assets (Net)

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Long term loans & advances Other non current assets 2. Current assets Current Investments Inventories Trade receivables Cash & cash equivalents Short-term loans & advances Other current assets Total

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Short Notes :I. Authorised Share Capital This is the maximum Share Capital that a Company is authorized to raise as per its memorandum of association and with which it is registered with the Registrar of Companies. For e.g. 10,000 Equity Shares of Rs. 10/- each Rs. 10,00,000/-. II. Issued Share Capital That part of the authorized Share Capital that is actually issued to the members of the public for subscription. For e.g. Equity Shares of Rs. 10/- each Rs. 5,00,000/-. III. Subscribed Share Capital That part of the issued Share Capital that is actually subscribed by the members of the public. For e.g. Out of the 5,000 issued share, 4000 are subscribed by the public. Therefore, 4,000 Equity Shares of Rs. 100/- each. Rs. 4,00,000/-. IV. Called Up Capital That part of the subscribed Share Capital that is called up for payment by the Company. For e.g. Out of Rs. 100/- only Rs. 80/- may be called up on the date of Balance Sheet. 4,000/- Equity Shares of Rs. 100/- each, Rs. 80/- per share called up. Rs. 3,20,000/-. V. Paid Up Capital That part of the Called up Capital that is actually paid by the shareholders. The part not paid by Shareholders is called Calls in arrears. Thus paid up Capital = Called Up Capital Calls in arrears. For E.g. If Rs. 5,000/- have not been paid by shareholders, The paid up capital will be Rs. 3,20,000/- - Rs. 5,000/- = Rs. 3,15,000/VI. Contingent Liabilities A Contingent liability is a liability which may or may not occur, depending on the occurance or non- occurance of an event. For e.g. 1) Bills discounted not yet matured. 2) Legal suit pending in the court of law against the Company. 3) Uncalled amount as partly called up shares.

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INTERNAL RECONSTRUCTION
In the case of internal reconstruction no company either goes into liquidation or is newly formed; only the capital structural of the existing company is recognized. It includes reduction of capital as also alteration of capital and reduction of claims of creditors against the company. This course is resorted to write off the past accumulated losses, and bring down the values of fixed assets which are over-valued. Thus, an attempt is made to infuse new life in the company. Reduction of capital cannot be made without court sanctions, as the reduction of capital reduces the security of the creditors. Alteration of capital is different from reduction of capital. Alteration can be done under provisions of sections 94 to 97 of the Companies Act. Alteration includes: a) Increase in capital by issue of new shares. b) Consolidation or sub-division of the existing shares into shares of larger or smaller denominations. c) Conversion of fully paid shares into stock and vice-versa. d) Cancellation of unissued shares. Alteration can be done by passing ordinary resolution by the company, provided its Articles authorize it to do so.

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Symbiosis Law School Prof. Swati Magikar

BUY BACK OF SHARES

The buy-back of shares was prohibited in India until October 31, 1998 when the Union Government promulgated the Companies (Amendment) Ordinance 1998 permitting Indian companies to buy-back their own shares. The ordinance inserted two new Sections, viz, 77A and 77B in the Companies Act, 1956 which laid down the provisions and restrictions relating to buy-back of shares. Buy-back would result in reduction of capital. The Act has lot of restrictions on reduction of share capital, as it would affect the interests of the creditors. However the rigour of these provisions does not apply when buy-back is in accordance with the provisions in the Act.

Meaning of Buy-back
Buy-back of shares essentially means repurchase by a company of its own shares. This may be done at par or premium or discount. The par value of the shares purchased is reduced from the equity capital. Any excess paid is debited to reserves or surplus. If purchased at discount the same will be transferred to capital reserve. Some of the important reasons for buy-back are listed below: 1. To return surplus cash to the investors. Companies want to have buy-back since it facilitates them to manage their surplus cash. If it is paid as dividend companies will have to pay dividend tax on the distribution. * On the other hand, if cash is distributed through buy-back, the tax burden shifts to the shareholder who has to pay capital gains tax. 2. To increase underlying share value. Buy-back reduces equity and enables the company to increase earnings per share, which would result on enhancing the share value. A share buy-back may also be announced when share prices are depressed in the market. Such a move will have signaling effect on the market. 3. To prevent hostile takeover bids. A cash rich company (cash cow) is often the target of hostile takeover bid. By eliminating surplus cash through buy-back such a bid can be avoided. 4. Buy-backs also facilitate a company to maintain a target capital structure. Buy-backs aid a company to achieve an optimal debt-equity ratio. 5. To profit from treasury operations. Companies can buy shares when the prices are low and reissue later at attractive prices thus making profit. In India buy-back for treasury operations is not possible. This is because shares bought will have to be extinguished.

Conditions of Buy-back
The following are the necessary conditions for buy-back under the Indian Company Law. 1. Buy-back should be authorized by Articles. If Articles are silent they will have to be amended. 2. A company should pass a special resolution in a general meeting authorizing the buyback.

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3. The buy-back does not exceed 25% of the paid-up capital and free reserves of the company concerned. 4. The debt-equity (including free reserves) ratio is not more than 2 after such buy-back. 5. All shares and other specified securities are fully paid-up. Partly paid up shares or securities cannot be bought back by the company. 6. Buy-back must be completed within 12 months from the date of special resolution. 7. The securities bought back should be physically destroyed within 7 days from completion of buy-back. Because of this there can be no treasury operations with buy-back. As the shares are to be extinguished they cannot be resold. 8. A company can buy-back from any of the following a) From existing shareholders on a proportionate basis b) From open market c) From holders having odd lots. Shares in odd lots cannot be traded in the market, and d) From employees to whom shares have been earlier offered under ESOPS (employees stock option schemes) or sweat equity. 9. After completion of buy-back, a company cannot issue same kind of share or security for a period of 24 months. 10. Money borrowed from banks/financial institutions cannot be utilized for the purpose of buy-back. 11. A company which has defaulted in repaying fixed deposits or the interest there on, or redemption of debentures or preference shares, payment of dividend or repayment of term loans is not permitted to buy-back. 12. A company defaulting in filing of annual returns, preparation of annual accounts or whose accounts do not reflect a true and fair vies is also nor permitted to buy-back its shares.

Accounting Requirements
A company can purchase its shares from out of i) free reserves ii) securities premium account or iii) proceeds of any shares or specified securities/ However, buy-back cannot be effected from the proceeds of any shares or specified securities issued earlier. Free reserves are defined as those, which are free for distribution as dividend. If the buy-back is from free reserves a sum equal to nominal value of the shares purchased should be transferred to Capital Redemption Reserve Account (CRR).

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For private circulation only Symbiosis Law College

Prof. Swati Magikar

ISSUE OF SHARE CAPITAL Problem No.1: X Ltd invited applications for 10,000 shares of Rs.100 each payable as follows On application Rs.25 On allotment Rs.50 st On 1 and final call Rs.25 The applications received were for 9000 shares and all these shares were issued. All money due was received except the 1stand final call on 100 shares which were forfeited. All these forfeited shares were reissued at Rs.90 as fully paid up. Journalise. Problem No. 2: On 1st Jan 09, X Ltd decided to issue 1,00,000 equity shares of Rs. 10 each, Rs. 2.5 payable on application and Rs. 2.5 payable on allotment & Rs. 5 payable at the time of first and final call. Applications were received for 1,20,000 shares and directors decided to refund the excess money received in respect of 20,000 shares. On 31st March, company received allotment money as well. On 1 st June, company made first and final call of Rs. 5 and company received the amount in whole. Journalise. Problem No. 3: On 1st Jan 08, company made an issue of 10,000 equity shares of Rs. 10 each payable as below: On application Rs. 2 On allotment Rs. 3 (Premium of Rs.1) First and final call Rs.6. Applications were received for 13000 shares and directors made allotment in full and returned money to the applicants for 3000 shares. One shareholder who was allotted 20 shares, paid first and final call with allotment money and another shareholder did not pay allotment money on his 30 shares but which he paid with first and final call. Journalise the transaction. Problem No. 4: A Ltd issued shares of Rs.10 each at 10% premium payable as follows: On application Rs.2 On allotment Rs.3 First call Rs.2 Final call Rs.4 In all the company issued 10,000 equity shares.

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Sonia who was holding 50 shares did not pay her allotment & first call but paid the amount at the time of final call. Manmohan who was holding 30 shares paid the first call money in advance at the time of allotment. Journalise the transaction.

Problem No.5: X Ltd invited applications for 10,000 shares of Rs.100 each payable as follows On application Rs.25 On allotment Rs.50 On 1st and final call Rs.25 The applications received were for 9000 shares and all these shares were issued. All money due was received except the 1stand final call on 100 shares which were forfeited. All these forfeited shares were reissued at Rs.90 as fully paid up. Pass the transaction. Problem No.6: A Ltd issued 25000 shares of Rs.10 each. There were applications for 60,000 shares. Amount on 10,000 applications was refunded. Shares were issued on pro rata basis. Amount called up was as follows: On application Rs. 5 On allotment Rs. 5 First and final call Rs.2 One share holder to whom 400 shares were allotted, did not pay final call. Company decided to forfeit 400 shares on which final call was unpaid and out of these 200 shares were reissued at Rs.9 per share. Journalise the transaction. Problem No. 7: A Ltd issued 5000 shares of 100 each. There were applications for 6000 shares. Shares were issued on prorata basis. Amount called up was as follows. On applications Rs.25 On allotment Rs.35 (25+10) On 1st and final call Rs.50 A shareholder whom 500 shares were allotted did not pay allotment & final call amount. Hence these shares were forfeited & were reissued at Rs.90 per share. Journalise the transaction. Problem No. 8: A Ltd issued 20,000 equity shares of Rs. 10 each payable as On application Rs. 2 On allotment Rs. 3 (includes premium) On 1st call Rs.3 On final call Rs.3 Shares were called up to the first call stage. Mr. A holding 300 shares paid only application money while Mr. B holding 100 shares paid upto allotment amount. All these shares were forfeited and reissued to C on payment of Rs. 6 per share and as paid upto the same extent as other shares. Journalise the transaction. Problem No. 9: Issued 10000 shares on

