Corporate Accounting Solved Paper May 2013, Dibrgarh University B.Com 2nd/4th Sem

Corporate Accounting Solved Question Papers Dibrugarh University
Corporate Accounting Solved Paper May 2013
COMMERCE (General/Speciality)
Course: 203 (Corporate Accounting )
The figures in the margin indicate full marks for the questions
Full Marks: 80
Pass Marks: 32
Time: 3 hours

1. (a) state true or false
(i)      Out of face value of shares, at least 10% is payable with application.   False
(ii)    A debenture holder is an owner of the company.                     False
(iii)   Under net payment method purchase consideration is calculated by adding the various payments made by the purchasing company.                     True
(iv)  Insolvency is a necessary condition for liquidation of a company.
(b) State the correct answer:
(1)    Preference shareholder are
(a)    Creditors of a company
(b)   owner of the company
(c)    customers of the company
(2)    Debentures are show in the Balance sheet at
(a)    Face value
(b)   Discount
(c)    Premium
(3)    Accumulated losses to the vendor company should be transferred to the
(a)    Profit and Loss Account
(b)   Profit and Loss Appropriation Account
(c)    Equity shareholder Account
(4)    A contributory is a
(a)    Debenture holder
(b)   Share holder
(c)    creditor
2. Answer the following:
a) Explain how would you deal with Shares forfeited but not reissued and Shares forfeited and reissued;
Ans: Forfeiture of shares: A person, whose shares have been forfeited, ceases to be a member of the company. But he shall remain liable to pay to the company all moneys which at the date of forfeiture were payable by him to the company in respect of the shares. The liability of such a person shall cease as and when the company receives payment in full in respect of the shares. At the time of forfeiture, share capital account is debited with the called up and amount paid on forfeited shares is transferred to “Forfeited Shares a/c” and amount unpaid on shares is transferred to “Calls in arrear a/c.
Reissue of the forfeited shares:
            The directors of the company have the power to re-issue the forfeited shares on such terms as it think fit. Thus the forfeited shares can be reissued at par, or at premium or at discount. However, if the forfeited shares are reissued at discount, the amount of discount should not exceed the amount credited to the forfeited shares a/c. If the discount allowed on reissue is less than the forfeited amount there will be the surplus left in the forfeited shares a/c. This surplus will be of the nature of capital profits so it will be transferred to the Capital Reserve A/c.
b) Distinguish between ‘pre-acquisition profit’ and ‘post-acquisition profit’ of a company.
Ans: General Reserve & Profit & Loss Account (credit balance) appearing in the books of the subsidiary company on the date of acquisition are treated as pre – acquisition profits. Since, they were not earned by the holding company in the ordinary course of business they are capitalized & set off against the purchase price of the shares.
A pre – acquisition loss appearing in the books of the subsidiary company is treated as a capital loss & debited to goodwill account. Post acquisition profits or losses are those that are made or suffered by a subsidiary company after its shares have been purchased by the holding company. Revenue profits are added to the profits of the holding company if it acquires all the shares of the subsidiary company or to extent of its share holding in the subsidiary company. A post acquisition loss is treated as a revenue loss & deducted from the profits of the holding company.
If the date of acquisition is during the course of the year it becomes necessary to make an estimate of pre acquisition & post acquisition periods on time basis so as to apportion profits.
c) Explain briefly the modes of winding up of a company.                            (Out of Syllabus)
d) State the order in which ordinarily made by a liquidator to satisfy the various claims in case of voluntary liquidation of a company.                                         (Out of Syllabus)

3. (a) A limited company issued 6% 10000 debentures of Rs. 100 each at discount of 5 per cent, repayable after 5 years at a premium of 10 per cent. Show journal Entries in the books of the company recording the above transactions.
Amount (Dr.)
Amount (Cr.)
At the Time of Issue:
Bank A/c                                                  Dr.
Loss on issue of debenture A/c               Dr.
To 10% Convertible Debentures A/c
To Premium on redemption of debenture A/c
(Being the 10,000 6%Debentures of Rs. 100 each issued at a discount of 5% but redeemed at a premium of 10%)



At the Time of Redemption:
10% Convertible Debentures A/c           Dr.
Premium on redemption of debenture A/c  Dr.
To Bank A/c
(Being the 10,000 6% Debentures redeemed at a premium of 10%)


