ACCOUNTS OF JOINT STOCK COMPANY –

ISSUE OF SHARES & DEBENTURES, & SCHEDULE VI

1. Define a company.
“A company is an artificial person created by law having a separate legal entity with a
perpetual succession and a common seal”.
2. Define share capital of a company.
Share capital means capital raised by the company by issuing shares to general public.
3. What are the different categories of share capital?
(i) Authorised / Registered/ Nominal capital
(ii) Issued capital
(iii) Subscribed capital
(iv) Called up capital
(v) Paid up capital.
4. Distinguish between Equity shares & Preference shares.
(i) Equity shareholders have voting rights but preference shareholders do not
have this right.
(ii) Dividend on equity shares fluctuates but preference shareholders get fixed
rate of dividend.
(iii) Equity shareholders do not have preference in getting dividend and
repayment of capitals at the time of winding up of the company but
preference shareholders have the preference.
5. What are the different categories of preference shares?
(i) Cumulative & Non-cumulative preference shares
(ii) Participating & Non- participating preference shares.
(iii) Convertible & Non-convertible preference shares
(iv) Redeemable & Irredeemable preference shares.
6. What is meant by minimum subscription?
Minimum subscription refers to the minimum amount of capital that should be
subscribed by the public before a company can proceed with allotment of shares. The
minimum subscription must be received with in 120 days from the date of opening
public issue.
7. What is a prospectus?
A prospectus is a document inviting the general public to subscribe to share capital of
a company. This document is issued by a public company.
A prospectus contains the following particulars:
(i) Name & full address of the company.
(ii) Composition of Board of Directors.
(iii) Capital of the company, number of shares and amount of each share.
(iv) Remuneration of managing director.
8. What do you mean by preliminary expenses?
Preliminary expenses are those expenses which are incurred during the formation of
the company. Preliminary expenses include the following:
(i) Printing cost of various documents.
(ii) Stamp duty & registration fees.
(iii) Underwriting commission.
(iv) Cost of preliminary books and common seal.

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 9. Explain the following:
a) Memorandum of Association:
It is a charter of the company that defines the company’s relation with the
outsiders and the business that company can undertake. It contains the following
clauses:
The name of the company
The place where the registered office is situated
The objectives of the company
A declaration that the liability of the members is limited
The amount of share capital and how it is divided.
b) Articles of association: Articles of association regulate the internal
administration of the company including the powers of directors, rights of
shareholders and holding of company’s meeting.
10. How are preliminary expenses dealt in the final account of a company?
Preliminary expenses may be written off against Security Premium Account. The
unwritten off portion of Preliminary expenses is shown on the assets side of the
balance sheet under the heading “Miscellaneous Expenditure”.
11. Explain the following:
(i) Issue of shares at par: Means the issue of shares at a price equal to the
face value of the share. For example, if shares of face value of Rs. 10 each
are issued to the public at Rs. 10 each, the issue is called issue of shares at
par.
(ii) Issue of shares at premium: Means issue of shares at a price higher than
the face value of the share. For example, face value of share Rs. 10 each
issued at Rs. 12, the issue is called issue of shares at premium.
(iii) Issue of shares at discount: Means the issue of shares at a price less than
the face value of share. For example, face value of share Rs. 10 each
issued at Rs. 8 each, the issue is called issue of shares at discount.

12. State the purposes for which Security Premium amount can be utilized.
Section 78 of the Act states that security premium amount can be utilized only for the
following purposes:
(i) Writing off preliminary expenses of the company.
(ii) Writing off discount allowed on issue of shares/ debentures.
(iii) Writing off the commission paid or discount allowed on issue of shares or
debentures of the company.
(iv) Providing premium payable on the redemption of any redeemable
preference shares.
(v) Issuing fully paid up bonus shares.
13. Who are entitled first for rights issue of shares made by a company?
Existing shareholders of the company are entitled first to have shares offered by the
company.

