Distinguish between Authorised Share Capital and Paid-Up Share Capital.

Authorised vs. Paid-Up Share Capital • Authorised Capital: The maximum nominal amount of share capital that a company is legally empowered to issue to the public, as specified in its Memorandum of Association (MoA). • Paid-Up Capital: The actual amount of money received by the company from shareholders against calls made on issued shares.

What is forfeiture of shares? State the accounting treatment for re-issuing forfeited shares at a discount.

Forfeiture and Re-issue of Shares Forfeiture of shares is the cancellation of a shareholder's equity membership and shares by the board of directors due to non-payment of call monies. When forfeited shares are re-issued at a discount, the maximum permissible discount cannot exceed the amount already forfeited on those specific shares, debited to the Share Forfeiture Account.

Define Debenture Redemption Reserve (DRR) and state its statutory objective.

Debenture Redemption Reserve (DRR) DRR is a statutory reserve created by transferring profits from the Statement of Profit or Loss to ensure adequate liquidity for redeeming debentures upon maturity, safeguarding bondholders' capital.

Differentiate between Amalgamation in the Nature of Merger and Amalgamation in the Nature of Purchase (NAS 22 / NFRS 3).

Amalgamation: Merger vs. Purchase • Nature of Merger (Pooling of Interests): All assets, liabilities, and reserves of the transferor company are absorbed at book values, and at least 90% of shareholders become equity holders in the new entity. • Nature of Purchase (Acquisition Method): Assets and liabilities are recognized at fair market values, and any excess purchase consideration over net fair assets is recognized as Goodwill (or Gain on Bargain Purchase).

What is a Right Issue of shares? How does it protect existing shareholders from equity dilution?

Right Issue of Shares A right issue is an offering of new additional equity shares to existing shareholders in proportion to their existing shareholding (pro-rata) at a discounted subscription price, allowing them to preserve their proportional voting power and equity ownership without dilution.

Explain the redemption of Redeemable Preference Shares under corporate law. What are the sources of redemption, and how is the Capital Redemption Reserve (CRR) created?

Redemption of Redeemable Preference Shares Under corporate statutes, preference shares can only be redeemed if they are fully paid-up. 1. Legitimate Sources of Redemption • Out of Distributable Profits: Utilizing free reserves that would otherwise be available for dividends (Retained Earnings, General Reserve, P&L Surplus). • Out of Proceeds of Fresh Issue of Shares: Issuing new equity shares or preference shares specifically to fund the redemption. 2. Capital Redemption Reserve (CRR) • When preference shares are redeemed out of divisible profits, an amount equal to the nominal face value of the shares redeemed must be transferred from free reserves to the Capital Redemption Reserve (CRR): \text{Retained Earnings / General Reserve A/c} \quad \text{Dr.} \quad \text{To Capital Redemption Reserve (CRR) A/c} • Objective: The CRR protects enterprise creditors by ensuring that the firm's capital base is not diminished by distributing capital to preference shareholders. • Utilization of CRR: Under statutory company law, CRR can only be utilized to issue fully paid bonus shares to existing equity shareholders.

Discuss the accounting treatment for Internal Reconstruction (Capital Reduction Scheme). How are accumulated debit balances of Profit & Loss and fictitious assets written off?

Internal Reconstruction and Capital Reduction Internal reconstruction is a financial reorganization of a company facing severe accumulated losses and capital impairment, undertaken without liquidating the enterprise. 1. Creation of Capital Reduction Account • Equity shareholders sacrifice nominal capital (e.g., reducing Rs 100 shares to Rs 20 fully paid): \text{Equity Share Capital (Old) A/c} \quad \text{Dr. (Rs 100)} \quad \text{To Equity Share Capital (New) A/c (Rs 20)} \quad \text{To Capital Reduction (Reconstruction) A/c (Rs 80)} • Debenture holders and creditors may also waive portions of their claims, crediting the Capital Reduction Account. 2. Writing Off Impaired and Fictitious Assets The accumulated credit balance in the Capital Reduction Account is utilized to eliminate accumulated debit losses and write down overvalued assets: \text{Capital Reduction A/c} \quad \text{Dr.} \quad \text{To Profit \& Loss A/c (Accumulated Losses)} \quad \text{To Preliminary Expenses A/c} \quad \text{To Goodwill A/c (Impaired intangibles)} \quad \text{To Plant \& Machinery A/c (Asset write-downs)} \quad \text{To Capital Reserve A/c (Any remaining surplus balance)}

Explain the preparation of Consolidated Financial Statements (NFRS 10 / NAS 27). Define Non-Controlling Interest (NCI) and Goodwill on consolidation.