(b) Explain how the loss on debenture be dealt with and show how this account will appear in the books of the company over the five consecutive years.
Ans: When debentures are issued at a price lower than its face value, then such debentures are said to be issued as “Debentures issued at a Discount”. Discount on issue of debentures is a Capital loss and is show in the Balance sheet on the Assets side under the head “Miscellaneous Expenditure” till it is written off.
When debentures are redeemable at a premium, the extra amount payable over and above the nominal value on redemption is called “Loss on Issue of Debenture”.  Again when debentures are issued at a discount, the discount on issue of debenture is also a loss on issue of debentures. Thus when debentures are issued at a discount and redeemable at a premium both the losses are amalgamated under the head “Loss on Issue of Debenture Account”. It is a Capital loss and is show in the Balance sheet on the Assets side under the head “Miscellaneous Expenditure” till it is written off.
The amount of debenture discount/Loss on issue of debenture can be written off in two ways:
1. All debentures are to be redeemed after a fixed period: When the debentures are to be redeemed after a fixed period, the amount of discount will be distributed equally within the number of years spreaded between the issue of debentures and their redemption. The amount of discount on issue of debentures to be written off each year is calculated as: Amount of discount to be written off annually = Amount of Discount / No of Years
2. Debentures are redeemed in instalments: Debentures may also be redeemed in instalments but over a fixed period. In that case the amount of debenture discount will be written off each year in proportion to the amount of debentures redeemed.
Journal Entry for Writing of Discount on issue of Debentures/Loss on issue of Debentures is:
Profit and Loss Account                 Dr.
To Discount on issue of Debentures Account
To Loss on Issue of Debentures Account
What do you mean by buyback of shares? State the legal provisions relating to buyback of shares.
Ans: Out of Syllabus
4. (a) (i) How should be premium on shares be deals with?
Ans: If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act, 2013 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Account. Securities premium account is shown under the head “Reserves and Surplus”.
Under Section 52 of the Company Act 2013, the amount of security premium may be used only for the following purposes:
a)      To write off the preliminary expenses of the company.
b)      To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
c)       To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
d)      To issue fully paid bonus shares to the shareholders of the company.
In purchasing its own shares (buy back).
(b) A limited company has an accumulated reserve of Rs.500000. It was decided to declare bonus of Rs. 300000 out of its reserve. The bonus is too utilized as:
(1)100000 to make the existing 25000 shares of Rs. 10 each fully paid of which Rs. 6 per share called and paid.
(2)200000 by issuing 5000 bonus shares at Rs. 25 each at a premium of Rs. 15 per shares to the existing shareholders. Pass the Journal Entries in the book of the company recording the above transactions.
Journal Entries
In the books of the company
Equity share 1st & final call A/c                                                   Dr.
To Equity Share Capital A/c
(Being the equity share 1st & final call money due on 25,000 equity shares @ Rs. 4 each.)


Accumulated Reserves A/c                                                         Dr.
          To Bonus to Shareholders A/c
(Being the bonus dividend payable on 25,000 shares @ Rs.4 each to make partly paid share fully paid)


Bonus to shareholders A/c                                                          Dr.
           To Equity share 1st & final call A/c
(Being the bonus utilised towards payment of final call on 25,000 shares @ Rs.4 each)


Accumulated Reserve A/c                                                  Dr.
      To Bonus to Shareholders A/c
(Being the 5000 bonus share issued to equity shareholders @ Rs.25 per share)


Bonus to Shareholders A/c                                                           Dr.
      To Equity share capital A/c
       To Securities Premium Reserve A/c 
(Being the bonus share transferred to equity share capital A/c)