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 14. What conditions should be satisfied by a company to issue shares at discount?
Shares can be issued at discount only when the following conditions are satisfied
(Section 79):
(i) The shares must be of a class already issued.
(ii) The ordinary resolution to issue the shares at discount has been passed by
the company in the general meeting of the shareholders and sanction of the
Company Law Board has been obtained.
(iii) Discount must not exceed 10 % of the face value of the shares.
(iv) The issue must be made with in two months from date of receiving the
sanction of the Company Law Board.
15. ‘Issue of shares in consideration other than cash’-Write journal entry for this.
On the purchase of asset:
Sundry Assets A/c Debit
Vendor’s A/c. Credit
On issue of shares:
Vendor’s A/c Debit
Share Capital A/c. Credit
16. Explain the following terms:
(i) Calls -in -arrears: when the company calls the amount, some of the
shareholders may fail to pay the amount due from them on allotment or
call. The amount remaining unpaid on allotment or on call is called calls
-in –arrears. In other words, amount called up but not yet received is
called calls in arrears. Interest @ 5 % may be charged on calls in arrears.
(ii) Calls-in –advance: It is the money received by the company before the
calls actually due or asked from shareholders to pay. Calls in advance
account is shown separately on the liability side of the balance sheet under
head share capital. Interest @ 6 % is paid on such amount.
17. How are the following presented in the balance sheet?
(i) Calls in arrears: Calls in arrears will be shown in the balance sheet by
way of deduction from the called up capital.
(ii) Calls in advance: The credit balance of calls in advance account is shown
separately on the liabilities side of the balance sheet under the heading
share capital but it is not added to the amount of paid up capital.
(iii) Securities premium: The securities premium amount is considered as
capital receipts and should be shown on the liabilities side of company’s
balance sheet under the heading ‘Reserves & Surplus’.
18. Distinguish between calls in arrears & calls in advance.
Calls in arrears Calls in advance
a) It is the amount called up by the It is the amount not called up by the
company but not paid by company but paid by shareholders.
shareholders
b It is the amount due to the It is the amount due from the company
) company from the shareholder. to shareholders
c) It shows debit balance It shows credit balance.

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 19. Distinguish between over -subscription and under- subscription
Over-subscription Under-subscription
a) Number of shares applied is more Number of shares applied is less than
than the shares offered to the the shares offered to the public for
public for subscription subscription
b Problems of minimum Problems of minimum subscription
) subscription do not arise will arise
c) Company has to refund excess Such question does not arise.
application money

20. Write journal entries for the following:

Interest on calls in arrears Interest on calls in advance
Sundry Shareholders Account Dr. Interest on calls in advance Dr.
Interest on calls in arrears Account Cr. Sundry Shareholders Account Cr.
(Interest due) (Interest due)

Bank Account Dr. Sundry Shareholders Account Dr.

Sundry Shareholders Account Cr. Bank Account Cr.
(Receipt of interest) (Payment of interest)

Interest on calls in arrears Account Dr. Profit & Loss Account Dr.
Profit & Loss Account Cr. Interest on calls in advance Cr
(Transferring interest to PL Account) (Transferring interest to PL
Account).

21. “Excess application money exceeds even money due on allotment”- Write
journal entry for this.
Share Application Account Debit
Share Allotment Account Credit
Calls –in- advance Account Credit
22. Distinguish between Reserve Capital & Capital Reserve.
Reserve Capital Capital Reserve
a) It refers that portion of uncalled It refers to reserve that is created out of
share capital which shall not be profits.
called up, except in the event of
winding up.
b) It refers to the amount, which has It refers to the amount, which has
not been received. already been received.
c) It is not shown in the balance This amount is shown in the balance
sheet sheet under the heading ‘Reserves &
Surplus’.
d) This amount cannot be used up This amount can be used up during the
during the lifetime of the life time of the company
company.

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 23. What is forfeiture of shares?
When shareholders fail to pay money due on call or allotment or both, directors are
empowered to cancel such shares. This is called forfeiture of shares.
24. State the conditions for forfeiture of shares.
Shares can be forfeited if the following conditions are satisfied:
(i) The power to forfeit shares must be stated in the Articles of Association.
(ii) Company must give 14 days notice to the shareholder before forfeiture.

25. What is the maximum amount of discount a company can allow at the time of re-
issue of forfeited shares?
The maximum amount of discount at the time of re-issue should not exceed the
amount which has already been received from the shareholders at the time of forfeited
and credited to share forfeiture account.
26. How is over subscription dealt with?
Over subscription can be dealt in the following three ways:
(i) They can make a pro rata allotment.
(ii) They can make full allotment to some applicants and totally rejected the
others.
(iii) They can adopt combinations of the above two alternatives.
27. Can fully paid up shares be forfeited?
Fully paid up shares can be forfeited where the articles authorise.
28. Accounting entries on issue of shares:
Stages Journal Entry
Bank Account Debit
Share application Account Credit
(Application money received)

Application Stage Share application Account Debit

Share Capital Account. Credit
(Application money transferred to share capital)
Share Allotment Account Debit
Share Capital Account Credit
Allotment Stage (Allotment money due)
Bank Account Debit
Share Allotment Account Credit
(Allotment money received)
Share First/ Second/ Final Call Account Debit
Share Capital Account Credit
Call Stage (Call(s) money due)
Bank Account Debit
Share First/ Second/ Final Call Account Credit
(Share call(s) money received)