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On application Rs. 20 On allotment Rs. 45 (including premium Rs.20) 1st call Rs. 25 nd 2 call Rs. 30 In all there were applications for 13,000 shares. Amount was refunded on 1000 shares. Shares were issued pro rata basis. Mr P holding 200 shares paid 1st call in advance alongwith allotment money but failed to pay final call. Mr A holding 300 shares failed to pay two calls (1st and 2nd) Mr B holding 400 shares failed to pay final call. All these shares were forfeited and out of these 200 shares belonging to A and 300 shares belonging to B were reissued for Rs.90 per share. Journalise the transaction. Problem No.10: D Co. issued 75,000 equity shares of Rs. 10 each & 5,000 12% preference share of Rs. 100 each. Payable as under Particular Equity Share Preference Share Application Moneys on equity share 2 20 Allotment money 2 30 st 1 Call 3 50 2nd Call 3 The Company received application for 1,35,000 equity shares & 4500 preference shares. Application totally 10,000 equity share have rejected. Allotment on other application for equity shares on prorata basis. All applications for preference shares are accepted in full. Calls were duly made and amounts were received. Journalize. Problem No. 11: On January 2005, Co. X issued to public 10 thousand equity, 14% preference shares of Rs. 100 each at a discount of 5% the amount being payable as follows: On Application - 25 On Allotment - 25 On 1st Call - 25 Public applied for 9000 shares, shares will allotted on 3 rdFebruary, 2005. The Call was made on 3rd March 05 & all the money were received. Assuming that share premium A/c had between of 25,000. Journalize the above transaction. Problem No. 12: X Ltd issued 60,000 equity shares of Rs. 10 each at par payable at Rs. 2 - On Application Rs. 5 - On Allotment Rs. 3 On Call Application total 1,65,000 shares. The Board rejected application for 5,000 shares. Accepted in full application for 10,000 shares & allotted 50,000 shares to applicants for 1,50,000 shares on prorata basis. Call money on 1000 share was not received. His shares were forfeited. Out of the forfeited share 600 shares were reissued to Mr. A. at Rs. 8 per

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share. Later 100 shares were reissued to Mr. B at face value & still later, remaining 300 share were reissued to Mr. C at Rs. 11 per share. Journalize.

Problem No. 13: A Ltd. with an authorized capital of Rs. 20,00,000 offered to public 1,00,000 Equity Shares of Rs. 10 each payable as Rs. 2 on application & Rs. 2 on allotment. The balance in three equal calls of Rs. 2 each. The Company received application for 80,000 shares only. All applications were accepted. One shareholder holding 800 shares did not pay 1st call. After completing legal formalities, BOD forfeited these shares. Consequently, 2nd call was made on 19,200 shares only, which was duly received in full. Then the BOD reissued on of forfeited shares having Face Value of Rs. 8 at Rs. 7 per share. Final call was made after reissue of total money due was received before last date fixed and payment of call. Journalise. Problem No. 14: Saroj Ltd. was registered with a capital of Rs. 20,00,000 divided into 20,000 shares of Rs. 100 each. The company offered to the Public for subscription 10,000 shares at a premium of Rs. 10 per share payable as follows: Rs. 10 on application. Rs. 30 on allotment (including premium) Rs. 30 on first call. Rs. 40 on final call. The company receive applications for 16,000 shares.The applications for 1000 shares were rejected and application money was refunded Pro-rata allotment was made to the remaining applications. Excess money paid on application was adjusted against the amount due on allotment. All the calls were made and duly received except Mr. Ram who failed to pay first call and final call on 200 shares held by him. His shares were forfeited and reissued to Mr.Gopal at Rs.80 per share as fully paid. Pass the Journal entries in the books of Saroj Ltd. Problem No. 15: A Ltd. was formed with an authorized capital of Rs. 20,00,000 divided into 20,000 equity shares of Rs. 100 each. The company issued for public subscription 12,000 equity shares of Rs.100 each at a premium of Rs.5 per share payable as follows: On Application On Allotment On First Call Rs.20 Rs.40 (including Premium) Rs.30

50

On Final Call Rs.15 Applications for 20000 shares were received and pro-rata allotment was made to the applications of 18000 shares. The remaining applications were rejected and application money was refunded. Excess application money was adjusted against allotment dues. All the shareholders paid the allotment and call money except Mr. Shah who failed to pay First and Final Call money on 200 shares. His shares were forfeited and reissued to Mr. Shinde at Rs.80 per share fully paid. Give Journal entries in the books of A Ltd. Problem No. 16: Swadeshi Stores Ltd. issued 1,000 Equity Shares of Rs.100 each at a premium of Rs.10 per share payable as under: On Application Rs. 30 including Rs.10 premium, on Allotment Rs.30, on share First Call Rs.30 and on share Final Call Rs. 20. Applications for 3,000 shares were received. Applications for 1,800 shares were rejected and money was refunded. Applicants for 1,200 shares were allotted 1,000 shares pro-rata. Money over paid on application was applied against allotment money. Lewis to whom 200 shares were allotted failed to pay allotment and first call money. His shares were forfeited. Out of these shares, 100 shares were issued to Ajit at Rs.70 per share. Second call was not made. Give journal entries including those for cash. Problem No. 17: Maharashtra Transport Company Ltd. invited applications for 40,000 Equity Shares of Rs.100 each at a discount of Rs.4 per share. The amount was to be paid as follows: Rs. On application 20 On allotment 36 On first & final call 40 The public applied for 36,000 shares and these were allotted. All money due were collected with the exception of the first and final call on 4,000 shares and these were forfeited. 2,000 of these shares were re-issued as fully paid for a payment of Rs. 80 per share. Problem No.18: Neelam Company Ltd. issued 50,000 Equity Shares of Rs. 10 each, payable as under: Rs. 2 on application, Rs. 2.50 on allotment, Rs.3 on first call and Rs. 2.50 of final call. The applications were received from the public for 90,000 shares. The allotment was made as follows on 1st August, 1993. 1. To the applications of 45,000 shares in full. 2. To the applicants of 20,000 shares 25% of the shares they applied for. 3. To the remaining applicants Nil. The allotment money was due on 15 thOctober, 1993. The first call was made on 1stNovember, 1993 and the final call on 1stFeb.,1994. Both the calls were payable within 2 months. Surplus application money received from shareholders in(2) category was

51

appropriated by Directors against money due on allotment and subsequent calls. The application money received from applicants in the (3) Category was refunded. One shareholder from (i) category who paid application and Allotment money on 5,000 shares failed to pay first and final calls. Give the entries in the journal of the Company, assuming that all other money was fully received from shareholders on allotment account and subsequent calls. Problem No.19: The Bharat Company Ltd. issued 6,000 shares of Rs. 15 each at a premium of Rs. 2 per share. The amount was payable as under: On application Rs. 3 per share, On allotment Rs. 7 (including premium), On First Call Rs. 4 and on Second Call Rs. 3 per share. The Company received applications for 10,000 shares. The Directors rejected applications for 1,000 shares and refunded the application money received thereon. The shares were allotted pro-rata among the remaining applicants and the excess money received from them on application was transferred to the Allotment A/c. 60 Shares were allotted to A who failed to pay the allotment money and his shares were forfeited on non-payment of the First Call. B to whom 120 shares were allotted, failed to pay both the calls and hence, his shares also were forfeited. All the shares forfeited were subsequently issued to C at the rate of Rs. 14 per share as fully paid. Give the necessary Journal Entries in the Books of the company.

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Issue of Debentures Q1) S Ltd. Co. Ltd. Took over assets of Rs.15,00,000 & Liabilities of Rs. 8,00,000 of H Co Ltd for the purchase consideration of Rs. 7,60,000. S Co Ltd paid the purchase consideration by issuing debentures of Rs. 100 each at a 5% discount. Give Journal entries in the books of S Co ltd.

Q2) A Ltd. Co. Ltd. Took over assets of Rs.3,50000 & Liabilities of Rs. 30,000 of B Co Ltd for the purchase consideration of Rs. 3,30,000. A Co Ltd paid the purchase consideration by issuing debentures of Rs. 100 each at a 10% premium. Give Journal entries in the books of A co ltd.

Q3) Z Ltd. Co. Ltd. Took over assets of Rs.60,00,000 & Liabilities of Rs. 33,50,000 of X Co Ltd for the purchase consideration of Rs. 26,25,000. Z Co Ltd paid the purchase consideration by issuing debentures of Rs. 100 each at a 5% premium. Give Journal entries in the books of Z co ltd.

Q4) P Ltd. Co. Ltd. Took over assets of Rs.75,00,000 & Liabilities of Rs. 35,00,000 of Q Co Ltd for the purchase consideration of Rs. 45,00,000. P Co Ltd paid the purchase consideration by issuing debentures of Rs. 100 each at a 10% discount. Give Journal entries in the books of P co ltd. Q5) ABC Company Ltd. Proposes to issue 10,000, 14% debentures of R. 100 each. They give you the following terms of issue & ask you to pass the journal enties in every case separately: (i) The debentures were issued at premium of 10% & redeemable at par (ii) The debentures were issued at discount of 5% and redeemable at premium of10%. (iii) The debentures were issued at par but redeemable at a premium of 10% (iv) The debentures were issued at premiu of 5% but repayable at a premium of 10%. (v) The debentures were issued at discount of 5% and redeemable at par.

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Symbiosis Law School Prof. Swati Magikar

Redemption of Preference Shares Problem No.1: The Balance Sheet of Modem India Ltd. as on 31st March 2012 stood as follows: Balance Sheet Liabilities Amount Assets Rs. Share Capital: 2000 8% Redeemable preference 2,00,000 Sundry Assets shares of Rs. 100 each 50,000 Equity shares of Rs.10 each General Reserve Profit and Loss A/c Sundry Creditors

Amount Rs. 9,00,000

5,00,000 Cash at Bank 1,70,000 70,000 50,000 2,50,000 10,70,000 10,70,000 The redeemable preference shares were redeemed on 1st April 2012 at a premium of 5%. Not having sufficient profits available to redeem the whole issue, the company issued 1000 7% Non-redeemable preference shares of Rs. 100 each. These shares were duly taken up. On 1st April 2012 the company decided to utilize the capital redemption reserve to make an issue of Rs. 10 equity Bonus shares to the old equity shareholders. Pass the necessary journal entries and Balance Sheet of the company there after. Problem No. 2: RICO LTD., has an authorized share capital of Rs. 40,00,000. Its Balance Sheet as on 31st March 2012 is as follows. Liabilities Amount Assets Amount (Rs.) (Rs.) Issued & Paid up Capital Fixed Assets 20,60,000 1,20,000 Equity shares of Rs. 10 12,00,000 Investments 4,00,000 each 60,000 8% Redeemable Pref.shares 6,00,000 Current Assets 10,80,000