(b) Enumerate the SEBI’s guidelines regarding issue of shares and forfeiture of shares.
Ans: SEBI Guidelines for issue of fresh share capital
1. All applications should be submitted to SEBI in the prescribed form.
2. Applications should be accompanied by true copies of industrial license.
3. Cost of the project should be furnished with scheme of finance.
4. Company should have the shares issued to the public and listed in one or more recognized stock exchanges.
5. Where the issue of equity share capital involves offer for subscription by the public for the first time, the value of equity capital, subscribed capital privately held by promoters, and their friends shall be not less than 15% of the total issued equity capital.
6. An equity-preference ratio of 3:1 is allowed.
7. Capital cost of the projects should be as per the standard set with a reasonable debt-equity ratio.
8. New company cannot issue shares at a premium. The dividend on preference shares should be within the prescribed list.
9. All the details of the underwriting agreement.
10. Allotment of shares to NRIs is not allowed without the approval of RBI.
11. Details of any firm allotment in favor of any financial institutions.
12. Declaration by secretary or director of the company.
SEBI Guidelines for first issue by new companies in Primary Market:
1. A new company which has not completed 12 months of commercial operations will not be allowed to issue shares at a premium.
2. If an existing company with a 5-year track record of consistent profitability, is promoting a new company, then it is allowed to price its issue.
3. A draft of the prospectus has to be given to the SEBI before public issue.
4. The shares of the new companies have to be listed either with OTCEI or any other stock exchange.
SEBI guidelines for Secondary market
1. All the companies entering the capital market should give a statement regarding fund utilization of previous issue.
2. Brokers are to satisfy capital adequacy norms so that the member firms maintain adequate capital in relation to outstanding positions.
3. The stock exchange authorities have to alter their bye-laws with regard to capital adequacy norms.
4. All the brokers should submit with SEBI their audited accounts.
5. The brokers must also disclose clearly the transaction price of securities and the commission earned by them. This will bring transparency and accountability for the brokers.
6. The brokers should issue within 24 hours of the transaction contract notes to the clients.
7. The brokers must clearly mention their accounts details of funds belonging to clients and that of their own.
8. Margin money on certain securities has to be paid by claims so that speculative investments are prevented.
9. Market makers are introduced for certain scrips by which brokers become responsible for the supply and demand of the securities and the price of the securities is maintained.
10. A broker cannot underwrite more than 5% of the public issue.
11. All transactions in the market must be reported within 24 hours to SEBI.
12. The brokers of Bombay and Calcutta must have a capital adequacy of Rs. 5 lakhs and for Delhi and Ahmadabad it is Rs. 2 lakhs.
13. Members who are brokers have to pay security deposit and this is fixed by SEBI.
5. (a) Distinguish between Amalgamation and Absorption.
Ans: Meaning of Amalgamation: Amalgamation means the merging of two or more than two companies for eliminating competition among them or for growing in size to achieve the economies of scale. Amalgamation is a broad term which includes mergers (uniting of two existing companies) and acquisition (one company buying out another company).
Meaning of Absorption: Absorption is the process in which the one dominant company takes control over the weaker company.
Difference between Amalgamation and Absorption:
1) Two or more companies are liquidated in the process of amalgamation. One or more companies are liquidated in absorption.
2) Amalgamation involves formation of a new company. However, Absorption of companies does not involve formation of a new company
3) There is no such matter of size of amalgamating companies. Generally, size of purchasing company is greater than that of vendor company in absorption.
(b) What do you mean by internal reconstruction of a company? Explain its scope.
Ans: Internal Reconstruction: Internal reconstruction means a recourse undertaken to make necessary changes in the capital structure of a company without liquidating the existing company. In internal reconstruction neither the existing company is liquidated, nor is a new company incorporated. It is a scheme in which efforts are made to bail out the company from losses and put it in profitable position. Internal reconstruction of a company is done through the reorganization of its share capital. It is a scheme of reorganization in which all interested parties in the capital structure volunteer to sacrifice. They are the company’s shareholders, debenture holders, creditors etc. Under internal reconstruction, the accumulated trading losses and fictitious assets are written off against the sacrifice made by these interest holders in the form of reduction of paid up value of their interest.
Forms of Internal reconstruction of a company (Scope of Internal reconstruction)
Internal reconstruction of a company can be carried out in the following different ways. These are as under:
(A) Alteration of Share Capital; and
(B) Reduction in Share Capital
Alteration of Share Capital: Memorandum of Association contains capital clause of a company. Under Section 61 of the Companies Act 2013, a company, limited by shares, can alter this capital clause, if is permitted by (i) the Articles of Association of the company; and (ii) if a resolution to this effect is passed by the company in the general meeting. A company can alter share capital in any of the following ways:
(a) The company may increase its capital by issuing new shares.
(b) It may consolidate the whole or any part of its share capital into shares of larger amount.
(c) It may convert shares into stock or vice versa.
(d) It may sub-divide the whole or any part of its share capital into shares of smaller amount.
(e) It may cancel those shares which have not been taken up and reduce its capital accordingly.
To alter capital by any of the above modes require a resolution at a general meeting, but does not require confirmation by the National Company Law Tribunal. The company is required to give a notice to the Registrar within thirty days of alteration.
The accounting treatment of the above five types of capital alteration is discussed below.
(a) If the company has issued all of its authorised capital, then, for the purpose of raising fund by the issue of fresh shares, it will have to increase its authorised capital first. For increasing the authorised capital, the Capital clause of Memorandum of Association of the company is required to be altered and permission of S.E.B.I. is also required to be obtained.  No accounting entry is necessary for increasing authorised share capital. The company will have to observe the formalities prescribed under the Companies Act, 2013.
(b) The company may decide to change the shares of smaller denomination into larger denomination. This process is called consolidation of shares. On account of consolidation, the total amount of capital of the company will not change but the number of shares will decrease.
(c) A company, in order to alter its share capital, may convert all or any of its fully paid up shares into Stock or Stock into fully paid up shares. In case, shares are converted into Stock, the members get a part of Stock Capital in place of shares. By converting Shares into Stock, any amount of Stock Capital can be transferred to any other person.
(d) When the shares of a company are sub-divided in shares of small value, it is known as sub-division of shares. In sub-division of shares, the face value of a share is converted into smaller denomination from larger denomination. The total capital of the company remains unaffected by sub-division but the total number of shares increase.
(e) Cancellation of capital may take the following form:
(i) Cancellation of unissued capital; and
(ii) Cancellation of uncalled capital.
(i) Cancellation of unissued capital: Cancellation of unissued capital means cancellation of unissued shares by a company. It means that the part of the authorised capital which has not yet been issued to the public may be cancelled by the company.
(ii) Cancellation of uncalled capital: Cancellation of uncalled capital means cancellation of that part of the face value of the share which has not yet been called by the company.
Reduction of Capital: Sometimes there may be a genuine necessity for the reduction of capital. This power is, given by Section 66 of the Companies Act, 2013, subject to the compliance of conditions. According to this, a company may,
(1) Extinguish or reduce the liability on any of its shares in respect of share capital not paid up
(2) cancel any paid-up share capital which is lost or is unrepresented by any available assets;
(3) pay off any paid-up share capital which is in excess of what is required by the company. Conditions for effecting a reduction
Following conditions are required to be fulfilled by a company to reduce its share capital –
(a) The Articles of Association of the company must permit it to reduce its capital;
(b) The company in general meeting shall pass a special resolution to reduce its capital; and
(c) The approval of National Company Law Tribunal (previously Court) shall be obtained for the scheme of reduction in share capital.
(c) Kamrup Company Ltd had the following Balance Sheet as on 31st March, 2012:
Authorized Capital
5000 Shares of Rs. 100 each
Issued and Subscribed Capital:
2000 Shares of Rs 100 each
200, 6% debenture of Rs 1000 each
Sundry Creditors
Bills Payable
Bank Overdraft