Consolidated Financial Statements (NFRS 10) Consolidation presents the financial position and results of a parent company and its subsidiaries as if they were a single economic entity. 1. Core Consolidation Adjustments • Elimination of Intra-Group Balances: Eliminating parent investment in subsidiary against subsidiary equity capital at acquisition date. • Elimination of Unrealized Intra-Group Profits: Removing unrealized inventory markup on goods sold between group companies that remain unsold at year-end. 2. Key Consolidation Components • Non-Controlling Interest (NCI): The equity in a subsidiary not attributable, directly or indirectly, to the parent company (e.g., if parent holds 80%, NCI holds 20%). Presented separately within equity in the consolidated statement of financial position. • Goodwill on Consolidation: \text{Goodwill} = \text{Purchase Consideration Paid} + \text{NCI Value} - \text{Net Fair Value of Identifiable Assets Acquired} Goodwill is tested annually for impairment under NFRS.

Dean's Office Official Model Question Paper – ACS 203

Group A

Brief Answer Questions. Attempt ALL questions. (5 × 2 = 10)

[5*2=10]

Distinguish between Authorised Share Capital and Paid-Up Share Capital.

[2]
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Authorised vs. Paid-Up Share Capital
- Authorised Capital: The maximum nominal amount of share capital that a company is legally empowered to issue to the public, as specified in its Memorandum of Association (MoA).
- Paid-Up Capital: The actual amount of money received by the company from shareholders against calls made on issued shares.
What is forfeiture of shares? State the accounting treatment for re-issuing forfeited shares at a discount.

[2]
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Forfeiture and Re-issue of Shares

Forfeiture of shares is the cancellation of a shareholder’s equity membership and shares by the board of directors due to non-payment of call monies.

When forfeited shares are re-issued at a discount, the maximum permissible discount cannot exceed the amount already forfeited on those specific shares, debited to the Share Forfeiture Account.
Define Debenture Redemption Reserve (DRR) and state its statutory objective.

[2]
View model solution
Debenture Redemption Reserve (DRR)

DRR is a statutory reserve created by transferring profits from the Statement of Profit or Loss to ensure adequate liquidity for redeeming debentures upon maturity, safeguarding bondholders’ capital.
Differentiate between Amalgamation in the Nature of Merger and Amalgamation in the Nature of Purchase (NAS 22 / NFRS 3).

[2]
View model solution
Amalgamation: Merger vs. Purchase
- Nature of Merger (Pooling of Interests): All assets, liabilities, and reserves of the transferor company are absorbed at book values, and at least 90% of shareholders become equity holders in the new entity.
- Nature of Purchase (Acquisition Method): Assets and liabilities are recognized at fair market values, and any excess purchase consideration over net fair assets is recognized as Goodwill (or Gain on Bargain Purchase).
What is a Right Issue of shares? How does it protect existing shareholders from equity dilution?

[2]
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Right Issue of Shares

A right issue is an offering of new additional equity shares to existing shareholders in proportion to their existing shareholding (pro-rata) at a discounted subscription price, allowing them to preserve their proportional voting power and equity ownership without dilution.

Group B

Short Answer Questions. Attempt any THREE questions. (3 × 10 = 30)

[3*10=30]

Everest Manufacturing Company Ltd. issued 50,000 equity shares of Rs 100 each at a premium of Rs 20 per share, payable as follows:

On Application: Rs 30 per share
On Allotment: Rs 50 per share (including Rs 20 premium)
On First & Final Call: Rs 40 per share

Applications were received for 70,000 shares. Directors rejected applications for 10,000 shares (application money refunded) and made pro-rata allotment to the remaining applicants for 60,000 shares, excess application money being adjusted toward allotment.

All call monies were duly received except from Mr. Sharma holding 1,000 allotted shares who failed to pay allotment and call money. His shares were subsequently forfeited and re-issued to Mr. Thapa as fully paid-up for Rs 85 per share.

Required: Journal entries in the books of the company.

[10]

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Journal Entries in the Books of Everest Manufacturing Company Ltd.