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5,40,000 Bank Balance 3,60,000 8,00,000 4,60,000 3,00,000 39,00,000 39,00,000 The company decided to redeem the whole of the preference share capital at a premium of 10%. In order to pay off the preference share- holders, it sold the investment realizing Rs. 3,90,000. On 1stApril, 2000 the company issued Equity Bonus shares fully paid in the ratio of one every equity share held on that date. Journalize the above transaction in the book of Rico Ltd. Problem No. 3: The Balance Sheet of YASHODA LTD. as on 31st March 2012 was as under. Balance Sheet Liabilities Rs. Assets Rs. 6,000 7% Redeemable Pref. Fixed Assets 6,00,000 Sh.of Rs.100 Each fully paid 6,00,000 Investments 2,00,000 30,000 Equity Shares of Rs.10 3,00,000 Current Assets 5,45,000 each fully paid Share Premiums A/c 75,000 Cash 2,50,000 Profit & Loss 4,20,000 Sundry Creditors 2,00,000 15,95,00 15,95,000 0 By the terms of their issue, the redeemable Pref. Shares were redeemable at 5% premium and it was decided to arrange that far as possible out of the companys resources subject to leaving a balance Rs. 50,000 to remain to the credit of Profit & Loss A/c. It was also decided to raise the balance of funds required by the issue of a sufficient number of equity shares at a premium of Rs. 2 per share. Investments are sold at 10% discount pass the journal entries and give the Balance Sheet after redemption. Problem No. 4: Bajaj Electronics Ltd. has an authorized capital of Rs. 50,00,000. Its Balance Sheet as at 31stMarch, 2012 is as follows: Balance Sheet as at 31-3-2012 Liabilities Rs. Assets Share Capital Fixed Assets Issued and Paid up Capital Investment 60,000 equity shares of Rs. 10 each 3,00,000 Current Assets 30,000 5% Redeemable preference 1,50,000 Cash at Bank Shares of Rs.10 each Share Premium A/c 1,35,000 General Reserve A/c 2,00,000 55

of Rs. 10 each Share Premium A/c General Reserve Profit & Loss A/c Creditors

Rs. 4,90,000 1,00,000 2,70,000 90,000

1,35,000 50,000 8,50,000 The Company decided to redeem on the whole of the Preference Share Capital at a premium of 10%. In order to pay off the Preference Shareholders it sold the investments realizing Rs. 97,500.The company issued Equity Bonus Shares fully paid in the ratio of one share for every equity shares held on that date. Pass necessary journal entries and prepare Balance Sheet after redemption. Problem No. 5: The Balance Sheet of Amar Ltd. as at 31st March 2012 is as follows: Liabilities Rs. Assets Rs. Share Capital: Land and Building 4,00,000 Issued and fully paid 2,000 9% Plant and machinery 1,00,000 redeemable Preference shares of Rs.100 2,00,000 Furniture 18,000 each 30,000 equity shares of Rs. 10 3,00,000 Investments 1,12,000 each Reserves and Surplus: Stock 1,00,000 General Reserve 1,00,000 Debtors 30,000 Share Premium 40,000 Bank 80,000 Profit & Loss A/c 80,000 Current Liabilities: Sundry creditors 1,20,000 8,40,000 8,40,000 The Company decided to redeem its preference shares at a premium of 5% on 31 stMarch, 2000. A fresh issue of 4,000 equity shares of Rs.10 each was made at Rs.12 per share payable in full . These shares were fully subscribed and all monies were duly collected. All the investments were sold realizing Rs. 1,08,000. The directors wish that only a minimum reduction should be made in the revenue reserves. You are required to give the Journal Entries, including those relating to cash, to record the above transactions and draw up the Balance Sheet as it would appear after redemption of preference shares. Problem No. 6: The Balance Sheet of Ashok Limited as on 31-03-2012 stood as follows: Liabilities Rs. Assets Share Capital 3000 9% redeemable Land and Building preference Shares of Rs. 100 each 3,00,000 Plant and Machinery 40,000 equity shares Rs.10 each 4,00,000 Stock General Reserve 1,05,000 Debtors Profit & Loss Account 25,000 Cash at Bank Share Premium 20,000 Sundry Creditors 1,25,000 56

Profit & Loss A/c Creditors

8,50,000

Rs. 3,00,000 2,00,000 1,50,000 75,000 2,50,000

9,75,000 The redeemable preference shares were redeemed at a premium of 5%. Not having sufficient profits available to redeem the whole issue, the company issued 2000 8% preference shares of Rs.100each. These shares were duly taken up The company decided to utilize the capital Redemption Reserve to make an issue of Rs. 10 equity shares to the old equity shareholders.

9,75,000

Q7) . Following is the Balance Sheet of Gaurav Ltd.as on 31.03.2011 Liabilities Amount Assets Amount Rs. Rs. Share Capital 30,000 Fixed Asset 1,00,000 (6% 3,000 redeemable Pref. Shares of Rs. 10/- each) 6,000 Equity Shares of Rs. 10 60,000 Investments 21,000 each Security Premium 29,000 Current Assets 82,000 Cash balance 22,000) General Reserve 40,000 P&L A/c 24,500 Sundry Creditors 19,500 2,03,000 2,03,000 The Company exercised its option to redeem the whole of the Pref. Share capital at a premium of 5%.To assist in financing the redemption, all the investments were sold for Rs. 19,500. After redemption the Company made bonus issue of 7 Equity shares for every 6 Equity Shares held on that day. The appropriate resolutions were passed. And the transactions were duly completed. Record journal entries & also prepare Balance Sheet.

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Symbiosis Law School Prof. Swati Magikar

Internal Reconstruction Problem No.1: The following was the Balance Sheet of AB Ltd. as on 31-3-2012 Liabilities Rs. Assets Share Capital: Freehold 15,000 7% Cumulative Preference Plant & Machinery Shares of Rs. 100 each 15,00,000 Goodwill 2,75,000 Equity Shares of Rs. 10 27,50,000 Stock each Share Premium A/c 4,00,000 Debtors Sundry Creditors 4,00,000 Preliminary Expenses Profit & Loss A/c 50,50,000 Dividend on Preference Share was in arrears as from 1stApril, 2012. The following scheme of reconstruction was approved and duly sanctioned. a) Preference Shares to be reduced to Rs. 80 per share. b) Equity Shares to be reduced to Rs. 5 per share. c) Write off all intangible assets and premium account. d) Freehold to be written down to Rs. 18,50,000. Give necessary Journal Entries and prepare revised Balance Sheet. Problem No.2: A Ltd. Company presents you with the following Balance Sheet as on 31/3/2012 Liabilities Rs. Assets Share Capital Goodwill Equity Shares of Rs.100 each fully 4,00,000 Land and Building paid 7% Preference Shares (Rs. 100 each) 3,00,000 Plant & Machinery Profit prior to Incorporation 10,000 Patents 6% Debentures 3,00,000 Stock Sundry Creditors 2,00,000 Sundry Debtors Cash Preliminary Expenses Profit & Loss A/c 12,10,000

Rs. 23,75,000 8,00,000 3,00,000 3,50,000 2,25,000 2,50,000 7,50,000 50,50,000

Rs. 60,000 1,50,000 3,00,000 30,000 2,20,000 1,50,000 5,000 25,000 2,70,000 12,10,000

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The following scheme of reconstruction was duly approved: 1. 7% preference shares be converted into 9% preference shares, the amount being reduced by 30%. 2. Equity shares be reduced to fully paid shares of Rs. 50 each. 3. Land and Building be appreciated by 20%. 4. Debentures be reduced by 20%. 5. All intangible assets and fictitious amounts including patents be written off. Utilise profit prior toincorporation, if necessary. 6. Equity shareholders to subscribe equity shares of Rs. 1,00,000.The amount to be utilized for acquiring new Plant & machinery. Assuming the whole scheme to have been put through, give journal entries resulting from it and prepare the resultant Balance Sheet. Problem No.3: The Balance Sheet of AKS Ltd. as on 31-03-2012 was as follows: Liabilities Share Capital: 2,000 Pref. Shares of Rs.100 each 4,000 Equity Shares of Rs.100 each 5% Debentures Bank Overdraft Creditors
Amount Rs.

Assets

Amount Rs.

Goodwill 2,00,000 Freehold Property 4,00,000 Plant & Machinery

15,000 2,00,000 3,00,000

1,00,000 Stock 50,000 50,000 Debtors 40,000 1,00,000 Profit & loss 2,45,000 8,50,000 8,50,000 The company got the following scheme of capital reduction approved by the court: 1. The preference shares to be reduced to Rs. 75 per share fully paid up and the equity shares to Rs.37.50 per share. 2. The debenture holders took over the Stock & the Debtors in full satisfaction of their claim. 3. The Goodwill Account to be eliminated. 4. The freehold property to be depreciated by 50%. 5. The value of plant and machinery to be increased by Rs. 50,000. Pass the Journal entries in the books of AKS Ltd. Problem No. 4: Unique Ltd. Company presents you with the following Balance Sheet as on 31st March 2012 Liabilities Rs. Assets Share Capital: Goodwill Equity Share of Rs. 100 each fully 2,00,000 Land & Building paid

Rs. 30,000 75,000

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5,000 Patents 15,000 1,50,000 Stock 1,10,000 1,00,000 Sundry Debtors 75,000 Cash 2,500 Preliminary Expenses 12,500 Profit & Loss A/c 1,35,000 6,05,000 6,05,000 The following scheme of reconstruction was duly approved: 1. 7% Preference Shares be converted into 9% Preference Shares, the amount being reduced by 30%. 2. Equity shares be reduced to fully paid shares of Rs.50 each. 3. Land and Building be appreciated by 20%. 4. Debentures be reduced by 20%. 5. All intangible assets and fictitious amounts including Patents be written off. Utilise profit prior to incorporation, if necessary. 6. Equity shareholders to subscribe equity shares of Rs. 50,000. The amount to be utilized for acquiring new Plant and Machinery. Assuming the whole scheme to have been put through, give journal entries resulting from it and prepare the resultant Balance Sheet. Problem No.5: The following is the Balance Sheet of XY Ltd. as at 31-03-2012 Balance Sheet as on 31-03-2012 Liabilities Rs. Assets Authorised Capital: Goodwill 10,000 6% Pref. Shares of 10,00,000 Patents and Trade marks Rs.100 each 50,000 equity shares of Rs.10 5,00,000 Building each Issued capital: Plant and Machinery 5,000, 6% pref. shares of Rs. 5,00,000 Furniture and fixture 100 each fully paid 40,000 equity shares of Rs. 10 4,00,000 Stock in Trade each fully paid up Capital Reserve 25,000 Sundry Debtors 5% Deb. of Rs.100 each 2,00,000 Cash at Bank Accrued Int. on Cash at Hand Debentures 30,000 P&L A/c Sundry Creditors 1,55,000 Discount on issue of Debentures 13,10,000

7% Preferences Shares of Rs.100 each Profit Prior to Incorporation 6% Debentures Sundry Creditors

1,50,000

Plant & Machinery

1,50,000

Rs. 55,000 45,000 2,15,000 2,55,000 60,000 90,000 75,000 12,500 2,500 4,80,000 20,000 13,10,000 60

Note: The pref. Dividend is in arrear for 3 years. It was decided to reconstruct the company. The following scheme was prepared and duly approved by the court: a) The preference shares shall be converted into 7% pref. Shares of Rs. 50 each. b) The equity shares shall be reduced to Rs. 3 each. c) The 5% Debt. Shall be converted into 6% Debt. of Rs. 75 each. The debentureholders also agreed to waive 50% of the accrued interest. d) Arrears of Pref. Dividend is to be cancelled. e) The sundry creditors agreed to waive 30% of their claims and to accept equity shares for Rs. 30,000 of their renewed claims. f) The assets are to be revalued as follows: Rs. Building 2,50,000 Plant and Machinery 2,25,000 Furniture and Fixture 55,000 Stock in trade 80,000 Sundry Debtors 70,000 g) Patents and Trade marks and other fictitious assets are to be written off as far as possible. Draft the journal entries necessary to give effect to the a foresaid scheme.