Land & Building
Plant & Machinery
Sundry Debtors
Cash at Bank
Preliminary Expenses
Profit & Loss A/c (Dr)


The Following schemes of reconstruction were adopted:
(1)    Without altering the number of shares in authorised, issued and subscribed capital, the face value and paid value of each shares was to be reduced to Rs. 50
(2)    The existing debentures be converted into 100, 9 1/2%  Debentures of Rs. 1000 each
(3)    The assets be revalued as under: Land and Building Rs. 82000, Plant and Machinery Rs. 175000, Stock Rs. 44500, Sundry Debtors subject to a bad debts provision Rs.5000
(4)    Goodwill, preliminary expenses and the debit balance of Profit & Loss A/C are completely written off. Give Journal Entries to implement the above schemes of reconstruction and prepare the Balance Sheet.
Journal Entries
In the books of Kamrup Co. Ltd
Share Capital A/c                                                          Dr.
To Share Capital A/c (2,000x50)
To Capital Reduction A/c (2,000x50)
(Being the share capital reduced by Rs. 50 per share)


6% Debenture A/c                                                        Dr.
To 9.5% Debenture A/c
To Capital Reduction A/c
(Being the existing debentures converted into 100 9.5% Debentures of Rs. 1000 each)


Capital Reduction A/c                                                  Dr.
To Goodwill A/c  
To Preliminary Expenses A/c
To Profit & Loss A/c
To Land & Building A/c (Balancing figure)
To Plant & Machinery A/c
To stock A/c
To Provision for doubtful debt A/c
(Being the sundry assets written off)


Balance Sheet of Kamrup Co. Ltd
        I.            Equity & Liabilities:
1)      Shareholders fund:
a)      Share Capital
b)      Reserve & Surplus

2)      Non Current Liabilities:
a) Long Term Borrowings: 9.5% Debentures A/c
3)      Current Liabilities
a)      Short Term borrowing (Bank Overdraft)
b)      Trade Payable
Creditors                                  75,000
Bills Payable                            25,000



Total (1 + 2 + 3)
      II.            Assets:
1)      Non Current Assets:
a)      Fixed Assets
Tangible Fixed Assets:
Land & Building                        82,000
Plant & Machinery               1,75,000
Intangible Fixed Assets:
2)      Current Assets
a)      Inventories
b)      Trade receivable
c)       Cash & cash equivalent