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 29. Accounting entries when shares are issued at premium.
Transactions Journal Entries
Bank Account Debit
Share application Account Credit
(Application money received)
If premium
amount due with Share application Account Debit
application money Share Capital Account. Credit
Securities premium Account Credit
(Application money transferred to share capital)
Share Allotment Account Debit
If premium Share Capital Account. Credit
amount due with Securities premium Account Credit
allotment money (Allotment money due)
Bank Account Debit
Share Allotment Account Credit
(Allotment money received)
Share First/ Second/ Final Call Account Debit
Share Capital Account Credit
If premium Securities premium Account Credit
amount due with (Call(s) money due)
call money Bank Account Debit
Share First/ Second/ Final Call Account Credit
(Share call money received)

30. Accounting entries when shares are issued at discount.

Share Allotment Account Debit
Generally the Discount on Shares Account Debit
amount of Share Capital Account Credit
discount on shares (Allotment money due)
is recorded at the Bank Account Debit
time of allotment Share Allotment Account Credit
(Allotment money received)

31. Accounting entries when shares are issued for a consideration other than cash.
On purchase of Assets Account Debit
assets Vendor Credit
Vendor Debit
On issue of shares Share Capital Account Credit

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 32. Calls in arrears & accounting entries.
Without opening calls in arrears By opening calls in arrears
Account Account
Share Allotment Account Dr. Share Allotment Account Dr.
Share Capital Account Cr. Share Capital Account Cr.
(Allotment money due) (Allotment money due)
Bank Account Dr. Bank Account Dr.
Share Allotment Account Cr. Calls in arrears Account Dr.
(Allotment money received) Share Allotment Account Cr.
(Allotment money received)

33. Accounting entries on forfeiture of shares

Forfeiture of shares issued at par
Share Capital Account Debit – ( No. of shares forfeited x called up value)
Share Allotment Account Credit (Amount due on allotment)
Share Call Account Credit (Amount due on call)
Share Forfeiture Account Credit (Amount received so for)
OR
Share Capital Account Debit – ( No. of shares forfeited x called up value)
Calls in arrears Account Credit (Amount due on allotment & Call)
Share Forfeiture Account Credit (Amount received so for)

Forfeiture of shares issued at premium

a) When shares are issued at premium, on which the premium
amount has not been paid:
Share Capital Account Debit – ( No. of shares forfeited x called up value)
Security premium Account Debit (Premium amount)
Share Allotment Account Credit (Amount due on allotment)
Share Call Account Credit (Amount due on call)
Share Forfeiture Account Credit (Amount received so for)
b) When shares are issued at premium, on which the premium
amount has been paid by the shareholder:

Share Capital Account Debit – (No. of shares forfeited x called up value)

Share Allotment Account Credit (Amount due on allotment)
Share Call Account Credit (Amount due on call)
Share Forfeiture Account Credit (Amount received so for)
Forfeiture of shares issued at discount
Share Capital Account Debit – (No. of shares forfeited x called up value)
Discount on issue of shares Account Credit (Amount of discount)
Share Allotment Account Credit (Amount due on allotment)
Share Call Account Credit (Amount due on call)
Share Forfeiture Account Credit (Amount received so for)

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 34. Accounting entries for re-issue of forfeited shares

a) If forfeited shares are re-issued at par:

Bank Account Debit
Share Capital Account Credit

b) If forfeited shares are re-issued at premium:

Bank Account Debit
Share Capital Account Credit
Securities Premium Account Credit
c) If forfeited shares are re-issued at discount:
Bank Account Debit
Forfeited Shares Account Debit
Share Capital Account Credit

35. How is the balance of the share forfeiture account treated?

When forfeited shares have been re-issued, the credit balance left in the Forfeited
Share Account is transferred to Capital Reserve Account. If all the forfeited shares are
not re-issued, only that proportion of share forfeiture account which belongs to the re-
issued shares should be transferred to the Capital Reserve Account.
36. Important points:
(i) Application money cannot be less than 25 % of the issue price of the
share.
(ii) Name of the call viz. first, second and final must be mentioned.
(iii) There must be of at least one month between the making of two calls.
(iv) One call shall not exceed 25 % of the issue price.
(v) At least 14 days notice must be given to share holders to pay the amount
of call.
37. What do you mean by Sweat Equity Shares?
Equity shares issued by the company to employees or directors at a discount or for
consideration other than cash for providing know how or value additions are called
sweat equity shares.