Problem No.6: The Balance Sheet of A Ltd as on 31-3-2012 stands as under: Liabilities Rs. Assets Rs. Authorised Capital: Fixed Assets 14,30,000 10,000 Equity Shares of Rs.100 each 10,00,000 Stock in Trade 80,000 Issued Capital: Sundry Debtors 30,000 8,000 Equity Shares of Rs. 100 each 8,00,000 Investments 17,000 8% Debentures 13,80,000 Cash at Bank 13,000 Creditors 4,50,000 Profit & Loss A/c 10,70,000 Liability for Income Tax 10,000 26,40,000 26,40,000 The following scheme of reconstruction was approved: 1. The Equity Shareholders are prepared to have their capital reduced to 5% of their present holdings. 2. The Debenture holders are agreeable to have their claim reduced to 50% & for the balance claim accept 7% debentures for half the claim and 8% preference shares of Rs.100 each for the remaining half of the claim. 3. The creditors are prepared to forego 20% of their dues & to accept equity shares of the like amount in part payment of their claim. 4. The assets are to be reduced to the revalued figures: Fixed Assets Rs. 11,00,000

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Stock in Trade Debtors Investments

Rs. Rs. Rs.

50,000 20,000 7,000

Pass the journal entries in the books of A Ltd. Problem No.7: X Ltd whose Balance Sheet as at 31st March 2012 appears below formulated a scheme of reconstruction, details of which follow and secured approval of all concerned. Liabilities Rs. Assets Rs. Equity Share Capital: Fixed Assets 5,60,000 5,000 shares of Rs. 20 each Rs. 5,00,000 10 paid. 8% Preference Shares Capital Patents and Copyrights 40,000 40,000 shares of Rs. 10 each, 3,00,000 Rs.75 paid up. Secured Loans: Investments at cost 32,500 9% Debentures (Market value Rs. 27,500) 3,00,000 3,54,000 Interest accrued and due 54,000 Bank Overdraft 75,000 Current Assets 4,24,500 Sundry Creditors (including Profits and Loss A/c 2,14,000 interest of Rs. 7,500 due to Bank) 42,000 12,71,00 12,71,000 0 Preference dividend is in arrears for one year. a) Preference shareholders to give up their claims, inclusive of dividends, to the extent of 30 per cent and desire to be paid off. b) Debentureholders agree to give up their claims to interest in consideration of their rate of interest being enhanced at 10 per cent. c) Bank agrees to give up 50 per cent of their interest outstanding in consideration of their being paid off at once. d) Sundry creditors would like to grant a discount of 5 per cent if they were to be paid off immediately. e) Balances on Profit and Loss Account, Patents and Copyrights and 25 per cent of the total Sundry debtors of Rs. 60,000 to be written off. Fixed assets to be written down by Rs. 7,000. Investments to reflect their market value. f) To the extent not specifically stated, equity shareholders suffer on reduction of their rights. g) Costs of reconstruction Rs. 1,675.

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Pass journal entries in the books of the company assuming that the scheme has been put through fully with the equity shareholders bringing in necessary cash to pay off the parties and to leave a working capital of Rs. 10,000. Please draw the Balance Sheet after reconstruction.

Problem No.8: The Directors of Hardluck Ltd. decided to recommend to the shareholders certain steps to put the affairs of the Company back on the rails. On 30th June, 1987, the Balance Sheet of the Company was as under: Liabilities Share Capital: Authorised : 1,00,000 Equity Shares of Rs. 1 each Issued and Paid: 85,000 Equity Shares of Re.1 each fully paid Reserve and Surplus: Share Premium Rs. 1,00,000 Freehold Property At cost 85,000 50,000 (-) Depreciation 8,500 Plant and Machinery 15,000 At cost 1,19,000 (-) Depreciation 59,000 Investments: Shares at cost in associated companies 1,81,000 30,000 Other quoted invest. At cost 16,000 Current Assets: Stock 23,000 Debtors 19, 600 Misc. Expenses & Losses Profit and Loss Account 2,81,000 41,500 Assets Fixed Assets Goodwill at cost Rs. 22,600

60,000

Current Liabilities: Trade Creditors Bank Overdraft Loan from Bank

64,500 56,500 60,000

46,000

42,600

68,300 2,81,000

63

The scheme of reconstruction, as approved by the competent authorities, was as under: 1) The issued ordinary shares were reduced to 5 paise each paid up, the unpaid value of the share was subsequently called by the company and paid by all the shareholders. 2) The balance of unissued capital was allotted to the Bank in part discharge of the loan; the balance due was paid in cash. 3) The authorized capital of the company is to be increased by another 50,000 shares and these are to be issued to the existing shareholders as rights issue. The amount due from the shareholders was realized. 4) Trade creditors to give up 25% of their claims and the balance due to them to be converted into 12% secured Debentures of Rs. 100 each. 5) Interest of Rs. 6,500 on overdraft to be waived by the Bank and the balance Overdraft to be paid off. 6) All the amounts available, including share premium, to be utilized to write off losses, goodwill and value of shares in associated companies. Show the journal entries to record the above and also draw the Balance Sheet of the company after the scheme is fully implemented. All working should form part of your answer. Problem No.09: D Ltd decided with the approval of court and sanction of the parties concerned upon a scheme of reconstruction to the balance as on the date is as under:Liabilities 12% Preference Share (Rs. 10 each) Equity Share (Rs. 10 each) 10% mortgage Debentures Interest accrued 10% convertible Debentures Interest Loans from Bank Capital Reserve Creditors Rs. Assets 4,20,000 Land, Building& Machinery 8,20,000 Stock 3,15,000 Debtors 5,950 Investment 63,800 Goodwill 15,050 Discount on Debentures 1,00,000 P&L A/c 68,000 94,000 24,76,00 0 Rs. 9,45,000 3,20,000 1,80,000 3,98,000 3,80,000 31,000 2,22,000 24,76,000

Adjustments: The material points in the scheme are: 1) Each convertible debenture is to be exchanged for Rs. 35 of non-convertible, 10% debenture Rs. 50 of 13% preference share and Rs. 15 equity shares. 2) Each existing 12% preference share is to be written down from Rs.10 to Rs. 8 of which Rs. 5 will be represented by 13% preference share and Rs. 3 by equity share.

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3) Each existing equity share will be written down to Rs. 3 fully paid up. 4) Both classes of share will be subdivided into share of Rs. 1 each 5) St.financial corporation has agreed to apply for Rs. 3,75,000 of equity shares and they will pay cash on application. 6) The reduction of capital and reserve are to be applied in eliminating ficticious asset and the balance to be used in writing down- land ,building, machinery and investment in ratio of 3:1.Pass Journal entries and Prepare Balance Sheet SYMBIOSIS LAW SCHOOL Prof. Swati Magikar External Reconstruction Problem No.1: Following was the Balance Sheet of Dinesh Ltd. as on 31st March 2012 Liabilities Share Capital 2,500, Equity shares of Rs. 50/each Profit prior to incorporation Loans Creditors Assets Land & Building 1,25,000 Plant & Machinery Rs. Rs. 65,000 42,500

500 Furniture 2,500 33,250 Patents 10,000 20,000 Stock 15,000 Debtors 12,000 Cash in hand 1,750 Profit & Loss A/c 30,000 1,78,750 1,78,750 Dinesh Ltd. adopted a scheme of reconstruction as working capital was badly needed. The new company Lotus Ltd. was formed to take over the business of Dinesh Ltd. on the following terms: 1) Out of creditors Rs. 500 were preferential creditors and they were paid fully by the new company. The remaining creditors were given the following option either. a) 50% of their claim will be paid in cash immediately as full settlement or b) 5% debenture in the new company will be issued to them equivalent to their claim in the old company. Half of the creditors opted for cash payment. 2) One equity share of Rs. 100/- each, Rs. 75/- paid up will be issued for every four shares of the old company. 3) Lotus Ltd. made a final call of Rs. 25/- on equity shares which was fully received. 4) The amount made available under the reconstruction scheme was to be utilized to write off Stock by 25%, Furniture by 50% and Plant & Machinery by 10%. The new company write off patents completely. Debtors were valued at Rs. 10,000 keeping Rs. 2,000 as a Reserve for doubtful debts. The value of Land & Building being adjusted to the extent required. 5) Formation expenses of the new company were Rs. 6,250. Pass the necessary Journal Entries in the books of Dinesh Ltd, and Lotus Ltd, also show the calculation of Purchase Consideration.