Date / S.N.	Particulars	Debit (Rs)	Credit (Rs)
1	Bank A/c ... Dr. ( $70{,}000 \times 30$ )<br> To Share Application A/c<br>(Being application money received for 70,000 shares)	2,100,000	<br>2,100,000
2	Share Application A/c ... Dr.<br> To Share Capital A/c ( $50{,}000 \times 30$ )<br> To Bank A/c (Refund: $10{,}000 \times 30$ )<br> To Share Allotment A/c (Pro-rata: $10{,}000 \times 30$ )<br>(Being application money transferred, refunded, and adjusted)	2,100,000	<br>1,500,000<br>300,000<br>300,000
3	Share Allotment A/c ... Dr. ( $50{,}000 \times 50$ )<br> To Share Capital A/c ( $50{,}000 \times 30$ )<br> To Securities Premium A/c ( $50{,}000 \times 20$ )<br>(Being allotment due with premium)	2,500,000	<br>1,500,000<br>1,000,000
4	Bank A/c ... Dr.<br>Calls-in-Arrears A/c ... Dr.<br> To Share Allotment A/c ( $2{,}500{,}000 - 300{,}000$ )<br>(Being allotment received net of arrears)	2,156,000<br>44,000	<br><br>2,200,000
5	Share First & Final Call A/c ... Dr. ( $50{,}000 \times 40$ )<br> To Share Capital A/c<br>(Being call money due on 50,000 shares)	2,000,000	<br>2,000,000
6	Bank A/c ... Dr. ( $49{,}000 \times 40$ )<br>Calls-in-Arrears A/c ... Dr. ( $1{,}000 \times 40$ )<br> To Share First & Final Call A/c<br>(Being call money received except on 1,000 shares)	1,960,000<br>40,000	<br><br>2,000,000
7	Share Capital A/c ... Dr. ( $1{,}000 \times 100$ )<br>Securities Premium A/c ... Dr. ( $1{,}000 \times 20$ unpaid)<br> To Calls-in-Arrears A/c ( $44{,}000 + 40{,}000$ )<br> To Share Forfeiture A/c ( $1{,}200 \text{ applied} \times 30$ )<br>(Being 1,000 shares forfeited for non-payment)	100,000<br>20,000	<br><br>84,000<br>36,000
8	Bank A/c ... Dr. ( $1{,}000 \times 85$ )<br>Share Forfeiture A/c ... Dr. (Discount: $1{,}000 \times 15$ )<br> To Share Capital A/c ( $1{,}000 \times 100$ )<br>(Being 1,000 forfeited shares re-issued at Rs 85)	85,000<br>15,000	<br><br>100,000
9	Share Forfeiture A/c ... Dr. ( $36{,}000 - 15{,}000$ )<br> To Capital Reserve A/c<br>(Being net gain on re-issued shares transferred to Capital Reserve)	21,000	<br>21,000

Explain the redemption of Redeemable Preference Shares under corporate law. What are the sources of redemption, and how is the Capital Redemption Reserve (CRR) created?

[10]
View model solution
Redemption of Redeemable Preference Shares

Under corporate statutes, preference shares can only be redeemed if they are fully paid-up.

1. Legitimate Sources of Redemption
- Out of Distributable Profits: Utilizing free reserves that would otherwise be available for dividends (Retained Earnings, General Reserve, P&L Surplus).
- Out of Proceeds of Fresh Issue of Shares: Issuing new equity shares or preference shares specifically to fund the redemption.
2. Capital Redemption Reserve (CRR)
- When preference shares are redeemed out of divisible profits, an amount equal to the nominal face value of the shares redeemed must be transferred from free reserves to the Capital Redemption Reserve (CRR):
  $\text{Retained Earnings / General Reserve A/c} \quad \text{Dr.}$
  
  $\quad \text{To Capital Redemption Reserve (CRR) A/c}$
- Objective: The CRR protects enterprise creditors by ensuring that the firm’s capital base is not diminished by distributing capital to preference shareholders.
- Utilization of CRR: Under statutory company law, CRR can only be utilized to issue fully paid bonus shares to existing equity shareholders.
Discuss the accounting treatment for Internal Reconstruction (Capital Reduction Scheme). How are accumulated debit balances of Profit & Loss and fictitious assets written off?

[10]
View model solution
Internal Reconstruction and Capital Reduction

Internal reconstruction is a financial reorganization of a company facing severe accumulated losses and capital impairment, undertaken without liquidating the enterprise.