38. What do you mean by debenture?

Debenture is a written instrument acknowledging a debt and containing provisions as
regards the repayment of principal and the payment of interest at a fixed rate.
According to the Companies Act 1956, “ Debenture includes debenture stock,
bonds and any other securities of the company whether constituting charge on the
company’s assets or not.”
39. What are the different kinds of debentures?
• Registered Debentures
• Bearer Debentures
• Secured Debentures
• Unsecured or simple Debentures.

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 • Redeemable debentures
• Irredeemable Debentures
• Convertible Debentures
• Non-convertible Debentures.
40. What are the differences between share & debenture?
Share Debenture
a) A share is a part of the a) A debenture is a part of
capital of the company the loan of the company
b) Dividend on share is b) Debenture interest has
paid only when there to be paid irrespective
are profits in the of the result of the
company company
c) Normally, the amount c) Debentures are issued
of shares is not repaid for a definite period.
during the life time of Hence amount of
the company debenture is repaid after
d) Shares cannot be that period.
converted into d) Debentures can be
debentures converted into shares.

41. What are the differences between shareholder & debenture holder?
Shareholder Debenture holder
a) Shareholders are the a) Debenture holders are
owners of the company the creditors of the
b) Shareholders are company
entitled to participate in b) Debenture holders are
the management of the not entitled to
company. participate in the
management of the
company.

42. Can debentures be forfeited?

If a debenture holder fails to pay the amount of allotment or call, debentures cannot
be forfeited. According to section 122 of the Act, the unpaid amount can only be
recovered by filing suit in the court of law.
43. Issue of debentures for consideration other than cash. (Journal entries)

On purchase of Assets Account Debit

assets Vendor Credit
Vendor Debit
On issue of Debentures Account Credit
Debentures
44. Explain the meaning of “debentures issued as collateral securities” by a
company.
Sometimes companies issue their own debentures as collateral (additional) security
for a loan. In case the company cannot pay loan borrowed and interest thereof on the

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 due date, the lender becomes the debenture holder who can exercise all the rights of
debenture holder. No interest is payable on these debentures. The issue of such
debentures does not constitute a liability on the part of the company.
45. Explain the accounting treatment of debentures issued as a collateral security.
There are two methods of accounting treatment:
Method 1 Method 2
Bank Account Debit a) On taking loan:
Bank Loan Account Credit Bank Account Debit
Bank Loan Account Credit
b) On issuing debentures as collateral
security:
Debentures Suspense Account Debit
Debentures Account Credit

46. What are the different ways of writing off the discount on issue of debentures?
Method 1
Securities Premium Account Debit
Discount on issue of debentures Account Credit
Method 2
Profit & Loss Account Debit
Discount on issue of debentures Account Credit
47. What are the different types of issue of debentures?
Issue Redeemable Journal Entry
1 Par Par Bank Account Debit
Debenture Account Credit
2 Discount Par Bank Account Debit
Discount on Debenture Account Debit
Debenture Account Credit
3 Premiu Par Bank Account Debit
m Debenture Account Credit
Securities Premium Account Credit
4 Par Premium Bank Account Debit
Loss on issue of debentures Account Debit
Debenture Account Credit
Premium on redemption of debentures Account Cr.
5 Discount Premium Bank Account Debit
Discount on issue of debenture Account Debit
Loss on issue of debentures Account Debit
Debenture Account Credit
Premium on redemption of debentures Account Cr.
6 Premiu Premium Bank Account Debit
m Loss on issue of debentures Account Debit
Debenture Account Credit
Premium on redemption of debentures Account Cr
Securities Premium Account Credit

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 APPLICATION OF SCHEDULE VI OF COMPANIES ACT
48. Why is Profit & Loss Appropriation Account is prepared?
Profit & Loss Appropriation Account is prepared in order to show how the profits of
the company are appropriated or allocated for various purposes.
49. Give format of Profit & Loss Appropriation Account.
Profit & Loss Appropriation Account for the year ending………….
Particulars Rs Particulars Rs.
To Last year’s Loss b/d By Last Year’s Profit b/d
To Current Year’s Loss b/d By Current Year’s Profit b/d
To Transfer to: By Balance of Loss carried
General Reserve To Balance Sheet
Development Reserve
Dividend Equalization
Reserve
Debenture Redemption
Reserve.
To Preference Dividend
To Equity Dividend
To Provision for Dividend
Tax
To Balance of profit
carried to Balance Sheet
***** *****