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Problem No. 2: The following was the Balance Sheet of Jitendra Ltd. as on 31-3-2012 Liabilities Share Capital 10,000 Equity Shares of Rs. 20 each 6,000, 8% Cumulative Preference Shares of Rs. 20 each fully paid Debentures Sundry Creditors Rs. Goodwill 2,00,00 Building 0 1,20,00 Machinery 0 80,000 Stock 20,000 Sundry Debtors Cash Preliminary Exp. P&L Account 4,20,00 0 Assets Rs. 60,000 80,000 1,30,000 50,000 30,000 10,000 6,000 54,000 4,20,000

The scheme of reconstruction was agreed as follows: 1) A new company to be formed Virendra Ltd with an authorized capital of Rs. 6,00,000 in all In Equity Shares of Rs. 10 each. 2) Two equity shares of Rs. 5 paid-up in the new company issued for every one equity share in the old company. 3) Four equity shares as Rs. 5 paid up in the new company to be issued for every preference share in the old company. 4) Debentureholders to be allotted 8,000 equity shares fully paid up in the new company. 5) Sundry creditors to be taken over by the new company. 6) The remaining equity shares to be issued to the public and duly collected in full. 7) The assets of the old company to be taken over subject to writing down the value of machinery by Rs. 10,000. Show the Ledger Accounts in the books of old company and the opening journal entries in the books of new company. Problem No. 3: The shareholders and creditors of Small Ltd. decided to reconstruct the company on account of its heavy losses. The financial position of the company as on 31st March 2012 was as under: Liabilities Rs. Assets Rs.

66

Land & Building 2,00,000 6,00,000 Plant & Machinery 1,00,000 52,000 Stock in Trade 72,000 20,000 Furniture 35,000 Sundry Debtors 97,000 Cash at Bank 28,000 Profit & Loss Account 1,40,000 6,72,000 6,72,000 The Scheme of reconstruction includes the following terms: a) The new company called Big. Ltd. was to be formed with a capital of Rs. 10,00,000 divided into 10,000 shares of Rs. 100 each. b) The new company will take over only the assets of the old company. c) The new company will issue 8,000 shares of Rs. 100 each credited at Rs. 50 paid up and pay Rs. 75,000 in cash. d) Cost of liquidation amounted to Rs. 3,000 to be paid by the old company. e) The new company decided to write off profit & loss a/c completely and plant & machinery by Rs. 10,000 and land & building as required. f) The new company made a call of Rs. 25 per share on the partly paid shares and it was received in full. You are required to prepare necessary ledger accounts in the books of Small Co. Ltd. and Journal Entries in the books of Big Co.Ltd. Problem No.4: On 1st April 2012, the Balance Sheet of Manish Ltd. was as follows: Liabilities 5,000, 6% Preference shares of Rs.10 each 15,000 Equity shares of Rs. 10 each 5% Debentures Creditors Rs. Assets 50,000 Goodwill 1,50,000 Sundry Assets Rs. 55,000 1,64,500

Share Capital 6,000 Equity Shares of Rs. 100 each Sundry Creditors Bank Loan

30,000 Cash 500 20,000 Profit and Loss A/c 30,000 2,50,000 2,50,000 A scheme of reconstruction was agreed upon as follows: i) A new company to be formed called Niranjay Ltd. with authorized capital of 32,500 equity shares of Rs.10 each. ii) One equity share of Rs. 5 paid in the new company to be issued for each equity share in the old company. iii) Two equity shares of Rs. 5 paid in the new company to be issued for each preference share in the old company. iv) Debentureholder to receive 3,000 equity shares in the new company fully paid. v) Creditors to be taken over by the new company. vi) The remaining un issued shares to be taken up and paid for in full by the directors. vii)The new company revalued Sundry Assets at Rs. 1,29,500 and adjusting Goodwill as required. 67

Prepare Realisation A/c, Equity Shareholders A/c, Preference Shareholders A/c, Niranjay Ltd. A/c and Cash A/c in the books of Manish Ltd. prepare Opening Balance Sheet of Niranjay Ltd.

Absorption Problem No.1: Following was the Balance Sheet of Apple Ltd. as on 31-3-2012

2,00,000 64,000 60,000 42,400 70,000 4,36,400 Apple Ltd.was absorbed by Banana Ltd. on the following terms: 1. Apple Ltd. agreed to write-off Advertising Suspense A/c against its own reserves. 2. Banana Ltd. revalued the assets of Apple Ltd. as under: Land and Building Rs. 1,50,000, Plant and Machinery Rs. 1,04,000, Stock Rs. 1,20,000 and Debtors at Book Value. 3. Banana Ltd. took over the assets and liabilities of Apple Ltd. and agreed to discharge the purchase consideration into 2,600share of Rs. 100 each at Rs. 110 per share and balance in cash. 4. Apple Ltd. paid its liquidation expenses of Rs. 4,000.

Liabilities Share Capital: 2,000 shares of Rs. 100 each General Reserve Profit & Loss A/c Bills Payable Creditors

Rs.

Assets Land & Buildings Plant & Machinery Stock Debtors Cash in Hand Advertising Suspenses A/c

Rs. 1,40,000 1,10,000 98,000 42,000 14,400 32,000 4,36,400

Prepare Realisation A/c, Banana Ltd. A/c, Cash A/c and Shareholders A/c in the books of Apple Ltd. and opening journal entries in the books of Banana Ltd. Problem No.2: Following is the Balance Sheet of Minal Ltd. as on 31-3-2012 Liabilities Share Capital: 6,000 Shares of Rs. 100 each 6% Debentures Creditors Outstanding Expenses Rs. 6,00,000 20,000 60,000 4,000 Assets Land & Building Plant & Machinery Vehicles Stock Debtors Cash Underwriting Commission Rs. 2,10,000 1,60,000 1,00,000 80,000 60,000 64,000 10,000 68

6,84,000 6,84,000 Nikita Ltd. absorbed Minal Ltd. on the following terms: 1. Nikita Ltd. acquired only the assets of Minal Ltd. except cash balance. 2. The Purchase Consideration was fixed as 5 equity shares of Rs.100 each, at Rs. 140 per share for 7 equity shares of Minal Ltd. and 700, 6% preference shares of Rs. 100 each. 3. Realisation expenses amounted to Rs. 12,000 and were paid by Minal Ltd. 4. The Liquidator of Minal Ltd. transferred the preference shares, to creditors in full satisfaction of their claims. 5. Debentures were paid at a premium of 10%. 6. Outstanding expenses were paid in full and in addition Minal Ltd. had to pay Rs. 4,200 as compensation to the worker. 7. Nikita Ltd. valued Land & Building Plant & Machinery at 10% appreciation, Vehicles at 10%depreciation stock was reduced to its market value which was Rs. 64,000. Debtors were taken subject to 5% Reserve for Doubtful Debts. Prepare the necessary ledger accounts in the books of Minal Ltd. Pass the opening entries in the books of Nikita Ltd. Problem No.3: Efficient Ltd. agreed to acquire the business of Popular Ltd. as on 31st March 2012. The Balance Sheet of Popular Ltd. on that date was as follows: Liabilities Rs. Assets Rs. Share Capital: Fixed Assets: Authorised 60,000 Equity 6,00,000 Goodwill 1,00,000 shares of Rs. 10/- each. Issued, Subscribed & paid up 6,00,000 Land & Buildings 3,00,000 60,000 Equity shares of Rs. 10 each Reserves & Surplus Plant & Machinery 3,40,000 General Reserve 1,70,000 Current Assets Profit & Loss A/c 1,10,000 Loan & Advances Secured Loans 6% Debentures 1,00,000 Stock in Trade 1,68,000 Current Liabilities & Sundry Debtors 36,000 Provisions Sundry Creditors 20,000 Cash in hand 6,000 Cash at Bank 50,000 10,00,000 10,00,000 The Consideration Payable by the Efficient Ltd. was agreed as follows: a) A Cash Payment of Rs. 2.50 per share in the Popular Ltd. b) The Issue of 90,000 Rs. 10/- equity shares in the Efficient Ltd. having as agreed value of Rs.15/- per share. c) The issue of such an amount of fully paid 8% debentures of the Efficient Ltd. at 96% as is sufficient to discharge the 6% debentures of Popular Ltd. at a premium of 20%. While computing the agreed consideration, the directors of the Efficient Ltd. valued Land & Buildings at Rs. 6,00,000, Plant & Machinery at Rs. 6,00,000, Stock in trade at Rs.

69

1,42,000 and debtors at their face value subject to an allowance of 5% to cover doubtful debts. The cost of liquidation of the Popular Ltd. came to Rs. 5,000/-. Show the necessary Ledger A/cs in the books of the Popular Ltd. & draft journal entries required in the books of the Efficient Ltd. Show details of Purchase Consideration.

Problem No.4: The following is the Balance Sheet of X Co.Ltd. as on 31st March 2012. Liabilities Share Capital: 2,000 equity shares of Rs. 100/each. Profit and Loss A/c 5% Debentures Creditors Rs. Assets Buildings 2,00,000 Machinery Rs. 70,000 80,000

60,000 Stock 50,000 50,000 Debtors 90,000 20,000 Investments 30,000 Cash 10,000 3,30,000 3,30,000 X. Co.Ltd. was absorbed by Y Co.Ltd. on the above date on the following terms and conditions. Y Co. Ltd. to i) Assume all liabilities and acquire all assets except investments which were sold by X Co.Ltd. for Rs. 25,000. ii) Discharge the 5% debentures of X Co. Ltd. at a discount of 10% issuing 6% Debentures of Y Co. Ltd. iii) Issue two shares of Rs. 50 each in Y Co. Ltd. at Rs. 60 per share and also pay Rs. 5 in cash to the shareholders in X Co. in exchange for one share in X Co. Ltd. iv) Cost of liquidation of Rs. 2,000 is to be borne by X Co. Ltd. with the consent of shareholders of X Co. Ltd. the liquidator sold one fourth of the shares received from Y Co.Ltd. at a market price of Rs. 62 per share. You are requested to show: The working of purchase consideration. Ledger accounts in the books of X Co. Ltd. so as to record the above transactions. Problem No. 5: Following is the Balance Sheet of Seema Ltd. as on 31stMarch, 2012 Liabilities Rs. Assets 4000 Eq. Shares of Rs. 100 4,00,000 Buildings each General Reserve 50,000 Plant & Machinery Profit & Loss A/c 5,600 Investments 5% Debentures 2,50,000 Debtors Creditors 1,28,700 Stock

Rs. 1,70,000 4,00,000 50,600 1,40,500 80,700 70

24,000 Cash at Bank 16,500 8,58,300 8,58,300 Seema Ltd. was absorbed by Hema Ltd. on the above date, on the following terms and conditions. Hema Ltd to: a) Assume all liabilities and to acquire all assets except investments which were sold by Seema Ltd. for Rs. 45,500. b) Discharge the debentures at a discount of 5% by issue of 7% debentures in Hema Ltd. c) Issue two shares of Rs. 60 each in Hema Ltd. at Rs. 65 per share and also pay Rs. 2 in cash to the shareholders of Seema Ltd. in exchange for one share in Seema Ltd. d) Pay the cost of absorption for Rs. 1,500. With the consent of shareholders, the liquidator of Seema Ltd. sold off, in open market, one-fourth of the shares received from Hema Ltd. at the average rate of Rs. 63 per share.

