Shares MCQ Quiz - Objective Question with Answer for Shares - Download Free PDF

The correct answer is - transferred to capital reserve account

Key Points

• Transferred to capital reserve account
  • When shares are forfeited, the amount paid by the shareholders on these shares is credited to the share forfeiture account.
  • Upon reissuing the forfeited shares, the amount received from the reissue is credited to the share capital account.
  • Any surplus remaining in the share forfeiture account after reissuing the shares is not a profit earned from the business but a capital gain.
  • Therefore, this surplus is transferred to the capital reserve account, which is used for specific purposes as dictated by the company's policies and regulations.

Additional Information

• Added to the paid-up capital
  • This option is incorrect because adding the balance to the paid-up capital would distort the actual paid-up capital of the company, which should only include the actual amount paid by shareholders for their shares.
• Transferred to goodwill account
  • This option is incorrect because goodwill represents the value of a company's brand, customer base, and other intangible assets, not the surplus from share forfeiture.
• Shown in the balance sheet under the heading share forfeiture account
  • This option is incorrect because the share forfeiture account is a temporary account used to hold funds until they are transferred to the capital reserve account.

The correct answer is 48

Key Points

• A Ltd. issued prospectus inviting applications for 2000 shares:
  • A company, A Ltd., invited applications for 2000 shares, indicating it is planning to issue this number of shares to interested investors.
• Applications were received for 3000 shares and pro-rata allotment was made on the application for 2400 shares:
  • Despite inviting applications for 2000 shares, the company received applications for 3000 shares, showing an oversubscription. To handle this, the company decided to allot shares on a pro-rata basis for the 2400 shares applied for.
• If Ramesh had been allotted 40 shares:
  • Ramesh received 40 shares out of the total shares available for allotment. To find out how many shares he originally applied for, we need to understand the pro-rata allotment process.
• Calculation:
  • Pro-rata allotment means that shares are distributed in proportion to the number of shares applied for. Here, 2000 shares were allotted for 2400 shares applied, which gives a ratio of 5:6 (2000/2400).
  • Ramesh was allotted 40 shares, so we apply the ratio to determine his application: (40 shares * 6) / 5 = 48 shares. Therefore, Ramesh must have applied for 48 shares.

Additional Information

• Pro-rata allotment process:
  • Pro-rata allotment is a method used by companies when the number of shares applied for exceeds the number of shares available for allocation. It ensures that all applicants receive shares in proportion to their applications.
• Oversubscription handling:
  • When a company receives more applications than the shares it intends to issue, it has several options to manage the oversubscription, including pro-rata allotment, lottery, or refunding excess application money.

The correct answer is Rs. 9

Key Points Forfeiture & Reissue of shares

• When some shareholders are unable to pay one or more amounts, such as allotment money or call money, the shares can be forfeited.
• In such cases, the firm has the option to forfeit the shares, thus cancelling their allotment.
• After the shares are forfeited, the company can re-issue the shares, in this case it is known as re-issue of forfeited shares or reissue of shares.
• After the shares are forfeited, the company can re-issue the shares, in this case it is known as re-issue of forfeited shares or reissue of shares.

Important Points Working note:

Forfeited amount: Number of shares forfeited x amount per share paid

Forfeited amount: 4000 x 3 = 12000

No of Forfeited shares re-issued = 2,000 (Given)

Forfeited Amount on 2,000 shares = 1200 x 2,000/4000 = 6000

Amount transferred to capital reserve = 4000 (Given)

Therefore, discount allowed on re-issue=6000 - 4000 = 2000

Discount allowed per share = 2000 / 2000 = Rs. 1

Additional Information

The correct answer is Capital Reserve Account.

 Key Points

• The corporation has shares that have been forfeited for sale. The corporation is required to dispose of the forfeited shares following their forfeiture.
• To reissue forfeited shares, the firm needs to pass a resolution at its board meeting. Reissuing forfeited shares amounts to the corporation merely selling its stock. These shares are not distributed by the corporation.

Important PointsJournal Entries for reissue of forfeited shares

Hence, the  balance of share forfeiture account is transferred to Capital Reserve Account.

The correct answer is ₹8 Per share.

Key PointsForfeiture of Shares - Shares are forfeited when shareholders fail to pay one or more instalments on shares that have been assigned to them. The corporation has the ability to confiscate the defaulters' shares in such a circumstance. This is known as 'Share Forfeiture.'

