CORPORATE ACCOUNTING I

MODULE I
ACCOUNTING FOR SHARES
2 MARK QUESTIONS
1. What do you mean by preference Share?
Preference shares are those shares which enjoy preferential rights as compared
to equity shareholders in the matter of payment of dividend and repayment of
share capital in the event of winding up.

2. What is redeemable preference shares?

Redeemable preference shares are those shares which a company may issue on
the stipulation that they may be repaid within a certain number years.

3. What do you mean by redemption of preference shares?

Redemption of Preference Shares means repayment of Preference Share
Capital to the existing preference shareholders during the life time of the
company on expiry of the stipulated period.
4. What is securities premium?

If Shares were issued at premium, the premium amount will be

transferred to a Reserve called Securities Premium account.
5. What is Capital Redemption Reserve?

If the preference shares were redeemed out of profit, a sum equal to

the nominal value of shares redeemed should be transferred to a reserve
called Capital Redemption Reserve.
6. Mention any two purposes for which Securities Premium utilized.

(1) Issue of fully paid bonus shares (2) Writing of preliminary expenses (3)
Writing of expenses of or the commission paid or discount allowed on
any issue of shares or debentures of the company.
7. What are the profits and reserves available for redemption of

Preference shares?

• Credit balance in P&L a/c

• General Reserve
• Dividend equalisation fund
• Reserve fund
8.What are the profits not available for redemption of preference shares?

• Premium on issue of shares or debentures

• Capital Reserve
• Capital Redemption Reserve
• Profit prior to incorporation
• Share forfeiture account
• Development Rebate account
• Profit on redemption of debentures
• Profit on revaluation of assets and liabilities
9. What is bonus issue or Capitalisation of profit?

Capitalisation of profit or bonus issue means issue of shares to the

existing shareholders out of accumulated profits in the proportion of shares
held by them, without receipt of anything as consideration from them.
10. What is bonus share?

Bonus shares are those fully paid shares distributed by a company to its
Shareholders, free of cost, by capitalising a part of company’s retained earnings.
11. What is cash bonus?

Bonus paid in the form of cash is called cash bonus.

13. What are the profits and reserves available for bonus issue?

(1) Credit balance in P&L a/c (2) General Reserve/Reserve fund (3)
Dividend equalisation fund (4) Securities premium received in cash (5) Profit
prior to incorporation (6) Capital Redemption Reserve (7) Profit on sale of fixed
assets.
14. What are the profits and reserves not available for bonus issue?

• Capital reserve arising due to revaluation of assets

• Share premium arising on issue of shares on amalgamation or takeover
• Investment allowance reserve/ Development rebate reserve before expiry of
8 years of creation
• Balance in debenture redemption reserve account
• Surplus arising from a change in the method of charging depreciation
15. What are the prior steps to be taken regarding bonus issues?

Before commencement of bonus issue, the following steps should be taken in

advance.

• The Board of Directors should fix the Record date and inform the matter to
stock change, 42 days in advance.
• The approval of the regional office of RBI must be obtained before
allotment of shares to non-resident shareholders.
• A general notice to the effect shall be given as per the provisions of the
companies act, 2013.
16. What is Capital bonus?

The bonus paid in the form of equity shares is called Capital bonus.

17. What do you mean by buy-back of Shares?

It is the process of re-purchase or re-acquisition of its own shares by a

company. Buying back of shares from existing shareholders is made usually on
proportionate basis.

18. What is escrow account?

The word ‘Escrow’ means a contract or bond deposited with a third person, by
who it is to be delivered to the guarantee (i.e., the person to whom guarantees is
given) on fulfilment of some conditions. In order to perform obligations under this
scheme of buy back of securities, a company is required to open an escrow
account which may consist of (a) cash deposited with a commercial bank, or (b)
bank guarantee in favor of a merchant banker (c) depositable accepted securities
or (d) a combination of all these.

19. What is cooling off period?

There should be a time gap of at least one year between 2 buy backs. The time
gap of one year between the two buy backs is called Cooling off period.

20. State the source of buy- back of shares?

• Free reserves

• Securities Premium account

• Proceeds from issue of any shares or other specified securities

21.what is Right Issue?

Issue of shares by an existing company to the existing shareholders on
right basis in proportion to their present holdings is known as Right issue
and the shares thus offered are known as Right shares. Such rights are also
known as pre-emptive rights.

22.what is value of right?

The money value of the advantage or benefit to the shareholder in
connection with rights receivable is called Value of Rights.

23.What is Employee Stock Option Plan?