Dividend Equalisation Fund

Problem No.6: The following is the Balance Sheet of Moon Ltd. as on 31stMarch, 2012: Liabilities Share Capital (3,000 shares of Rs. 100 each) 6% Debentures Creditors Outstanding Expenses Assets Land and Buildings 3,00,000 Plant and Machinery Rs. Rs. 1,05,000 80,000

10,000 Vehicles 50,000 30,000 Stock 40,000 2,000 Sundry Debtors 30,000 Cash 32,000 Underwriting Commission 5,000 3,42,000 3,42,000 Sun Ltd. absorbed Moon Ltd. on the following terms: 1. Sun Ltd. acquired only Assets of Moon Ltd. except cash. 2. The purchase consideration was fixed as five equity shares of Rs. 100 each at Rs. 120 each for six equity shares of Moon Ltd. and 350 6% preference shares of Rs. 100 each. 3. Realisation expenses amounted to Rs. 6,000 which were paid by Moon Ltd. 4. The liquidator of Moon Ltd. transferred the preference shares to creditors in full satisfaction of their claims. 5. Outstanding expenses were paid in full and in addition Moon Ltd. had to pay Rs. 2,100 on compensation to the workers. 6. Debentures were paid at a premium of 10%. 7. Sun Ltd. valued Land and Buildings and Plant and Machinery at 10% appreciation, vehicles at 10% depreciation, stock was reduced to market value which was Rs. 32,000 and debtors were taken subject to 5% reserve for doubtful debts. Prepare: a) Realisation Account b) Shareholders Account c) Cash Account 71

in the books of Moon Ltd. and Journal Entries in the books of Sun Ltd. Problem No.7: The following is the Balance Sheet of X Ltd. as on 31stMarch, 2012 Liabilities Share capital 20,000 Equity Shares of Rs. 100 each fully paid Reserve Fund Sinking Fund Staff Provident Fund Sundry Creditors A Debentures B Debentures Rs. 20,00,000 5,00,000 1,00,000 3,00,000 1,40,000 4,00,000 10,00,000 Assets Goodwill Land and Buildings Plant and Machinery Patent Rights Stock Sundry Debtors Sinking Fund Investments Cash at Bank Rs. 4,00,000 15,60,000 14,00,000 3,50,000 2,00,000 4,00,000

1,00,000 30,000 44,40,000 44,40,000 Y Ltd. absorbed X Ltd. on the date of its above Balance Sheet, the consideration being: i) The taking over of the liabilities and all assets. ii) The payment of cost of absorption (as part of purchase consideration) Rs. 8,000. iii)The repayment of the B Debentures at a premium of 5% in cash. iv)The discharge of A Debentures at a premium of 10% by the issue of 6% Debentures in Y Ltd. at par. v) Payment of Rs.15 per share in cash. vi) Allotment of one 7% preference share of Rs. 100 each fully paid and five equity shares of Rs.100 each fully paid for every four equity shares in X Ltd. vii) The actual cost of absorption came to Rs. 10,000. Prepare Realisation A/c, Equity Shareholders A/c, Cash A/c, in the books of X Ltd. and give journal entries in the books of Y Ltd.

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Amalgamation of Co.s Problem No. 1: Following are the Balance Sheets of Anita Ltd. & Babita Ltd. as on 31stMarch, 2012 Balance Sheet of Anita Ltd. Liabilities Rs. Assets Rs. Share Capital: Land and Building 1,00,000 3,000 Equity Shares of Rs. 100 each 3,00,000 Plant and Machinery 1,50,000 500, 6% Preference Shares of Rs. 50,000 Furniture 10,000 100 each Contingency Reserve 10,000 Stock 35,000 Creditors 35,000 Debtors 45,000 Unclaimed Dividend 2,500 Cash at Bank 7,500 Contingent Liability for Bill Preliminary Expenses 10,000 Discounted Rs. 2,000 Discount on issue of 2,500 Shares Profit and Loss A/c 37,500 3,97,500 3,97,500 Balance Sheet of Babita Ltd. Liabilities Rs. Assets Rs. Share Capital: Freehold Premises 2,00,000 3,500 Equity Shares of Rs. 100 each 3,50,000 Plant and Machinery 1,05,000 General Reserve 9,000 Stock 14,500 Profit & Loss A/c 20,000 Debtors 95,000 Workmens Compensation Fund 5,000 Cash at Bank 5,500 Creditors 36,000 4,20,000 4,20,000 st Anita Ltd. and Babita Ltd. amalgamated as on 31 March, 2012 and a new Company Sunita Ltd. was formed with an Authorised Capital of 10,000 Equity Shares of Rs. 100 each. The amalgamation was agreed on the following conditions: 1. Sunita Ltd. took all assets of Anita Ltd. at book values and creditors of Anita Ltd. The Purchase consideration was discharged by issuing 1,500 Equity Shares of Rs. 100 each at Rs.120 per share and the balance in cash. 2. Sunita Ltd. took all assets of Babita Ltd. at book values except cash and also took the

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creditors. The purchase consideration was discharged by issuing 3,000 Equity Shares of Rs.100 each at Rs. 120 per share and the balance in cash. 3. Anita Ltd. paid its preference capital back with arrears of preference dividend for the last two years. 4. Liability for bills discounted was settled at Rs. 1,250. 5. Out of the unclaimed dividend Rs. 1,000 was paid to the rightful shareholders. The remaining unclaimed dividend was time barred and thus transferred to shareholders account. 6. Liability for Workmens Compensation of Babita Ltd. amounted to Rs. 3,750. 7. The cost of liquidation of Anita Ltd. was Rs. 2,500 and that of Babita Ltd. was Rs. 3,000, which was paid by the respective Companies. You are required to prepare: Realisation Account, Sunita Ltd. A/c, Cash Account & Shareholders A/c in the books of Anita Ltd. and Babita Ltd. Opening entries in the books of Sunita Ltd. Problem No.2: The Balance Sheets of Pune and Indapur Ltd. as on 31-3-2012 were as follows: Balance Sheet of Pune Ltd. As on 31-3-2012 Liabilities Rs. Assets Rs. Share Capital: Goodwill 22,500 675 Equity Shares of Rs. 100 67,500 Land & Building 32,500 each General Reserve 3,000 Plant & Machinery 12,500 Dividend Equilisation Reserve 2,500 Stock 20,000 Debtors 10,500 10,000 Less: R.D.D. 500 Profit and Loss A/c 4,500 Cash-in-hand 2,500 Creditors 20,000 Cash at Bank 10,000 Outstanding Exp. 1,250 Provision for Taxation 11,250 1,10,000 1,10,000 Balance Sheet of Indapur Ltd. As on 31-03-2012 Liabilities Rs. Assets Share Capital: Land and Building 500 Equity Shares of Rs. 100 50,000 Plant and Machinery each Bank Overdraft 5,000 Furniture and Fittings Creditors 17,500 Vehicles Stock Debtors

Rs. 20,000 20,000 3,750 11,250 12,500

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1,250 1,250 72,500 72,500 The companies amalgamated as on date of above Balance Sheet and new Company Satara Ltd. was formed to carry on the business of Pune Ltd. and Indapur Ltd. on the following terms. 1. Satara Ltd. took all Assets of Pune Ltd. except debtors, cash and bank balances at 10% depreciation and agreed to pay Rs. 25,000 for goodwill. It also took over creditors and outstanding expenses. 2. Tax liability for 1997 was realised at Rs. 9,500. 3. Satara Ltd. took all assets of Indapur Ltd. except Cash and Debtors, Land and Building and Stock were taken at 20% appreciation and other assets were taken at book value. Satara Ltd. also agreed to take over the creditors of Indapur Ltd. 4. Indapur Ltd. paid bank overdraft in full. 5. The purchase consideration was satisfied as follows: Cash of Rs. 5,000 to Pune Ltd. and Rs. 3,750 to Indapur Ltd. The Balance of purchase consideration was paid in the Equity Shares of Satara Ltd. of Rs. 100 each. 6. Debtors of Pune Ltd. and Indapur Ltd. realised Rs. 9,500 and Rs. 3,000 respectively. You are required to prepare: Realisation Account, Cash Account, Satara Ltd. Account and Equity Shareholders Account in the books of Pune Ltd. and Indapur Ltd. Problem No.3: Following are the Balance Sheets of X Ltd. and Y Ltd. as on 31-03-2012 Balance Sheet of X Ltd Liabilities Rs. Assets 6,000 Equity shares of Rs. 100 each 6,00,000 Land and buildings 1,000 6% Preference Shares of Rs.100 1,00,000 Plant and Machinery each Contingency Reserve 20,000 Furniture Creditors 70,000 Stock Unclaimed Dividend 5,000 Debtors Contingent Liability for Bills discounted Cash at Bank Rs. 4,000 Preliminary Expenses Discount on issue of shares Profit & Loss A/c 7,95,000 Balance Sheet of Y Ltd Liabilities Rs. Assets 7,000 Equity Shares of Rs. 100 7,00,000 Freehold Premises

3,500 Less: R.D.D. 1,000 Cash-in-hand Profit and Loss A/c

2,500

Rs. 2,00,000 3,00,000 20,000 70,000 90,000 15,000 20,000 5,000 75,000 7,95,000

Rs. 4,00,000

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18,000 Plant & Machinery 2,10,000 40,000 Stock 29,000 10,000 Debtors 1,90,000 72,000 Cash at Bank 11,000 8,40,000 8,40,000 X Ltd. and Y Ltd. amalgamated as on 31-12-2001 and a new company Z Ltd.was formed with an authorized capital of 20,000 equity shares of Rs. 100 each. The amalgamation was agreed on the following conditions: 1. Z Ltd. took all assets of X Ltd. at book values and creditors of X Ltd. The purchase consideration was discharged by issuing 3,000 equity shares of Rs. 100 each at Rs. 120 per share and the balance in cash. 2. Z Ltd., took all assets of Y Ltd. at book values except cash and also took the creditors. The purchase consideration was discharged by issuing 6,000 equity shares of Rs. 100 each at Rs.120 per share and the balance in cash. 3. X Ltd. paid its preference capital back with arrears of preference dividend for the last two years. 4. Liability for bills discounted was settled at Rs. 2,500/-. 5. Out of the unclaimed dividend Rs. 2,000 was paid to the rightful shareholders. The remaining unclaimed dividend was time barred and transferred to shareholders account. 6. Liability for workmens compensation of Y Ltd. amounted to Rs. 7,500/-. 7. The cost of liquidation of X Ltd was Rs. 5,000 and that of Y Ltd. was Rs. 6,000which was paid by the respective companies. You are required to prepare: a) Necessary accounts in the books of X Ltd. b) Opening entries in the books of Z Ltd.

each General Reserve Profit & Loss A/c Workmens Compensation Fund Creditors

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Symbiosis Law School Prof. Swati Magikar

Liquidation of a Company Problem No. 1: A company went into voluntary liquidation on 1.1.2013. The following balances were extracted: Liabiliies 24,000 Equity shares of Rs. 10 Debentures floating charge Bank overdraft Creditors Rs 2,40,000 1,50,000 54,000 60,000 Assets Machinery Leasehold property Stock Debtors Investment Cash P&L A/c Rs 90,000 1,20,000 3,000 1,50,000 18,000 3,000 1,20,000

5,04,000 5,40,000 Assets are valued as under: Machinery Rs 18,000 Lease hold property Rs. 2,18,000 Investment Rs. 12,000 Stock Rs. 6,000 Debtors Rs. 1,40,000 Bank overdraft is secured against leasehold property & there were preferential creditors Rs. 3000 which were not included in creditors Rs. 60000. Prepare Statement of affairs.

