CUET UG Business Studies: Accounting - Company Accounts, Share Capital, Debentures, Issue at Premium/Discount

Must-Know

• A company can issue shares at par, at a premium, or at a discount; however, discount on issue of shares is permitted only under Section 53 of the Companies Act, 2013, and not in the case of a public issue.
• Shares issued at a premium mean the issue price is higher than the face value; e.g., if face value is ?10 and issue price is ?13, ?3 is the premium per share.
• Securities Premium Reserve can be used for issuing bonus shares, writing off preliminary expenses, and buy-back of shares, as per Section 52 of the Companies Act, 2013.
• Discount on issue of shares is shown under "Non-current liabilities" as a deduction from share capital in the Balance Sheet (Note: AS 11 does not apply; presentation follows Schedule III).
• Minimum subscription is 90% of the issued amount as per Rule 13(1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014; if not received, allotment must be refunded.
• Calls-in-arrears is the amount not paid by shareholders on calls made; it is deducted from subscribed capital in the Balance Sheet.
• Calls-in-advance is the amount paid by shareholders before it is called; it is shown under "Current liabilities" and carries interest up to 6% p.a. as per Table F of the Companies Act, 2013.
• Forfeiture of shares occurs when a shareholder fails to pay allotment or call money; the amount received is transferred to "Share Forfeiture Account", a temporary account.
• Reissued forfeited shares can be issued at par, premium, or discount, but the discount cannot exceed the amount credited to Share Forfeiture Account.
• Debentures are debt instruments acknowledging a loan; they carry a fixed rate of interest and are issued under the company’s common seal.
• Irredeemable debentures are not repayable during the lifetime of the company; however, as per Section 71(4) of the Companies Act, 2013, no company can issue irredeemable debentures.
• Debentures can be secured or unsecured; secured debentures are backed by a charge on company’s assets.
• Discount on issue of debentures is a capital loss and shown under "Other Non-current Assets" in the Balance Sheet as per Schedule III.
• Premium on redemption of debentures is a loss and must be provided for before redemption; maximum premium allowed is 25% unless permitted by terms of issue.
• When shares are issued for consideration other than cash (e.g., machinery), the asset is recorded at agreed value and Share Capital credited accordingly; e.g., machinery worth ?5 lakh for 50,000 shares of ?10 each.
• Underwriting commission is allowed up to 2.5% on issue price for shares and 1.5% for debentures as per Table F of the Companies Act, 2013.
• Right issue is an offer to existing shareholders in proportion to their current holdings; it follows Section 62(1)(a) of the Companies Act, 2013.
• Private placement of shares under Section 42 allows issue to 200 or fewer persons in a financial year; securities premium can be received in this method.
• Buy-back of shares is allowed up to 25% of total paid-up equity capital in a financial year as per Section 68; funds cannot be used from proceeds of earlier issues of same kind.
• Debentures issued as collateral security do not require interest unless the primary security fails; no journal entry is made unless invoked.

Difficulty Level

Intermediate — Requires understanding of journal entries, Balance Sheet presentation under Schedule III, and application of Companies Act, 2013 provisions; numerical problems are moderate but concept-heavy.

Common CUET Traps

• Trap: Assuming discount on issue of shares is allowed freely like premium. Avoid: Discount on shares is highly restricted under Section 53; only permitted for sweat equity or to vendors, not public issues.
• Trap: Treating Securities Premium Reserve as profit available for dividend. Avoid: It is a capital reserve and cannot be used for dividend distribution; permitted uses are specified under Section 52.
• Trap: Believing debentures can be irredeemable. Avoid: Section 71(4) prohibits issuance of irredeemable debentures; all must be redeemed within 10 years (20 years for infrastructure companies with CRR approval).

Practice MCQs

1. Question: A company issues 10,000 shares of ?10 each at a premium of ?3 per share. What is the amount credited to the Securities Premium Reserve?
   A. ?30,000
   B. ?100,000
   C. ?130,000
   D. ?70,000
   Answer: A
   Explanation: Premium amount (?3 × 10,000) = ?30,000 is credited to Securities Premium Reserve.
   Why others fail: Option C is total issue proceeds, not just premium.

2. Question: Which of the following cannot be financed using the Securities Premium Reserve?
   A. Issue of bonus shares
   B. Writing off preliminary expenses
   C. Payment of dividend
   D. Buy-back of shares
   Answer: C
   Explanation: Dividend cannot be paid out of Securities Premium Reserve as it is a capital reserve.
   Why others fail: Students confuse capital reserves with revenue reserves, thinking all reserves can pay dividends.

3. Question: A company forfeited 1,000 shares of ?10 each (?7 called up) for non-payment of ?4 per share. Later, these shares were reissued at ?6 per share, fully paid. What is the balance in Share Forfeiture Account after reissue?
   A. ?3,000
   B. ?4,000
   C. ?6,000
   D. ?1,000
   Answer: A
   Explanation: Amount forfeited was ?4 × 1,000 = ?4,000; reissued at ?6 (face ?10), so discount of ?4,000 charged to forfeiture account; balance = ?4,000 – ?1,000 (discount) = ?3,000.
   Why others fail: Students forget to deduct the discount on reissue from the forfeiture account.

4. Question: Maximum period for redemption of debentures issued by a non-infrastructure company is:
   A. 5 years
   B. 10 years
   C. 15 years
   D. 20 years
   Answer: B
   Explanation: As per Section 71(4) of the Companies Act, 2013, debentures must be redeemed within 10 years, except for infrastructure companies (up to 20 years).
   Why others fail: Option D is correct only for infrastructure companies; students overlook this exception.

5. Question: A company received ?50,000 as calls-in-advance from shareholders. At what maximum rate can it pay interest on this amount?
   A. 5% p.a.
   B. 6% p.a.
   C. 8% p.a.
   D. 10% p.a.
   Answer: B
   Explanation: Table F of the Companies Act, 2013 allows interest on calls-in-advance up to 6% p.a.
   Why others fail: Students assume higher rates are allowed, confusing it with loan interest rates.

Last?Minute Revision

• Discount on issue of shares: allowed only under Section 53, not for public issues.
• Securities Premium Reserve: use for bonus shares, buy-back, preliminary expenses – not for dividend.
• Minimum subscription: 90% of issued amount – Rule 13(1).
• Calls-in-arrears: deducted from subscribed capital in Balance Sheet.
• Calls-in-advance: shown under Current liabilities, max interest 6% p.a.
• Forfeiture of shares: Share Forfeiture Account is temporary; balance transferred to Capital Reserve after reissue.
• Reissue of forfeited shares: discount cannot exceed forfeited amount.
• Debentures: always debt, carry fixed interest, not voting rights.
• Irredeemable debentures: prohibited under Section 71(4).
• Maximum redemption period: 10 years (20 years for infrastructure companies).
• Discount on debentures: shown under Other Non-current Assets.
• Premium on redemption: treated as loss, must be provided.
• Shares for consideration other than cash: asset recorded at agreed value.
• Underwriting commission: 2.5% on shares, 1.5% on debentures.
• Right issue: under Section 62(1)(a), offered to existing shareholders.
• Private placement: max 200 persons per financial year under Section 42.
• Buy-back limit: 25% of paid-up equity capital in a year – Section 68.
• Buy-back funding: not from proceeds of same type of securities.
• Collateral debentures: no entry unless invoked.
• Table F: governs interest on calls-in-advance and allotment money.