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Chapter Analysis
Advanced75 pages • EnglishQuick Summary
This chapter focuses on the concept of share capital as it pertains to companies, examining the types of shares such as preference and equity shares, and the processes associated with the issue, forfeiture, and reissue of shares. It delves into the accounting treatments for shares issued at par, premium, or discount, while teaching how to manage various transactions like applications, allotments, and calls on shares. The legal and procedural framework as defined under the Companies Act, 2013 is also discussed, providing a comprehensive guide to share capital accounting.
Key Topics
- •Types of companies and share capital
- •Issue, forfeiture, and reissue of shares
- •Accounting treatments for share transactions
- •Legal framework under the Companies Act, 2013
- •Securities Premium and its uses
- •Calls in Arrears and Calls in Advance
- •Oversubscription and its management
- •Preference shares versus equity shares
Learning Objectives
- ✓Explain the concept of share capital and types of shares
- ✓Describe the process of issuing shares at par, premium, or discount
- ✓Understand accounting entries related to shares
- ✓Identify procedures for forfeiture and reissue of shares
- ✓Articulate the impact of the Companies Act on share transactions
- ✓Discuss financial strategies using securities premium
Questions in Chapter
What is public company?
Page 67
What is a private company.
Page 67
When can shares be Forfeited?
Page 67
What is meant by Calls in Arrears?
Page 67
What do you mean by a listed company?
Page 67
What are the uses of securities premium?
Page 67
What is meant by Calls in Advance?
Page 67
Write a brief note on “Minimum Subscription”.
Page 67
What is meant by the word ‘Company’? Describe its characteristics.
Page 68
Explain in brief the main categories in which the share capital of a company is divided.
Page 68
What do you mean by the term ‘share’? Discuss the type of shares, which can be issued under the Companies Act, 2013 as amended to date.
Page 68
Discuss the process for the allotment of shares of a company in case of over subscription.
Page 68
What is a ‘Preference Share’? Describe the different types of preference shares.
Page 68
Describe the provisions of law relating to ‘Calls in Arrears’ and ‘Calls in Advance’.
Page 68
Explain the terms ‘Over subscription’ and ‘Under subscription’. How are they dealt with in accounting records?
Page 68
Describe the purposes for which a company can use the amount of Securities Premium.
Page 68
State clearly the conditions under which a company can issue shares at a discount.
Page 68
Explain the term ‘Forfeiture of Shares’ and give the accounting treatment on forfeiture.
Page 68
Additional Practice Questions
What is the significance of a company having limited liability?
easyAnswer: Limited liability means that the shareholders' liability for company debts is limited to the nominal value of their shares. It protects personal assets of shareholders from company debts, encouraging entrepreneurs to invest without risking personal bankruptcy.
Outline the steps involved in the allotment process of shares.
mediumAnswer: The allotment of shares involves issuing a prospectus, receiving applications, allocating shares to applicants, transferring the application money to the share capital account, and sending allotment letters to successful applicants.
Why might a company choose to issue shares at a premium?
mediumAnswer: A company might issue shares at a premium to reflect a strong valuation and market demand, raising additional capital beyond the nominal value which can be used for business expansion or to strengthen the financial position of the company.
Discuss the concept of 'Calls in Arrears' and its impact on the balance sheet.
hardAnswer: 'Calls in Arrears' refers to the amount due on shares which has not been paid by the share subscribers. It impacts the balance sheet as a reduction in equity or as a separate current asset indicating receivables on unpaid calls.
Explain the accounting treatment for the reissue of forfeited shares.
hardAnswer: On reissuing forfeited shares, the Share Capital account is credited with the paid-up value of shares, the Share Forfeiture account is adjusted for gains or the loss on reissue compared to original forfeiture. Any balance is transferred to Capital Reserve if the reissue price is lower than the original.
How does the concept of 'Securities Premium' facilitate financing options for a company?
hardAnswer: Securities Premium provides a cushion for companies by generating additional funds without diluting equity. It can be used for legal premium-related expenses, issuing bonus shares, writing off preliminary expenses, and enhancing the company’s credit rating by showing stronger reserves.
What are the procedural requirements for increasing 'Authorised Share Capital'?
mediumAnswer: To increase 'Authorised Share Capital,' a company must amend its Memorandum of Association with shareholder approval through special resolution, pay fees to the registrar, and fulfill all legal and procedural mandates as per the Companies Act.
Discuss the roles and responsibilities of the Board of Directors in managing share capital.
mediumAnswer: The Board of Directors is responsible for making decisions regarding share issuances, deciding on calls, managing corporate finance, ensuring compliance with regulatory requirements, and protecting shareholder interests, thereby maintaining corporate governance standards.
Consider a situation where shares have been oversubscribed. How should a company deal with excess applications?
hardAnswer: In the case of oversubscription, the company may allocate shares pro-rata, reject some applications, or refund excess application money. The decision should align with company policy stated in the Articles or under regulatory guidelines.
How are 'Preference Shares' beneficial in terms of dividend distribution as compared to equity shares?
easyAnswer: Preference Shares provide preferential rights to dividends, meaning they are paid before equity shareholders. They often offer fixed dividends, providing predictable returns to investors and stabilizing a company’s dividend payout strategy.