Employee Stock Option Plan means the option given to the directors,
officers or employees of the company, the benefits or right to purchase or to
subscribe for the shares of the company at a future date at a pre-determined
lower price.
 5 MARK QUESTIONS

1. What are the Conditions for the Redemption of Preference Shares?

• The shares shall be redeemable only if they are fully paid up.

• The shares shall be redeemed either out of profits of the company

which would otherwise available for dividend or either out of the
proceeds of fresh issue of shares made for the purpose of
Redemption.

• Premium if any, payable on redemption should be paid out of profits

of the company which would otherwise available for dividend.

• If the preference shares were redeemed out of profit, a sum equal to

the nominal value of shares redeemed should be transferred to a
reserve called Capital Redemption Reserve.

• Redemption of preference shares should not be regarded as

reduction of authorised capital and it remain parts of its authorised
capital.
2. What re the objectives of issuing bonus shares?

• To reduce market price of shares

The market price of shares reduces as more number of shares are

bought into the market.
• To indicate good prospect
Issue of bonus shares is an indication to the investors that the company has
good prospects. It improve the confidence of investors.
• To increase the goodwill
The goodwill of the company which issues bonus shares is increased. It is
because, the common notion is that, only those companies having
accumulated profits and expecting bright future can issue bonus shares.
• To raise capital
 Issue of bonus shares is an inexpensive method of raising capital by which
the cash resources of the company are conserved.
• To make shareholders satisfied
On issue of bonus shares, the shareholders get satisfied as the shares can be
sold in the market for realizing cash.
3. Mention any 8 guidelines given by SEBI / Companies Act, 2013 for issue
of bonus shares.
• The bonus issue is made out of free reserves built out of the genuine profits
or share premium collected in cash or out of capital redemption reserve
account.
• There should be a provision in the articles of association of the company for
capitalisation of profits and reserves, and if not the company should pass a
resolution at its general body meeting making provisions in the articles of
association for capitalization.
• The bonus issue is authorised by the general body meeting of the company,
on recommendations of the board of directors.
• The company should ensure that it has not defaulted in making payment of
interest or principal in respect of fixed deposits or debt securities issued by
it.
• It should also ensure that it has not defaulted in respect of the payment of
any statutory dues of the employees such as contribution to pension fund,
gratuity, bonus etc.
• Partly paid up shares are made fully paid up before issue of any additional
shares as bonus shares.
• The declaration of bonus issue should not be made in lieu of dividend.
• Reserves created by revaluation of fixed assets should not be capitalized for
the purpose of bonus issue.
• No bonus issue will be made which will dilute the value of rights of the
debenture holders.
• A company which announces its bonus issue after the approval of the Board
 of Directors must implement the proposal within a period of six months
from the date of such approval and shall not have the option of changing
the decision.
4. What are the advantages and disadvantages of issuing bonus shares?
Advantages of Bonus Issue

a. Advantages to the Company

• Unaltered liquidity position
The cash position of the company will remain unaffected as there is
no inflow or outflow of cash on issue of bonus shares.

• More realistic Balance Sheet

Balance sheet of the company will reveal more realistic picture after
the issue of bonus shares.
• Increase in credit worthiness
Issuing bonus shares means capitalization of profits. Capitalisation of
profits always increase the credit worthiness of the company, which helps
the company to raise fund at lower rate.
• Economical
Bonus issue is an inexpensive mode of raising capital by which cash
resources of the company can be used for some expansion projects.
• Wider Marketability
When bonus shares are issued, market price of share is automatically
reduced which increases its wider marketability.
• Gives a green signal of growth
Bonus issue has a signaling effect which gives a positive sign to the market
that the company is in its long term growth path.
• Satisfied the Shareholders
The company may not be in a position to pay high rate of dividend in cash
as its effects the liquidity position of the company. Bonus issue is the only
means to satisfy the shareholder’s desire for a high dividend.
• Improve the images of the company
Bonus issue improves the image of the company. It leads to increase in the
value of shares in the market.
b. Advantages to Shareholders
• Free additional shares
Shareholders get additional shares without paying anything for it.
• Immediately Realisable
High rate of cash dividend is not received, the shareholders can realize cash
by sale of shares received as bonus.
• Not Taxable
No tax is to be paid by the shareholders on the bonus shares received.
• Increase in future income
Shareholders get dividend on their increased share capital base. Their
dividend income will be more than that of their earlier dividend income.
Disadvantage of Issue of Bonus Shares
• Decline in the rate of dividend
Sharp decline in the rate of dividend immediately after the issue of bonus
shares may create confusion in the minds of investors.
• Speculative Dealings
Bonus issue encourages speculative dealings in the shares of the company.
• Affecting Liquidity of Shareholders
Market value of shares will falls when the availability of shares increase in
the market.
• Reduction in accumulated profits
Reduction in accumulated profits and reserves on issue of bonus shares
make the outsiders feel that the company is weaker than earlier.
• Foregoes Cash equivalent
When partly paid up shares are converted into fully paid up through the
bonus issue, the company forego the cash equivalent to the amount of
 bonus so applied for the purpose.
• Lengthy Procedure
Prior approval of Central Government through SEBI must be obtained
before the bonus issue. The lengthy procedure, sometimes may delay the
issue of bonus shares.
• Decreased rate of dividend
After the bonus issue, if the rate of profit is not increased, the rate of
dividend may be decreased.
• High Administration Cost
The cost of administering a bonus share plan is more than that of paying a
cash dividend.
5. What are the circumstances in which the bonus shares issued?
a. When a company has accumulated large reserve and it wants to
capitalise these by issuing bonus shares.
b. When the company is not in a position to give cash bonus, as it
adversely affects its working capital.
c. When the value of fixed assets far exceeds the amount of paid up
capital.
d. When higher rate of dividend is not are advisable for the distribution of
the accumulated reserves.
e. When there is a big difference between the market value and paid up
value of shares of the company. i.e., market value of shares far exceeds
the paid up value of shares.
6. What are the objectives of buy- back of shares?

