Company Accounts (Basics): Issue of Shares and Debentures and Redemption Overview Questions

Question 1

Define authorised capital.

Accepted Answer

**Authorised capital** is the maximum share capital that a company is permitted to issue as per its Memorandum of Association.

Question 2

What is securities premium?

Accepted Answer

**Securities premium** is the excess of issue price of shares over their face value, credited to Securities Premium A/c.

Question 3

Define debenture.

Accepted Answer

**Debenture** is a written acknowledgement of debt by a company, creating a liability to pay interest and repay the principal as per terms.

Question 4

What is called-up capital?

Accepted Answer

**Called-up capital** is that part of subscribed capital which has been called/demanded by the company from shareholders.

Question 5

State one difference between shares and debentures.

Accepted Answer

**Shares** represent ownership capital, whereas **debentures** represent borrowed capital (debt).

Question 6

What is redemption of debentures?

Accepted Answer

**Redemption of debentures** means repayment of debenture amount by the company to debenture holders as per terms.

Question 7

Explain types of share capital (any three) with a short table.

Accepted Answer

Types of share capital (any three):

- **Authorised capital**: maximum capital permitted by Memorandum.
- **Issued capital**: portion of authorised capital offered for subscription.
- **Subscribed capital**: portion taken up by public.
- **Called-up capital**: portion demanded by company.
- **Paid-up capital**: portion actually received.

Table:

| Term | One-line meaning |
|---|---|
| Authorised | maximum allowed |
| Issued | offered |
| Subscribed | taken up |
| Called-up | demanded |
| Paid-up | received |

Thus, these terms explain the stages of raising share capital.

Question 8

Differentiate equity shares and preference shares (any three points) with a table.

Accepted Answer

### **Equity vs Preference Shares**

- Equity dividend is generally **variable**; preference dividend is **fixed**.
- Preference shareholders have **priority in repayment** at winding up.
- Equity shareholders usually have **voting rights**; preference voting rights are limited.

Table:

| Basis | Equity | Preference |
|---|---|---|
| Dividend | variable | fixed |
| Repayment priority | after preference | before equity |
| Voting | usually yes | usually restricted |

Hence, preference shares provide preferential rights while equity carries higher risk and higher potential return.

Question 9

Explain calls in arrears and calls in advance (any three points) with a mini table.

Accepted Answer

Calls relate to amounts due on shares.

- **Calls in arrears**: amount called but not received from shareholders; it is a **debit balance**.
- **Calls in advance**: amount received before it is called; treated as a **liability** until calls become due.
- Both affect paid-up capital and are shown separately in accounts.

Mini table:

| Item | Meaning | Shown as |
|---|---|---|
| Calls in arrears | unpaid called amount | debit balance / deduction |
| Calls in advance | received before due | liability |

Thus, arrears reduce receipts while advance creates obligation to adjust later.

Question 10

Differentiate shares and debentures (any three points) with a table.

Accepted Answer

### **Shares vs Debentures**

- Shares represent **ownership**; debentures represent **debt**.
- Return on shares is **dividend** (appropriation of profit); return on debentures is **interest** (expense).
- Debentures are **redeemable** as per terms; shares are generally not repayable (except special cases).

Table:

| Basis | Shares | Debentures |
|---|---|---|
| Nature | ownership | borrowed capital |
| Return | dividend | interest |
| Redemption | generally no | yes |

Thus, shareholders are owners, whereas debenture holders are creditors.

Question 11

Explain forfeiture of shares (any three points) and its basic accounting effect (overview) with a mini table.

Accepted Answer

Forfeiture of shares means cancellation of shares due to **non-payment** of allotment/call money.

Points (any three):
- it happens when a shareholder defaults on amount due on shares.
- the amount already received is credited to **Share Forfeiture A/c**.
- share capital relating to forfeited shares is reduced and unpaid amount is removed from shareholder’s account.

Mini table (effect):

| Account | Effect |
|---|---|
| Share Capital | decreases |
| Share Forfeiture | increases (credit) |
| Shareholders A/c | closed for forfeited shares |

Thus, forfeiture reduces share capital and records forfeited amount separately.

Question 12

Explain issue of shares at par and at premium (any three points) with a table.

Accepted Answer

Issue price may be equal to or more than face value.

- **At par**: issue price = face value (no premium).
- **At premium**: issue price > face value; excess is credited to **Securities Premium A/c**.
- Share capital is credited only with **face value**; premium is shown separately.

Table:

| Case | Issue price vs face value | Credit goes to |
|---|---|---|
| At par | equal | Share Capital |
| At premium | higher | Share Capital (face value) + Securities Premium |

Thus, premium strengthens capital base but is treated as a separate capital item.

Question 13

Explain issue of shares in stages (exam-style) with a flowchart and key entries overview.

Accepted Answer

### **Issue of Shares in Stages — Exam-Style**

Shares are commonly issued by collecting money in stages:
- **Application**
- **Allotment**
- **Calls** (first/final)

Key points:
- on receipt of application money, **Bank A/c** is debited.
- on allotment/calls becoming due, shareholders’ account is debited and **Share Capital** (and premium, if any) is credited.
- when money is received, Bank is debited and shareholders’ account is credited.

Flowchart:

```text
Application received → Allotment made → Calls due → Calls received → Paid-up capital determined
```

**Conclusion:** A clear stage-wise approach helps pass correct journal entries and avoids confusion in numericals.

Question 14

Explain securities premium: meaning and typical uses (exam-style) with a table.

Accepted Answer

### **Securities Premium — Exam-Style**

**Meaning:** Securities premium is the amount received by the company over and above the face value of shares.

Why it is special:
- It is treated as a **capital item** and its use is restricted (as per law).

Typical uses (broad overview):
- writing off preliminary/issue expenses (where permitted)
- writing off discount/loss on issue of securities (where permitted)
- issue of **bonus shares**
- other specific purposes allowed by statute

Table:

| Aspect | Securities Premium |
|---|---|
| Nature | capital reserve-like |
| When arises | shares issued above face value |
| Use | restricted to specified purposes |

**Conclusion:** Securities premium strengthens capital base but cannot be used freely like revenue profits.

Question 15

Explain issue and redemption of debentures (exam-style) with a comparison table and flow.

Accepted Answer

### **Debentures: Issue and Redemption — Exam-Style**

**Issue of debentures** means raising loan capital by creating a debenture liability. Debentures may be issued at **par/premium/discount**.

**Redemption of debentures** means repayment of the debenture amount to debenture holders at maturity or earlier as per terms.

Comparison table:

| Basis | Issue | Redemption |
|---|---|---|
| Meaning | creates liability | settles liability |
| Cash flow | inflow (generally) | outflow |
| Accounting focus | recognising debenture payable and discount/premium | closing debenture liability, payment/settlement |

Flow:

```text
Issue → Periodic interest (expense) → Redemption (repayment) → Liability closed
```

**Conclusion:** Debentures are borrowings; correct recording of issue terms and redemption ensures accurate liabilities and profit measurement.

Term	One-line meaning
Authorised	maximum allowed
Issued	offered
Subscribed	taken up
Called-up	demanded
Paid-up	received

Company Accounts (Basics): Issue of Shares and Debentures and Redemption Overview

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