1. Creation of Capital Reduction Account
- Equity shareholders sacrifice nominal capital (e.g., reducing Rs 100 shares to Rs 20 fully paid):
  $\text{Equity Share Capital (Old) A/c} \quad \text{Dr. (Rs 100)}$
  
  $\quad \text{To Equity Share Capital (New) A/c (Rs 20)}$
  
  $\quad \text{To Capital Reduction (Reconstruction) A/c (Rs 80)}$
- Debenture holders and creditors may also waive portions of their claims, crediting the Capital Reduction Account.
2. Writing Off Impaired and Fictitious Assets

The accumulated credit balance in the Capital Reduction Account is utilized to eliminate accumulated debit losses and write down overvalued assets:
$\text{Capital Reduction A/c} \quad \text{Dr.}$

$\quad \text{To Profit \& Loss A/c (Accumulated Losses)}$

$\quad \text{To Preliminary Expenses A/c}$

$\quad \text{To Goodwill A/c (Impaired intangibles)}$

$\quad \text{To Plant \& Machinery A/c (Asset write-downs)}$

$\quad \text{To Capital Reserve A/c (Any remaining surplus balance)}$
Explain the preparation of Consolidated Financial Statements (NFRS 10 / NAS 27). Define Non-Controlling Interest (NCI) and Goodwill on consolidation.

[10]
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Consolidated Financial Statements (NFRS 10)

Consolidation presents the financial position and results of a parent company and its subsidiaries as if they were a single economic entity.

1. Core Consolidation Adjustments
- Elimination of Intra-Group Balances: Eliminating parent investment in subsidiary against subsidiary equity capital at acquisition date.
- Elimination of Unrealized Intra-Group Profits: Removing unrealized inventory markup on goods sold between group companies that remain unsold at year-end.
2. Key Consolidation Components
- Non-Controlling Interest (NCI): The equity in a subsidiary not attributable, directly or indirectly, to the parent company (e.g., if parent holds 80%, NCI holds 20%). Presented separately within equity in the consolidated statement of financial position.
- Goodwill on Consolidation:
  $\text{Goodwill} = \text{Purchase Consideration Paid} + \text{NCI Value} - \text{Net Fair Value of Identifiable Assets Acquired}$
  Goodwill is tested annually for impairment under NFRS.

Group C

Comprehensive Answer / Case Analysis Question. (1 × 20 = 20)

[1*20=20]

Read the following scenario and answer the questions:

Alpha Holdings Ltd. agreed to acquire the business and undertaking of Beta Technologies Ltd. on 31 Ashadh 2080. The Balance Sheet of Beta Technologies Ltd. on that date stood as follows:

| Liabilities | Amount (Rs) | Assets | Amount (Rs) | | :--- | :--- | :--- | :--- | | | Equity Share Capital (100,000 shares of Rs 100) | 10,000,000 | Land & Factory Buildings | 5,500,000 | | General Reserve | 2,000,000 | Plant & Machinery | 4,000,000 | | Profit and Loss Account | 1,500,000 | Inventories (Stock) | 2,500,000 | | 12% Debentures | 3,000,000 | Trade Debtors | 1,800,000 | | Trade Creditors | 1,200,000 | Bank Balance | 1,200,000 | | Outstanding Expenses | 300,000 | Preliminary Expenses | 200,000 | | | | Goodwill | 2,800,000 | | Total | 18,000,000 | Total | 18,000,000 |

Terms of Acquisition:

Alpha Holdings agreed to issue 4 equity shares of Rs 100 each (market value Rs 125 each) for every 5 equity shares held in Beta Technologies Ltd.
Alpha Holdings issued 13% Debentures of Rs 100 each to redeem the 12% Debentures of Beta Technologies Ltd. at a premium of 5%.
Alpha Holdings agreed to take over all assets and liabilities, except cash/bank balance and preliminary expenses. Land & Buildings were revalued at Rs 7,000,000, Plant & Machinery at Rs 3,500,000, Stock at Rs 2,200,000, and a 5% provision for doubtful debts was created on Trade Debtors.
Liquidation expenses of Beta Technologies Ltd. amounted to Rs 50,000, paid out of its retained bank balance.

Questions: a. Calculate the Purchase Consideration under the Net Payment Method. b. Compute the Net Assets Acquired at Fair Value and determine Goodwill or Capital Reserve arising on acquisition. c. Prepare the Realisation Account and Equity Shareholders’ Account in the books of Beta Technologies Ltd. (Transferor Company). d. Pass the opening journal entries in the books of Alpha Holdings Ltd. (Transferee Company).