• Increase in EPS

Buy back of shares helps the company to increase its earnings per share
as the number of shares get reduced on buy back.
• Increased Market Price
 On buying back of shares the number of shares in the market is reduced,
which in turn leads to increase in market price of the shares.

• Increased promoter’s holdings

The company buy-back the shares only from the public, whereas, the
number of shares held by the promoters remain intact.
• Build up the image of the company
Buy- back of shares helps to improve the company’s image or reputation.
• Utilisation of surplus cash
The surplus cash balance and other liquid assets are properly utilized when
the amounts are used for buying back of shares.
• Capital Appreciation
On buying back, the market price of the shares usually go up. The
shareholders who have not participated in the buy-back programme are also
expected to gain from capital appreciation.
• Changes in capital Structure
Buy back of shares helps a company to restructure its capital base.
7. Explain the methods of buy-back of shares.
• From existing shareholders on proportionate basis
A company can buy-back its shares from its existing shareholders on a
proportionate basis. This method is also known as buy-back through tender
offer.
• Purchase from open market
A company can buy-back its shares either through stock exchange or
through book building process. Under the book building process the
shareholders offer their shares at a price at which they are willing to sell
their shares within a price band or price range specified by the company.
The company will receive the offers and shall determine the buy-back price
based on the acceptances received.
• Acquisition of Stock option/ Sweat equity issued to employees
 It is the option given to the whole time whole time directors, officers or
employees in a company, to purchase or subscribe at a future date the securities
offered by the company at a predetermined price. The company may buy back
shares issued to them.

8. Explain the conditions of buy-back of shares as per Companies Act.

(i) Buy back should be authorized by the Articles of Association of the
Company.
(ii) A special resolution should be passed a special resolution at a general
meeting of the company authorizing the buyback.
(iii) After buyback, the debt equity ratio should not exceed 2:1 where the
aggregate of secured and unsecured debts outstanding after the buy back.
(iv) Only fully paid up shares can be acquired.
(v) If shares of securities are listed, buy- back should be in accordance with
SEBI regulations.
(vi) The buy-back in respect of unlisted shares or other specified securities is in
accordance with Rule 17 of Companies (Share Capital and Debentures)
Rules, 2014.
(vii) No offer of buy-back shall be made within a period of one year from the
date of closure of the proceeding offer of buy back, if any.
(viii) After buy back of its own shares, it shall not make any further issue of same
kind of shares within a period of six months from the date of completion of
the process of buy-back.
(ix) Buy-back of shares by a defaulter company is not allowed.The default may
be in respect of repayment of deposits or term loans, payment of interest
thereon, redemption of debentures or preference shares, payment of
dividend to shareholders etc.
(x) A company can buy -back its shares out of free reserves, securities
premium account, or proceeds of any shares or other specified securities.
(xi) Where a company purchases its own share out of free reserves, a sum equal
to the nominal value of the shares so purchased shall be transferred to
 Capital Redemption Reserve.
(xii) There should be a time gap of at least one year between 2 buy-backs. The
time gap of one year between the two buy-backs is called Cooling off
period.
9. What are the advantages of buy back of share?
• Utilisation of funds in an effective manner:
Companies possessing large free reserves base and are willing to use funds
to purchase or acquire shares and other securities under the buy- back
scheme, can use their funds in a wise and effective manner.
• Defense strategy against takeover
Buy back of shares and securities help the promoters to formulate an
effective defense strategy against threat of takeover from others.
• Helps to maintain a balance in the capital structure
Buy-back of shares helps to maintain a balance in the capital structure.
• Signal of financial strength
Buy back of shares send a signal among the investors about the company’s
financial strength and growth prospects.
• Helps to increase the stake of promoters
Share buy-back are undertaken to increase the stake of the promoters and
sometimes with the ultimate object of buying out completely the entire
shareholdings of non-promoter shareholders.
• Helps to acquire controlling power
Buy-back of shares repeatedly through different year paves way for its
promoters to increase their share in the company and thus acquire its
controlling power in future.