Total (1 + 2)

6.(a) Who are the ‘Preferential Creditors’?
(b) The balance sheet of Assam Ltd. As on 31st December, 2012:
Share Capital:
Authorised & Issued:
2000, 6% Preference Shares of Rs. 100 each
1000 Equity Shares of Rs. 100 each, Rs. 75 paid
3000 Equity Shares of Rs. 100 each, 60 Paid
5% debentures
(having a floating charges on all assets)
Interest outstanding


Land and building
Sundry Debtors
Cash at Bank
Profit & Loss


The company went into liquidation on that date. The preference divided in arrear for two years. Creditors include a loan of 50000 on the mortgage of land and building. The assets were realized as follows:
Land and Building: 120000; Machinery: 200000; Patent: 30000; Stock: 60000; Sundry Debtors: 80000
The expenses of liquidation amounted to Rs. 10900. The liquidator is entitled to a commission of 3 per cent on all assets realised except cash and a commission of 2 percent on amount distributed to unsecured creditors. Preferential creditors amounted to Rs. 1500. Prepare Liquidators Final Statement of Account.
7.  (a) Distinguish between Holding Company and Subsidiary Company.
Ans: Holding Company: As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. According to this section, one company can become the holding company of another in any of the following three ways:
1. By holding more than 50% of nominal value of the equity shares of the other company i.e. the holding company holds the majority of voting power in the subsidiary company.
2. By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.
Meaning of “subsidiary Company” 
As per Section 2(87) of the Companies Act, 2013, a company is a “subsidiary company” of another company, i .e.“holding company”, if that other company:
a)      holds a majority of the voting rights in it, or
b)      is a member of it and has the right to appoint or remove a majority of its board of directors, or
is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.
(b) Mention two advantages and two disadvantages of Holding Company.
Ans: Advantages of Holding Company:  Following are the important advantages of holding company:
a)      Easy Formation: The holding company can be formed very easily. There is no legal formality. Any company may purchase the majority shares from stock exchange and can become holding company.
b)      Large Business:  A holding company can collect the capital and expand the business on large scale.
Disadvantages or Defects of Holding Company: Following are the main defects of the holding company:
a)      Problem of Monopoly: A holding company tries to create monopoly over the market. Monopoly is always against the public interest. It fixes higher prices and consumer suffers a loss.
b)      Unequal Distribution of Wealth: Due to holding companies wealth goes in few hands and society is divided into two classes, rich and poor. Rich class enjoys all the amenities of life while poor class faces poverty and hunger.
(c) A Ltd. Acquired 1000 shares of Rs. 10 each in B Ltd. At a cost of Rs. 16000 and 500 shares of Rs. 10 each in C Ltd. At a cost of Rs. 4000 on 1st January2012 out of a total issue of share capital of 1500 and 800 shares respectively. Neither of the subsidiary company had issued any Preference Shares. At the date of acquisition, the accounts of B Ltd. Showed a General Reserve of Rs. 12000 and credit balance of Rs. 4500 in the Profit & Loss Account and the accounts of C Ltd. Showed a debit Balance of Rs. 6400 in the Profit and loss Account. Show how these facts would be set out in the Consolidated Balance Sheet of A Ltd. and its Subsidiary companies.
Ans: a) Degree of control of A Ltd in B Ltd: A Ltd=1,000/1,500 = 2/3 Minority share = 1/3
Degree of control of A Ltd in C Ltd:  A Ltd = 500/800 = 5/8 Minority share = 3/8
b) Pre-acquisition profit of B ltd = 12,000 + 4,500 = 16,500
A ltd’s Share = 16,500*2/3 = 11,000
Minority Share = 16,500*1/3 = 5,500
Pre-acquisition loss of C ltd = (6,400)
A ltd’s Share = 6,400*5/8 =4,000
Minority Share = 6,400*3/8 = 2,400
c) Calculation of Minority Interest to be shown in A’s Ltd Consolidated balance sheet
B Ltd
C Ltd
Share capital + Pre-acquisition profit
= 5,000 +5,500
= 10,500
Share Capital + Pre-acquisition profit
= 3,000+(2,400)
= 600
d) Calculation of goodwill or capital reserve
B Ltd
A Ltd
Cost of investment
Less: Holding Company’s Share in pre-acquisition profit
Less: Holding Company’s share in share capital
Goodwill (Capital Reserve)