[20]

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Comprehensive Corporate Acquisition Analysis: Alpha Holdings & Beta Technologies

a. Purchase Consideration (Net Payment Method)

Total shares in Beta Technologies = 100,000 shares.
Exchange Ratio: 4 shares of Alpha for every 5 shares of Beta.
Number of Alpha shares issued: $\frac{100{,}000}{5} \times 4 = 80{,}000 \text{ shares}$ .
Issue price per share = Rs 125 (Rs 100 face value + Rs 25 premium).

\text{Purchase Consideration} = 80{,}000 \text{ shares} \times \text{Rs } 125 = \mathbf{\text{Rs } 10{,}000{,}000}

Equity Share Capital: $80{,}000 \times 100 = \text{Rs } 8{,}000{,}000$
Securities Premium: $80{,}000 \times 25 = \text{Rs } 2{,}000{,}000$

b. Net Assets Acquired at Fair Value & Goodwill / Capital Reserve

Assets Taken Over at Agreed Fair Value	Amount (Rs)
Land & Buildings	7,000,000
Plant & Machinery	3,500,000
Inventories	2,200,000
Trade Debtors ( $1{,}800{,}000 - 5\% \text{ prov } 90{,}000$ )	1,710,000
Total Fair Value of Assets Taken Over	14,410,000
Less: Liabilities Taken Over:
12% Debentures (at agreed redemption value: $3{,}000{,}000 + 5\%$ )	(3,150,000)
Trade Creditors	(1,200,000)
Outstanding Expenses	(300,000)
Net Assets Taken Over	9,760,000
Purchase Consideration Paid	10,000,000
Goodwill on Acquisition ( $\text{Purchase Consideration} - \text{Net Assets}$ )	240,000

c. Ledger Accounts in the Books of Beta Technologies Ltd.

1. Realisation Account

Debit Particulars	Amount (Rs)	Credit Particulars	Amount (Rs)
To Land & Buildings	5,500,000	By Trade Creditors	1,200,000
To Plant & Machinery	4,000,000	By Outstanding Expenses	300,000
To Inventories	2,500,000	By 12% Debentures	3,000,000
To Trade Debtors	1,800,000	By Alpha Holdings Ltd. (Purchase Consideration)	10,000,000
To Goodwill	2,800,000	By Equity Shareholders A/c (Net Loss on Realisation)	2,150,000
To Bank (Liquidation Expenses)	50,000
Total	16,650,000	Total	16,650,000

2. Equity Shareholders’ Account

Debit Particulars	Amount (Rs)	Credit Particulars	Amount (Rs)
To Preliminary Expenses	200,000	By Equity Share Capital	10,000,000
To Realisation Loss	2,150,000	By General Reserve	2,000,000
To Shares in Alpha Holdings Ltd.	10,000,000	By Profit & Loss Account	1,500,000
To Bank Balance (Remaining cash distributed)	1,150,000
Total	13,500,000	Total	13,500,000

d. Opening Journal Entries in the Books of Alpha Holdings Ltd.

Particulars	Debit (Rs)	Credit (Rs)
Business Purchase A/c ... Dr.<br> To Liquidator of Beta Technologies Ltd. A/c<br>(Being purchase consideration due)	10,000,000	<br>10,000,000
Land & Buildings A/c ... Dr.<br>Plant & Machinery A/c ... Dr.<br>Inventories A/c ... Dr.<br>Trade Debtors A/c ... Dr.<br>Goodwill A/c ... Dr. (Balancing figure)<br> To Provision for Doubtful Debts A/c<br> To Trade Creditors A/c<br> To Outstanding Expenses A/c<br> To Liability for 12% Debentures A/c<br> To Business Purchase A/c<br>(Being assets and liabilities taken over at fair values)	7,000,000<br>3,500,000<br>2,200,000<br>1,800,000<br>240,000	<br><br><br><br><br>90,000<br>1,200,000<br>300,000<br>3,150,000<br>10,000,000
Liquidator of Beta Technologies Ltd. A/c ... Dr.<br> To Equity Share Capital A/c ( $80{,}000 \times 100$ )<br> To Securities Premium A/c ( $80{,}000 \times 25$ )<br>(Being purchase consideration discharged by issue of shares)	10,000,000	<br>8,000,000<br>2,000,000
Liability for 12% Debentures A/c ... Dr.<br> To 13% Debentures A/c<br>(Being 13% Debentures issued to discharge acquired debenture liability)	3,150,000	<br>3,150,000