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Problem No. 2: The following particulars were extracted from the books of G Ltd as on 31/03/2012 Liabilities Equity share capital 20,000 shares of Rs. 10 each Rs. 5 called up Calls in arrears Expected to be recovered Rs 5000 6% Preference shares 20,000 shares of Rs. 10 each 5% Debentures secured by 1st floating charge Bank overdraft Secured by second floating charge Fully secured creditors Secured on investments Partly secured creditors Secured on investments Rates & taxes payable Wages & salaries payable Bills Payable Creditors Contingent liability Likely to be paid Rs. 7,000 Assets Investments With fully secured creditors, estimated to realize Rs 35,000 Investments With partly secured creditors,estimated to realize Rs 10,000 Bills Receivable 40,000 25,000 12,000 Rs. 1,00,000

6,000 2,00,000 1,50,000 15,000 30,000 20,000 2,000 4,000 90,000 80,000 15,000

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Debtors-good Debtors Doubtful Estimated to produce 50% Debtors-bad Land & Building Estimated to produce Rs. 1,00,000 Stock Estimated to produce Rs. 40,000 Machinery Cash in hand Prepare statement of affairs.

13,000 7,000 6,000 1,40,000 60,000 2,000 200

79

Symbiosis Law School Prof. Swati Magikar

FINAL ACCOUNTS Problem No.1: Janata Co. Ltd. Nasik was incorporated with an authorized share capital of Rs. 10,00,000 divided into 10,000 equity shares of Rs. 100 each. The following is the trial balance as on 31-3-2012. Trial Balance as on 31-3-2012 Particulars Debit Rs. Credit Rs. Plant & Machinery 5,60,000 Land and Building 5,62,400 Share Capital called up 8,00,000 Loose Tools 38,000 Preliminary Expenses 22,000 Furniture 14,000 Cash in hand 8,400 10% Government Bonds (Face value Rs. 50,000) 49,000 Bills receivables 54,720 Goodwill 1,62,000 Motor Vehicles 11,000 Sundry Debtors 82,000 Interim Dividend paid 17,000 Calls in arrears 50,000 Purchases 9,37,000 Advertisement 10,000 Audit fees 4,160 Carriage Inwards 15,800 Wages 50,000 Discount allowed 5,800 Insurance 16,600 Stock (1.4.2011) 1,90,000 General Expenses 2,640

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Salaries Bad-debts Share Premium Sundry Creditors Bills Payable General reserve Sinking Fund Deposits Profit and Loss Appropriation A/c (1.4.2011) Share Transfer fees Reserve for bad and doubtful debts Sales Rent received 15% debentures Bank overdraft Discount

20,000 2,000 4,000 58,400 20,000 1,50,000 20,000 20,000 60,000 3,200 2,000 12,60,000 43,200 3,00,000 1,40,000 3,720 28,84,520

28,84,520

You are required to prepare Trading and Profit and Loss Account and Profit and Loss Appropriation Account for the year ended 31 stMarch, 2012 and Balance Sheet as on that date in the prescribed form under the Companies Act, 1956. The following adjustments have also to be made: 1. The stock on 31-3-2012 was valued at Rs. 1,90,000. 2. The provision for doubtful debts to be maintained at 5% on debtors. 3. Provide depreciation on plant and machinery at 5% and Furniture at 10% per annum. 4. Outstanding wages Rs. 4,000. 5. Insurance prepaid amounted to Rs. 1,500. 6. Interest on debentures and from Government Bonds is due and accrued for the year. 7. Provision for taxation to be made at 50% on net profit. 8. Write off 30% of the preliminary expenses. 9. The directors propose the following appropriations of profit : a) To declare a tax free dividend of 10% on paid up capital. b) To transfer a sum of Rs. 5,000 to General Reserve. Problem No. 2: M/s Sushmita Ltd. Bombay was incorporated with an Authorised Share Capital of Rs. 11,00,000 divided into 11,000 equity shares of Rs.100 each. Following is the trial balance as on 31stMarch, 2012. Particulars Plant & Machinery Land and Building Share Capital called up Loose Tools Debit Rs. 5,60,000 7,62,000 38,000 81 Credit Rs. 10,00,000

1,08,880 1,70,000 20,000 63,200 2,000 12,00,000 3,200 3,00,000 1,43,720 30,11,000 30,11,000 You are required to prepare Trading and Profit and Loss A/c for the year ending 31st March 2012 and balance Sheet as on that date according to the prescribed form in Companies Act, 1956. a) The stock on 31stMarch, 2012 was valued at Rs. 1,80,000. b) Create a Reserve for Doubtful Debts at 5% on Sundry Debtors. c) Provide Depreciation on Plant and machinery at 5% p.a.and Furniture at 10% p.a. d) Prepaid Insurance amounted to Rs. 1,600. e) Interest on Debentures and from Govt. Securities is due and accrued for the year. f) Provision for Taxation to be made at 50% of net profits. g) Write off 40% of the preliminary expenses. h) The directors propose the following appropriations. i) To declare 5% dividend on paid up equity shares. ii) To transfer Rs. 5,000 to Reserve Fund. Problem No. 3:

Preliminary Expenses Furniture Cash in hand 10% Government Bonds (Face value Rs.50,000) Bills receivables Goodwill Motor Vehicles Sundry Debtors Interim Dividend paid Calls in arrears Purchases Advertisement Audit fees Carriage Inwards Wages Discount allowed Insurance Stock (1.4.2011) General Expenses Salary Sundry Creditors Reserve Fund Deposits Profit and Loss Appropriation A/c (1.4.2012) Reserve for bad and doubtful debts Sales Rent received 8% Debentures Bank overdraft

22,000 14,000 38,880 49,000 54,720 63,000 10,000 83,000 16,000 50,000 9,37,000 10,000 4,160 15,800 51,800 4,000 16,600 1,90,000 640 20,000

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The following Trial balance for the year ended 31st Dec.1999, is extracted from the books of Bharat Industries Ltd, Pune, prepare Trading A/c, Profit & Loss A/c, Profit & Loss Appropriation A/c for the year ended on 31 st March 2012, and Balance Sheet as on that date. Particulars Plant & Machinery Land and Building Furniture & fittings Stock as on 1-04-2011 Salaries Printing & Stationery Purchases Carriage Inward Wages Calls in arrears Share capital (called up) General Reserve 7% Debentures Sundry Creditors Bank Overdraft Debentures Redemption fund Profit & Loss Apporpriation A/c Bills Payable Trade Investment Cash in hand Preliminary Expenses Debenture Interest Sales Directors fees Rent, Rates & Insurance Bad debts Audit fees General expenses Debtors Bills Receivable Debit Rs. 15,00,000 4,00,000 80,000 4,40,000 1,10,000 20,000 20,00,000 4,00,000 5,60,000 20,000 Credit Rs.

10,00,000 2,80,000 10,00,000 3,00,000 2,50,000 3,50,000 2,00,000 1,20,000 60,000 20,000 40,000 35,000

33,20,000 45,000 30,000 40,000 30,000 70,000 7,20,000 2,00,000 68,20,000 68,20,000 The following adjustments & information should be considered. a) Stock as on 31st March 2012 was Rs. 14,00,000. b) Salaries outstanding Rs. 10,000 and insurance prepaid Rs. 4,000. c) Further Bad-debts to be written off Rs. 20,000 and create a Reserve for doubtful debt at 5% on sundry debtors. d) Interest on Debentures for six months is outstanding. e) Depreciate plant & Machinery by 10% and Land & Building at 20% p.a. f) The authorized share capital of the company is Rs. 50,00,000 divided into 50,000 equity shares of Rs.100 each. g) Write off th of the preliminary

83

expenses. h) Provision for taxation to be made at Rs. 2,34,000 I) The Board of have decided to make the following appropriations. 1) Transfer Rs. 50,000 to General Reserve. (2) Transfer Rs. 1,00,000 to Debenture Redemption fund. (3) Equity Dividend at 10% should be provided for.

Problem No. 4: The Godavari Manufacturing Co. Ltd. was registered with a nominal Capital of Rs. 15,00,000 divided into equity shares of Rs. 100 each on 31 st March 2012 the following were the ledger balances in the companys books. Particulars Calls in Arrears Plant & Machinery Opening Stock Fixtures Debtors Building Purchases Interim dividend paid Rent General Expenses Debenture Interest Bills Payable General Reserve Profit & Loss Appropriation A/c Equity Share Capital Fully called up Preliminary Expenses Freight Goodwill Wages Cash in hand Cash at Bank Directors Fees Bad- debts Commission on Sales Salaries 6% Debentures Sales Debit Rs. 20,000 9,00,000 1,87,500 18,000 2,17,500 7,50,000 4,62,500 17,500 12,000 12,250 22,500 Credit Rs.