• Increase the earnings per share

Buy-back of shares and securities results in lower capital base. It helps to
enhance post-buyback earning per share and the value of shares in the
market.
 • Higher dividend yield
After buy-back of shares, the companies will have the advantage of
servicing a reduced capital base with higher dividend yield.
10.What are the differences between redemption of preference shares and
Buy-back of shares?
Redemption of Preference Shares Buy-back of shares
Meaning It is the repayment of preference It is a process of capital
share capital on expiry of the restructuring, whereby a
stipulated period. company re-purchases its share
at any time.
Limit Redemption can be made for the Maximum only 25% of the paid
whole amount of a particular class up share capital including
of shares. revenue reserves can be bought
back.
Securities Premium Securities premium cannot be Securities premium can be
utilized for the purpose as it is utilized considering it as a
available only for issue of bonus revenue profit for the purpose of
shares or buy back of shares. buy back of shares.
Premium payment Redemption is usually made at face Buy-back is always made at a
value. premium.
Fund from Fund raised from debentures or any Fund raised from debentures or
debentures and specifies securities debenture any specified securities can be
specified securities cannot be utilized for the purpose utilized for the purpose of buy-
of redemption of preference shares. back of shares.
 11.Distinguish between bonus shares issue and Right Issue.
Bonus Issue Right Issue
Issued to satisfy the shareholders Issued to meet the urgent
requirements of funds
Bonus shares are issued at free of cost Issued at a cost less than market price
No changes in shareholders fund changes in shareholders fund
No cash inflow or outflow There will be cash inflow at the time of
Right Issue
Debt-equity ratio remain same Debt-equity ratio will change
EPS falls EPS may not fail
Bonus shares are always issued at par shares are always issued at
Premium
No change in Assets Change in Assets at the time of Right
Issue
No question on minimum Require minimum subscription for Right
Subscription Issue.
No scope for transfer of right to Rights to get shares may be
bonus shares transferred in favor of others
12. Distinguish between Right issue and public issue.
Right Issue Public Issue
No chance of Over subscription There is a chance of Over
Subscription
Cost of Issue is very low Cost of Issue is higher than public
Right Issue
Price of Right shares is always less Price of public issue is generally
than market price lower than the expected market price.
Facility for transferring the Rights No renunciation right

13.What are the advantages/ Objectives of Rights Issue?

• Retaining of Control

Control of the company is retained in the hand of existing shareholders.

• More certainty of getting subscribed
There is more certainty of raising capital when shares are issued on right
basis.
• Getting shares to the deserved persons
As the shares are offered to the existing shareholders only, on proportionate
 basis, the directors cannot misuse the opportunity by issuing such shares to
their friends and relatives at lower prices.
• No loss due to dilution in value
The existing shareholders do not incur any loss on account of dilution in the
value of their holdings, as they get additional shares to compensate any
dilution in the value of existing shares.
• Low cost
The expense to be incurred in issue of right shares is very low compared to
the cost involved in public issue.
• Image enhancement
Image of the company is enhanced when right issues are made from time to
time and existing shareholders remain satisfied.
14.What are the objectives/benefits of ESOP?

• To motivate employees

ESOP is a vital tool to attract and retain quality employees highly involved
in their jobs.
• To retain quality employees
ESOP is a vital tool to attract and retain quality employees, and to create a
long term positive attitude among them.
• To reward quality employees
ESOP acts as a compensation tool, which offer rewards that can exceed the
expectations of employees.
• To grant retirement benefits
ESOP are used for granting retirement benefits to employees and as
succession plans for owners.
• To improve corporate performance
ESOP aims at promoting the corporate performance on a suitable basis.