50. Explain the following terms:

(a) Interim Dividend: This dividend is declared between two annual general
meetings.
(b) Proposed Dividend: Dividend proposed by the director whether for
preference shares or equity shares is termed as proposed dividend.
(c) Final Dividend: Dividend proposed and declared by the director at the
annual general meeting. After the declaration the proposed dividend is termed
as final dividend
(d) Quoted investment: It is an investment in respect of which a quotation or
permission to deal on a recognised stock exchange has been granted. Schedule
VI requires disclosing the aggregate amount of the company’s quoted
investments and the market value thereof.
(e) Unquoted investment: It is an investment in respect of which a quotation or
permission to deal on a recognised stock exchange has not been granted.
Schedule VI requires disclosing the aggregate amount of the company’s
unquoted investments and the market value thereof
(f) Trade investment: It is an investment by a company in the shares and
debentures of another company.

51. How is the Balance Sheet of the company is organized and presented? (Major
Headings)

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 Liabilities Rs Assets Rs.
a) Share Capital a) Fixed Assets
b) Reserves & Surplus b) Investments.
c) Secured Loans c) Current Assets and
d) Unsecured Loans Loans & Advances
e) Current Liabilities& • Current assets
Provisions • Loans & Advances
• Current liabilities d) Miscellaneous Expenditure.
• Provisions e) Profit & Loss Account (Loss)
f) Contingent Liabilities

52. What do you mean by contingent liabilities?

Contingent liabilities are those liabilities, which have not arisen at the date of balance
sheet but may arise upon happening of a certain event. Contingent liabilities are always
stated by way of foot-note on the liabilities side. Following are the examples:
a) Claim against the company not acknowledged as debt.
b) Uncalled liability on partly paid shares.
c) Liability on bills receivable discounted but not matured.
d) Liabilities under a guarantee.

53. Explain the following:

a) Provision: Provision is an amount set aside for a definite and specific liability but
the amount is unknown. It is created to provide for a known liability whose
amount cannot be correctly as ascertained.
b) Reserve: Reserve means amount set aside out of profit for meeting either
expected or unexpected future liability or loss. Reserve can also be created to
strengthen financial position of the firm.
54. Distinguish between reserve & provision.
Reserve Provision
1 It is an appropriation of profit It is charge against profit
2 It is for meeting future need of known It is provided for meeting
nature known loss
3 It makes a business financially strong It reduces net asset of a
business.
4 It is debited to Profit & Loss Appropriation It is debited to Profit & Loss
Account Account.
55. What is the difference between Reserve & Reserve Fund?
Reserve is created out of profits to meet any unforeseen contingencies. If the amount
of reserve is invested out side the business in securities, it is called reserve fund.
56. What do you mean by capital reserve?
A reserve which is created out of capital profit, it is called capital reserve. Following
are the examples of capital reserve:
a) Profit on sale of fixed assets.
b) Profit on revaluation of assets and liabilities.
c) Profit on shares forfeited.

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 d) Premium on issue of shares and debentures.
57. What do you mean by revenue reserve?
A reserve which is created out of revenue profit, is known as revenue reserve.
Revenue reserve can be divided into General Reserve and Specific Reserve
58. Give the important items appearing under the major headings of Balance Sheet.
Liabilities Assets
Share Capital: Fixed Assets:
• Authorised • Goodwill
• Issued • Land & buildings
• Subscribed • Plant & machinery
• Called up & paid up • Furniture& fittings
Less: Calls in arrears • Vehicle
Add: Share forfeiture Investments:
Calls in advance. • Govt. or Trust Securities
Reserves & Surplus: • Shares, Debentures and Bonds.
• Capital Reserve Current Assets:
• Securities Premium • Interest accrued on investments
• Sinking Fund. • Stores & Spare parts.
• Surplus (Bal of P/L A/c) • Stock in trade
Secured Loans: • Work in Progress
• Debentures • Sundry Debtors.
• Loan & Advances from • Cash & Bank Balance.
Bank. Loans & Advances:
• Other Loans & Advances. • Bills Receivable.
Unsecured Loans: • Advances recoverable in cash or
• Fixed Deposits. kind.
• Short-term loans & • Balance with customs, Port Trusts,
advances. Excise Authorities, etc.
Current Liabilities: Miscellaneous Expenditure:
• Bills Payable • Preliminary Expenses
• Sundry Creditors. • Expenses on issue on shares and
• Unclaimed Dividends. Debentures.
• Unexpired Discounts. • Discount allowed on shares and
Provisions: Debentures.
• Provision for Taxation • Interest paid out of capital during
• Proposed Dividend. construction period.
• Provision for Profit & Loss Account (Loss)
Contingencies.
Contingent Liabilities:

**********

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