Reissue of shares -Forfeited shares may be issued again as fully paid at a par, premium,  discount. It should be noted that the discount permitted on reissue of forfeited shares cannot exceed the amount received on forfeited shares at the time of first issue, and that the discount allowed on reissue of forfeited shares shall be deducted to the 'Forfeited Share Account.' The amount previously paid by the original shareholder determines the pace at which these shares are reissued.

Important Points

Forfeited Shares = 2,000 Shares 

Application money = Rs.3

unpaid amount on allotment & calls = Rs.7 per shares 

The rate of reissue of shares =10 - 3 = 7 per share
The minimum rate of reissue of shares = Total value of shares -  money already received on shares.

                                               =10 - 3 shares 

                                               = 7 per shares

Amount on Share forfeiture used in reissue of shares = 500 x 3 = Rs.1,500

Amount of profit on reissued shares transferred to capital reserve = Rs.500 (Given)

shares reissued = 500 shares

Profit on reissue of shares = Rs.500/500

=Rs.1  

Amount of reissue par shares= minimum rate of reissue of per shares + Profit on reissue of  per shares

= Rs.7 + Rs.1

= Rs.8 per Share

Additional InformationEntry for Forfeiture of 2000 Shares

Reissue of shares - 500 Shares 

The correct answer is Share Market.

• The term insider trading is associated with the share market.
• Insider trading is the buying or selling of a publicly-traded company's stock by someone who has non-public, material information about that stock.

Key Points

• Material non-public information is any information that could substantially impact an investor's decision to buy or sell the stocks that have not been made available to the public.
• Insider trading is illegal and comes with stern penalties including both potential fines and jail time.
• Securities and Exchange Board of India (SEBI) have stringent rules to prevent insider trading.

Additional Information

• Hawala: Hawala is the underground, cheap and instant medium to transfer the huge amount of money.
  • Hawala is cheaper and less cumbersome than formal remittance channels such as banks, Western Union or Money Gram.
  • Hawala system is used by Criminals, Businessmen, and Nonresidents to remit money.
  • Halawa system is the backbone of the underworld, drugs/arms mafias, terrorists and smugglers. Businessmen use it transfer money to evade tax.

The incorrect statement is The profit on re-issue of forfeited shares is transferred to General Reserve Account. 

Key PointsShares - a part or portion of a larger amount which is divided among a number of people, or to which a number of people contribute. The person who hold shares are called shareholders.

Important PointsOption 1: Forfeited shares can be reissued.

Explanation:

• Forfeited shares may be issued again as fully paid at a par, premium,  discount.
• It should be noted that the discount permitted on reissue of forfeited shares cannot exceed the amount received on forfeited shares at the time of first issue, and that the discount allowed on reissue of forfeited shares shall be deducted to the 'Forfeited Share Account.'
• Hence, this statement is true

Option 2: A notice of 14 days to shareholders is necessary before forfeiture of shares.

Explanation:

• In the event that the amount on calls is not paid, a firm may forfeit shares. Prior to forfeiture, the corporation must first send the defaulting shareholder a clear 14-day notice that he must pay the outstanding balance plus interest.
• Hence, this statement is true

Option 3: Premium on issue of shares can be used for writing off the preliminary expenses.

Explanation:

• Preliminary expenses are any costs incurred before a firm is created, or before the start of corporate operations.
• Any initial business expenses may be deducted from the Securities Premium Account.
• Hence, this statement is true

Option 4: The profit on re-issue of forfeited shares is transferred to General Reserve Account.

• The profit on re-issue of forfeited shares is transferred to Capital Reserve Account.
• Hence, this statement is false.

Thus, in above question "the profit on re-issue of forfeited shares is   transferred to General Reserve Account is not correct"

Solution:

Working note:- 

Amount Left in Share Forfeiture = No. of shares not reissued x Amount paid by John Per share

Amount Left in Share Forfeiture = 5 x 5 = Rs. 25

The correct answer is individuals buying and selling the stock.

Key Points

The market price of a share of common stock is determined by individuals buying and selling the stock.

• Once a company goes public, its shares are available for trading on a stock exchange.
• A stock's initial public offering (IPO) is at a price equal to the value of its expected future dividend payments.
• The public can buy and re-sell its shares.
• The price is determined by supply and demand in the market. 
• If there is a high demand for its shares, the price will increase and if there is a low demand for its shares, the price will increase.
• If an individual think that the future of the company does not look good, he might want to sell off as quickly as possible.
• If an individual think that the future of the company looks good, he might want to retain it in the hope that the share price will increase.

