Accounting for Share Capital – Class 12 Accountancy notes, important questions and MCQs

Chapter overview

A company raises its owned funds by issuing shares. Share capital is classified into authorised, issued, subscribed, called-up and paid-up capital, and shares may be equity or preference shares. Shares can be issued at par or at a premium, for cash or for consideration other than cash. If a shareholder fails to pay calls, the shares may be forfeited and later reissued, under the Companies Act, 2013.

Share capital and kinds of shares

• Authorised capital is the maximum capital the company can raise as stated in its memorandum; issued, subscribed, called-up and paid-up capital follow from it.
• Equity shares carry voting rights and a residual claim; preference shares have a preferential right to a fixed dividend and to repayment of capital.
• Shares are usually payable in instalments: application, allotment and one or more calls.

Issue of shares

• Shares can be issued at par (face value) or at a premium (above face value); the premium is credited to the securities premium account.
• Under Section 52, securities premium can be used only for specified purposes, such as issuing fully paid bonus shares, writing off preliminary expenses or discount on issue of securities, buy-back of shares, and premium on redemption of preference shares or debentures.
• Under Section 53, a company cannot issue shares at a discount, except sweat equity shares.
• Over-subscription is handled by rejecting some applications or by pro-rata allotment; excess money is adjusted towards allotment or refunded.

Forfeiture and reissue

• Calls in arrears are amounts called but not paid; calls in advance are amounts received before being called.
• On forfeiture, share capital is debited with the called-up amount, calls in arrears are credited, and the amount already received is credited to the share forfeiture account.
• Forfeited shares may be reissued at a discount not exceeding the amount forfeited; the balance in the share forfeiture account on reissued shares is transferred to the capital reserve.

Key terms

Authorised capital

the maximum share capital a company is permitted to raise under its memorandum

Securities premium

the excess of the issue price of shares over their face value

Calls in arrears

amounts called up on shares but not yet paid by shareholders

Forfeiture of shares

cancellation of shares for non-payment of calls, with the amount already paid forfeited

Pro-rata allotment

allotting shares to applicants in proportion to the shares applied for

Important questions with answers

Quick revision

• Equity vs preference shares.
• Issue at par or premium; no discount except sweat equity (Section 53).
• Securities premium uses under Section 52.
• Forfeiture and reissue; balance to capital reserve.

Exam tips

• Learn the hierarchy: authorised ≥ issued ≥ subscribed ≥ called-up ≥ paid-up.
• For forfeiture, always debit share capital with the called-up amount, not the face value.

Practice MCQs

1. The maximum capital a company can raise is

   1. issued capital
   2. paid-up capital
   3. authorised capital
   4. called-up capital
   Show answer

   Answer: (c) authorised capital. It is stated in the memorandum.

2. Shares issued above face value are issued at a

   1. discount
   2. par
   3. premium
   4. loss
   Show answer

   Answer: (c) premium. The excess goes to securities premium.

3. Amounts called but not paid by shareholders are

   1. calls in advance
   2. premium
   3. calls in arrears
   4. dividend
   Show answer

   Answer: (c) calls in arrears. They are deducted from called-up capital.

4. Under the Companies Act, 2013, shares cannot be issued at a discount except

   1. sweat equity shares
   2. bonus shares
   3. preference shares
   4. rights shares
   Show answer

   Answer: (a) sweat equity shares. Section 53 prohibits other cases.

5. Securities premium CANNOT be used for

   1. issuing fully paid bonus shares
   2. buy-back of shares
   3. writing off preliminary expenses
   4. paying dividend
   Show answer

   Answer: (d) paying dividend. Section 52 restricts its use.

6. When shares are forfeited, the amount already received on them is credited to the

   1. securities premium account
   2. share forfeiture account
   3. capital account
   4. bank account
   Show answer

   Answer: (b) share forfeiture account. It is held until reissue.

7. 100 shares of ₹10 each, ₹8 called up, holder paid ₹5 and failed to pay ₹3. On forfeiture, share capital is debited with

   1. ₹800
   2. ₹1,000
   3. ₹500
   4. ₹300
   Show answer

   Answer: (a) ₹800. 100 × ₹8 called up.

8. These 100 shares are reissued as fully paid for ₹7 each. The amount transferred to capital reserve is

   1. ₹500
   2. ₹300
   3. ₹700
   4. ₹200
   Show answer

   Answer: (d) ₹200. Forfeited ₹500 − discount on reissue ₹300.