95,000 62,500 36,250 11,50,000 12,500 32,750 62,500 2,12,000 5,875 95,750 14,350 5,275 18,000 36,250 7,50,000 10,37,500

84

8,750 1,25,000 32,65,000 32,65,000 The Stock on 31st March 2012 was estimated at Rs. 2,52,500. The following adjustments have also to be made. 1) Depreciation on Plant & Machinery at 10% and on Fixtures at 5%. 2) Rs. 25,000 included in wages were utilized in adding the rooms to the building. 3) Final Dividend at 5% be provided on paid up Capital. 4) Preliminary expenses to be written off by 20%. 5) The provision for reserve for doubtful debt to be maintained at 5% on Sundry Debtors. 6) Rs. 25,000 were to be transferred to General Reserve. 7) A provision for Income Tax to the extent of Rs. 50,000 was to be made. You are required to prepare Trading and Profit and Loss Account and Profit and Loss Appropriation Account for the year ending 31st March 2012 and the Balance Sheet as on that date in the form prescribed under the Companies Act, 1956. Problem No. 5: The National product Ltd., was incorporated with an Authorised Capital of Rs. 1,50,00,000 divided into Equity Shares of Rs.10 each. On 31 st March 2012 the following were the Ledger balances in the books of the Company. Particulars Calls in arrears Plant and Machinery Stock Fixtures Debtors Building Purchases Interim dividend paid Rent, Rates and Taxes General Expenses Debenture Interest Paid Preliminary Expenses Freight Goodwill Wages Cash in hand Directors Fees Bad debts Salaries 4% Govt. Securities (31-3-2012) Debit Rs. 18,000 9,00,000 1,88,000 18,000 2,18,000 7,50,000 4,62,000 19,000 12,000 12,000 22,500 13,000 32,000 62,000 2,12,000 1,00,000 16,000 5,000 54,000 1,50,000 Credit Rs.

4% Govt. Securities R.D.D. Creditors

1,50,000

85

7,50,000 9,500 10,38,000 1,25,000 95,000 60,000 36,000 11,50,000 32,63,500 32,63,500 You are required to prepare Trading and Profit and Loss Appropriation A/c for the year ending 31-03-2012 and the Balance Sheet as on that date in the prescribed form under Indian Companys Act 1956, after considering the following: a) The stock on 31-03-2012 was valued at Rs. 2,50,000 (b) Rs. 25,000 out of the wages were utilized in adding the rooms to the Building. Salaries were out- standing to the extent of Rs. 2,000/-and prepaid Insurance included in General Expenses to the extent of Rs. 2,000/- and prepaid Insurance included in General Expenses to the extent of Rs. 400/-. (d) Interest on Debentures for six months was outstanding (e) Provide for Reserve for bad and doubtful debts at 5% on Sundry debtors. (f) Preliminary Expenses to be written off by 20% (g) Depreciate Plant and Machinery at 10% and on Fixture at 5% (h) Provision for Income Tax to the extent of Rs. 60,000/- was to be made. (i) Directors decided: - (i) To transfer Rs. 20,000 to General Reserve. (ii) To propose final dividend at 5% on paid up capital. Problem No. 6: The Alpha Ltd. Bombay has an Authorised Capital of Rs. 8,00,000 divided into 80,000 equity shares of Rs.10 each. Following is the trial balance as on 31-03-2012. Particulars Share Capital Land and Building Plant and Machinery Loose Tools Preliminary Expenses Furniture Cash in Hand 5% Government Bonds (tax free) (Face Value Rs. 40,000) Bills Receivable Goodwill Motor Vehicles Sundry Debtors Interim Dividend Repairs Debits (Rs.) 3,60,000 6,62,400 37,600 19,600 14,400 8,000 39,520 54,400 64,000 12,000 83,200 18,000 3,440 86 Credit (Rs.) 8,00,000

6% Debentures R.D.D. Sales Creditors Bills Payable General Reserve Profit and Loss appropriation A/c Capital Called up

Sundry Creditors Reserve Fund Profit and Loss A/c (1.4.2011) Purchases and Returns Sales and Returns Advertisements Audit Fees Carriage Wages Insurance Stock (1.4.2011) General Expenses 6% Debentures Bank overdraft

1,22,400 60,000 35,200 9,60,000 28,000 10,160 4,000 14,800 92,800 19,600 1,90,400 17,200 27,13,520 4,00,000 44,720 27,13,520

Prepare: A) Profit and Loss Account. B) Profit and Loss Appropriation Account for the year ended 31st March1999 C) Balance Sheet as on that date in the Form prescribed under the Companies Act after considering the following adjustments: 1) Closing Stock as on 31-03-2012 Rs. 1,76,000. 2) Create Reserve for Bad Debts at 5% on Sundry Debtors. 3) Provide Depreciation: Plant and Machinery @ 5%, Furniture @ 7.5%, Loose Tools @ 15%, Motor Vehicle @20%. 4) Prepaid Insurance Rs. 1,600. 5) Reserve Fund to be increased by Rs. 10,000. 6) Wages outstanding Rs. 2,400. 7) Interest on Debentures and Government Bonds is due outstanding for the year. 8) Directors declared on 16th August 1998 an interim dividend for six months ending 30th Sept.2011 @3%. Problem No. 7: Following was the trial balance of Poona Electronics Ltd. as on 31sMarch 2012 Trial Balance Debit Balances Rs. Credit Balances Stock on 1.4.2012 20,000 5% Debentures Freehold Land 20,000 Sinking fund Plant & Machinery 25,000 General Reserve Sundry Debtors 12,000 Creditors Preliminary Exp. 3,000 Profit & Loss A/c Salaries 5,000 Sales Wages 12,000 Bills Payables Bad Debts 300 Share Capital (Shares of Rs. 10 each)

Rs. 20,000 10,000 4,000 15,000 5,400 94,000 4,900 74,000

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Interest on Debentures Insurance Power General Expenses Postage Repairs Travelling Expenses Purchases Directors Fees Cash in Hand Investments Building Goodwill Loose Tools Sinking Fund Investment

500 Sundry Receipts 1,700 Bank overdraft on hypothecation Of Plant & Machinery 2,500 1,500 100 420 250 40,700 2,000 1,600 25,000 40,000 20,000 4,100 10,000

2,300 15,570

2,47,670 2,47,670 st Prepare Trading & Profit & Loss Account for the year ended 31 March 2012 and Balance Sheet as on that date as required by the Indian Companies Act after considering the following adjustments. 1) The authorized capital of the Company is 20,000 shares of Rs.10 each out of which 7,500 shares were issued to the public. 2) Write off one third of the preliminary expenses. 3) Stock on 31-03-2012 was Rs. 30,000. 4) Salaries were outstanding to the extent of Rs. 400. 5) Prepaid insurance amounted to Rs. 200. 6) Provide 5% R.D.D. on debtors. 7) Provide Rs. 2,000 for taxation. 8) Make the following appropriation: a) Rs. 1,000 to Sinking Fund b) Rs. 1,500 to General Reserve. c) Directors declare 20% dividend on shares. 9) Depreciate Plant & Machinery at 10%. Problem No. 8: Khurana Enterprises Ltd. Nandurbar has on authorized and subscribed capital of Rs. 6,00,000 divided into 60,000 equity shares of Rs. 10 each. Following are the balances extracted from the books of the company as on 31stMarch, 2012. You are required to prepare from them. a) Trading Account b) Profit and Loss Account c) Profit and Loss Appropriation Account. d) Balance Sheet as on that date in the prescribed from under the companies Act, 1956.

88

Particulars Share Capital Land and Building Plant and Machinery Furniture Loose Tools Preliminary Expenses Calls in Arrears Cash in Hand 60,000 Equity shares in Sadhana Co. Ltd. of Rs. 10 each, Rs. 5 paid Bills Receivables Purchases and Returns Sales and Returns Sundry Debtors Interim Dividend General Repairs General Expenses Stock 1.4.11 Advertisement Audit Fees Goodwill Wages Carriage (Inward) Insurance Premium Reserve Fund Sundry Creditors 6% Debentures Profit and Loss A/c (on 1.4.2011) Dividend Received Government Bonds (31-3-2012) Deposits

Debit Rs. 1,80,000 4,58,000 18,500 35,000 15,000 10,000 12,000 30,000 50,400 10,00,000 17,200 84,000 15,000 3,900 18,500 1,75,000 10,500 3,000 58,000 87,800 10,600 7,400

Credit Rs. 6,00,000

20,000 11,50,000

60,000 1,00,000 3,42,000 26,000 1,800 10,000 23,09,800 10,000 23,09,800

Total Adjustments

1. Stock on 31-03-2012 was Rs. 2,25,000. 2. Prepaid Insurance Premium Rs. 1,400. 3. Interest on Debentures is due and outstanding for the year. 4. Create Reserve for and Bad Debts at 5% on Sundry Debtors. 5.Provide Depreciation. 6. Provision for Taxation is to be made to the extent of Rs. 5,000/-. 7. On 16thAugust, 2011 Directors declared an interim dividend for half year ending on 30th Sept. 2011 at 3% on paid up capital. 89

8. Directors decided to transfer Rs. 5,830 to Reserve Fund. Problem No. 9: The following trial balance for the ended 31stMarch, 1999 is extracted from the books of Ajay Industries Limited, Bombay, Prepare Trading Account, Profit and Loss Account and the Balance Sheet as at 31st March, 2012 Particulars Debit Rs. Credit Rs. Furniture and Fittings 8,000 Plant and Machinery 1,50,000 Land and Buildings 40,000 Stock as on 1-4-2011 44,000 Salaries 11,000 Printing and Stationery 2,000 Purchases 2,00,000 Carriage Inward 40,000 Wages 56,000 Share Capital (Paid up) 1,00,000 General Reserve 28,000 7% Debentures 1,00,000 Sundry Creditors 30,000 Bank Overdraft 25,000 Debenture Redemption Fund 35,000 Profit and Loss Appropriation A/c 20,000 Bills Payable 10,000 Trade Investments 6,000 Cash in Hand 2,000 Preliminary Expenses 4,000 Debentures Interest 3,500 Sales 3,32,000 Directors Fees 4,500 Rent Rates and Insurance 3,000 Bad Debts 4,000 Audit Fees 3,000 General Expenses 7,000 Debtors 72,000 Bills Receivable 20,000 Total Rs. 6,80,000 6,80,000 1. Stock on 31st March 2012 Rs. 1,40,000. 2. Salaries outstanding Rs. 1,000. 3. Insurance Premium prepaid Rs. 400. 4. Further bad Debts to be written off Rs. 2,000. 5. Create Reserve for Doubtful debts at 5% on sundry debtors. 6. Interest on Debentures for six months is outstanding. 7. Depreciate plant and machinery by 8% and Building at 20%.

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8. The authorized capital of the company is Rs. 5,00,000 divided into 50,000 Equity Shares of Rs.10 each. 9. The Board of Directors have decided to make the following appropriations. i) Transfer Rs. 10,000 to Debenture Redemption Fund. ii) Transfer Rs. 5,000 to General Reserve. iii) Equity Dividend at 8% should be provided for.

91