Question 1

Premium on buy-back (if any) is generally adjusted against:

Accepted Answer

Premium paid on buy-back is written off using securities premium or reserves as per rules.

Question 2

External reconstruction generally involves:

Accepted Answer

External reconstruction creates a new entity to take over the business of old company.

Question 3

Underwriting is an arrangement in which the underwriter agrees to:

Accepted Answer

Underwriter guarantees subscription and takes up any shortfall.

Question 4

A debenture is:

Accepted Answer

Debenture represents borrowed funds; debentureholders are creditors.

Question 5

Fictitious assets like preliminary expenses are generally:

Accepted Answer

Fictitious assets are eliminated/write-off to clean up the balance sheet.

Question 6

A key difference between bonus issue and buy-back is:

Accepted Answer

Bonus capitalises reserves to increase share capital; buy-back reduces share capital by cancelling shares.

Question 7

Accrual basis means:

Accepted Answer

Accrual records income/expense in the period to which they relate.

Question 8

In amalgamation, the company which is taken over is called:

Accepted Answer

Transferor company is the vendor company that is amalgamated.

Question 9

Oversubscription occurs when:

Accepted Answer

Oversubscription means demand (applications) is more than supply (shares offered).

Question 10

Pre-acquisition profits of subsidiary are generally treated as:

Accepted Answer

Pre-acquisition profits are capital in nature at consolidation.

Question 11

The main purpose of internal reconstruction is to:

Accepted Answer

Internal reconstruction cleans the balance sheet by writing off losses and overvaluation.

Question 12

Which account is used to record sacrifices made by stakeholders in internal reconstruction?

Accepted Answer

Reconstruction/Capital Reduction Account records sacrifice and its utilisation for write-offs.

Question 13

Liquidation of a company means:

Accepted Answer

Liquidation (winding up) involves realisation of assets and settlement of claims.

Question 14

Sub-underwriting refers to:

Accepted Answer

Sub-underwriting spreads risk from an underwriter to a sub-underwriter.

Question 15

Reserves and surplus generally appear under:

Accepted Answer

Reserves and surplus are part of shareholders’ funds.

Question 16

Marked applications are those applications which:

Accepted Answer

Marked applications are attributable to a specific underwriter.

Question 17

Post-acquisition profits of subsidiary are:

Accepted Answer

Post-acquisition profits are revenue in nature and shared between parent and NCI.

Question 18

Capital Redemption Reserve (CRR) is created mainly to:

Accepted Answer

CRR transfers an amount from free reserves to maintain capital after buy-back.

Question 19

Underwriting commission is generally treated as:

Accepted Answer

Commission is part of the cost of raising capital and treated as issue expense.

Question 20

Which group is the residual claimant in liquidation (paid last)?

Accepted Answer

Equity shareholders receive residual surplus after all claims are settled.

Question 21

Define subsidiary company.

Accepted Answer

A subsidiary company is a company that is **controlled** by another company (the holding/parent).

Question 22

What are accounting standards?

Accepted Answer

Accounting standards are authoritative **principles and rules** that prescribe the recognition, measurement and disclosure of accounting transactions for preparing financial statements.

Question 23

Define internal reconstruction.

Accepted Answer

Internal reconstruction is reorganisation of a company’s capital and liabilities within the same company to eliminate losses and improve financial position without forming a new company.

Question 24

Define a share.

Accepted Answer

A share is the smallest unit of ownership in a company representing the shareholder’s interest in its capital.

Question 25

Define amalgamation.

Accepted Answer

Amalgamation is a business combination in which two or more companies are combined into one company by merger or absorption.

Question 26

Define a provision.

Accepted Answer

A provision is a present obligation arising from past events for which an outflow of resources is probable and the amount can be estimated reliably.

Question 27

What is Capital Redemption Reserve (CRR)?

Accepted Answer

Capital Redemption Reserve is a reserve created out of free reserves to maintain capital when share capital is reduced due to buy-back/redemption.

Question 28

State the formula for NCI percentage when parent holding percentage is given.

Accepted Answer

NCI% = **100% – Parent holding %**.

Question 29

What is pooling of interests method?

Accepted Answer

Pooling of interests method is an accounting method for amalgamation in the nature of merger where assets, liabilities and reserves are combined at book values.

Question 30

State one purpose of underwriting.

Accepted Answer

One purpose of underwriting is to protect the company against under-subscription and ensure minimum funds are raised.

Question 31

Differentiate between net payment method and net assets method of purchase consideration (PC).

Accepted Answer

Net payment vs net assets method:

| Basis | **Net payment method** | **Net assets method** |
|---|---|---|
| Base | total payment to **shareholders** | agreed assets – agreed liabilities |
| Includes | shares/cash/debentures issued as consideration | only net assets taken over |
| Focus | how PC is **settled** | value of business **acquired** |

Both arrive at PC, but from different angles.

Question 32

Differentiate between dividend and debenture interest (any three points).