The correct answer is ₹4.

Key PointsReissue of Shares:

• The price at which the shares are reissued is up to the firm, but the total amount received on the shares cannot be less than the amount that is owed on the shares.
• The sum paid out to both the first allottee and the second buyer is referred to as the entire amount in this context..

Important PointsIn the above question, A company forfeited 100 equity shares of ₹10 each on which a final call of ₹4 per share was unpaid, it means ₹6 is paid.

Hence, the company can reissue the share at minimum price of ₹4, because maximum discount should not be exceeded the paid amount.

The correct answer is Existing Shareholders at free of cost​.

Key Points

Bonus shares are issued to the Existing employees at free of cost.

Bonus Shares:

• Bonus shares are additional shares given to the current shareholders without any additional cost.
• These are company's accumulated earnings which are not given out in the form of dividends but are converted into free shares.
• A company may choose to provide pre-existing shareholders with bonus shares in the event that it isn’t able to pay dividends to them.
• The basic principle behind bonus shares is that the total number of shares increases with a constant ratio of number of shares held to the number of shares outstanding.
• Companies issue bonus shares to encourage retail participation and increase their equity base.
• When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company.
• Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.

Mistake Points There was an error in first option as per the question paper, Hence, we have updated it. 

The correct answer is Reserve Capital.

Key PointsReserve Capital:

• A company may set aside a portion of its uncalled capital to be called only if the company is wound up.
•  The company's uncalled sum is referred to as 'Reserve Capital.'
• It is only available to creditors in the event of a company's liquidation.

Important Points Reserve Capital: According to Section 99 of the Companies Act 2013, Reserve Capital refers to that portion of uncalled share capital which shall not be called up, except in the event of winding up. It is not shown in the balance sheet of company and there's no compulsion to create reserve capital, a special resolution is required for creating reserve capital.

The correct answer is 5%.

Key PointsShares- A part or portion of a larger amount which is divided among a number of people, or to which a number of people contribute. The person who hold shares are called shareholders.

Important Points

When offering the share capital for public subscription, the following considerations should be made:

1. The application fee must equal at least 5% of the share's face value.

2. Calls must be placed in accordance with the articles of association.

3. The following provisions of Table A shall apply in the absence of its own articles of association:

(a) A minimum of 14 days' notice is given to the shareholders to pay the amount;

(b) The amount of the call should not be more than 25% of the face value of the share; and

(c) A period of one month must pass between two calls.

(d) All calls on shares belonging to the same class must be made uniformly.

Thus, According to the provisions of Companies Act, 2013, the amount of minimum application money to apply for shares should be at least 5 % of the face value of the share. 

Right offering:

1. A rights offering is when a company issues to its existing shareholders a right to buy additional shares in the company.
2. The company offers its shareholder a specific number of shares at a special price.
3. The company will also set a time limit for the shareholder to buy these shares.
4. The shares are often offered at a discounted price to the existing shareholders.
5. In a rights offering, the subscription price at which each share may be offered is generally at a discount to the current market price.
6. Rights are often transferable, allowing the holder to sell them in the open market.

Number Of Right Shares: 1

Total Shares= Existing + New share = 5+1= 6

Value Of Right = (Number Of Right Shares / Total Shares) x (Market Value - Issue Price)

Value Of Right = (1/6) x (150-120)

∴ Value Of Right = 0.166667 x 30

∴ Value Of Right = Rs. 5

Alternatively,

Market Value Of 5 Existing Holdings = Rs. 150 x 5 = Rs. 750

Add: Issue Price Of 1 New Holding   = Rs. 120 x 1 = Rs. 120

∴ Value Of Total Holdings = 750 + 120 = Rs. 870

Value Of Each Share = 870/6 = Rs. 145

Value Of Right = Market Price - Average Price

Value Of Right = 150 - 145

∴Value Of Right = Rs. 5

Thus, option 1 is the correct answer.

The correct answer is Capital Reserve Account.

 Key Points

• The corporation has shares that have been forfeited for sale. The corporation is required to dispose of the forfeited shares following their forfeiture.
• To reissue forfeited shares, the firm needs to pass a resolution at its board meeting. Reissuing forfeited shares amounts to the corporation merely selling its stock. These shares are not distributed by the corporation.

Important PointsJournal Entries for reissue of forfeited shares

Hence, the  balance of share forfeiture account is transferred to Capital Reserve Account.