Accepted Answer

Dividend vs debenture interest:

| Basis | **Dividend** | **Debenture interest** |
|---|---|---|
| Nature | **appropriation** of profit | **expense/charge** against profit |
| Payment | only if profits & declared | paid as per contract (fixed) |
| Recipient | shareholders (owners) | debentureholders (creditors) |

Hence, interest reduces profit before tax, while dividend is paid out of profit after tax/appropriation.

Question 33

Explain the basic structure of the company Balance Sheet (any three items under each side).

Accepted Answer

Balance Sheet structure:

**Equity & Liabilities** (any three):
- **Share capital**
- **Reserves & surplus**
- **Borrowings/Trade payables**

**Assets** (any three):
- **PPE (fixed assets)**
- **Inventories**
- **Trade receivables/Cash**

It shows financial position on a specific date.

Question 34

Compute NCI: Parent holds 80% in S Ltd. Subsidiary net assets at reporting date = ₹10,00,000.

Accepted Answer

Parent holding = 80% ⇒ **NCI% = 20%**.

NCI = 20% × 10,00,000 = **₹2,00,000**.

| Item | Amount |
|---|---:|
| Net assets (S) | 10,00,000 |
| NCI% | 20% |
| **NCI** | **2,00,000** |

Question 35

State any three conditions/features of amalgamation in the nature of merger (AS-14 basics).

Accepted Answer

Any three merger conditions/features (AS-14 basics):

- Substantially all **assets and liabilities** of transferor are taken over.
- Shareholders of transferor become shareholders of transferee (continuity of **ownership**).
- Business of transferor is intended to be **continued** by transferee.
- Consideration is discharged mainly by issue of **equity shares**.

Flow (write): Continuity of business + continuity of ownership → **Merger**

Question 36

Pass journal entries for receipt of share application money and transfer of application money to share capital (issue at par).

Accepted Answer

### (1) Receipt of application money
**Bank A/c Dr**  
  To **Share Application A/c**

(Being application money received.)

### (2) Transfer of application money on allotment
**Share Application A/c Dr**  
  To **Share Capital A/c**

(Being application money transferred to share capital for shares allotted.)

| Entry stage | **Keyword** |
|---|---|
| Receipt | **Bank** increases |
| Transfer | **Capital** recognised |

### Conclusion
These entries record collection and capitalisation of application money for allotted shares.

Question 37

Explain premium on redemption and show the issue entry when debentures are issued at par but redeemable at premium.

Accepted Answer

### Meaning
**Premium on redemption** is the extra amount payable over face value at the time of redemption.

### Issue entry (issued at par, redeemable at premium)
**Bank A/c Dr** (face value received)  
**Loss on Issue of Debentures A/c Dr** (premium payable)  
  To **Debentures A/c** (face value)  
  To **Premium on Redemption of Debentures A/c**

| Item | **Why** |
|---|---|
| Loss on issue | premium is a future obligation |
| Premium on redemption A/c | liability to be paid on redemption |

### Conclusion
Premium payable increases the cost of borrowing and is treated as part of loss on issue.

Question 38

Explain issue of debentures for consideration other than cash (vendor) with an example entry.

Accepted Answer

When a company purchases assets/business and pays the vendor using debentures, it is **issue for consideration other than cash**.

### Example entry
If Plant is purchased from Vendor for ₹5,00,000 settled by 10% debentures:

**Vendor A/c Dr**  
  To **10% Debentures A/c**

If issued at discount or premium, adjust through **Loss on Issue** or **Securities Premium** as per terms.

| Mode | Effect |
|---|---|
| Cash issue | Bank increases |
| Vendor issue | Vendor liability settles |

### Conclusion
Vendor issue is a non-cash settlement of purchase consideration using debenture liability.

Question 39

Prepare an exam-style working format for internal reconstruction showing sacrifice and utilisation (flow/table).

Accepted Answer

A clean exam approach is to show **(1) sacrifice** and **(2) utilisation**.

### (1) Sacrifice working
| Particulars | Old claim | New claim | **Sacrifice** |
|---|---:|---:|---:|
| Equity share capital | xxx | xxx | xxx |
| Creditors | xxx | xxx | xxx |
| **Total** |  |  | xxx |

### (2) Utilisation of Reconstruction A/c
| Utilisation | Amount |
|---|---:|
| Write off P&L (debit) | xxx |
| Write off goodwill/fictitious assets | xxx |
| Reduce asset values / provisions | xxx |

Flow (write): Sacrifice → Reconstruction A/c credit → Write-offs → Rewritten Balance Sheet

### Conclusion
This format ensures marks for working even if small arithmetic mistakes occur.

Question 40

Explain loss on issue of debentures and show a small working table for its computation.

Accepted Answer

**Loss on issue of debentures** represents the cost of raising debenture finance when debentures are issued at discount and/or redeemable at premium.

### Components
- **Discount on issue**
- **Premium on redemption** (if payable)

| Particulars | Amount |
|---|---:|
| Discount on issue | xxx |
| Premium on redemption | xxx |
| **Total loss on issue** | xxx |

### Conclusion
The loss is generally written off over the life of debentures as per policy/syllabus requirements.

Corporate Accounting — Question Paper

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