A company issues a share of face value 10 at 15. The Securities Premium of 5 may be used for:

Paying dividend to equity shareholders

Paying the managing director’s salary

Meeting the year’s operating losses

Calls in arrears appears in a company’s balance sheet as:

A deduction from called-up capital in Shareholders’ Funds

A current asset, since the money is receivable

A deduction from called-up capital in Shareholders’ Funds

An expense in the Statement of Profit and Loss

In the Schedule III balance sheet of a company, debentures are shown under:

Non-current liabilities — long-term borrowings

Current liabilities — short-term borrowings

Debentures of face value 100 are issued at 95 and are redeemable at 105. At the time of issue, Loss on Issue of Debentures per debenture is:

Nothing, until redemption falls due

100 shares forfeited after 600 had been received on them are reissued at a discount of 700. This reissue is:

Invalid, because the discount cannot exceed the 600 already forfeited on those shares

Valid, since a company may reissue forfeited shares at any price it can get

Invalid, because the discount cannot exceed the 600 already forfeited on those shares

Valid, and the extra 100 is debited to Capital Reserve

Valid, and the extra 100 is debited to the Statement of Profit and Loss

Company Accounts — Share Capital and Debentures

A company raises long-term money in two ways and the accounting difference between them is the whole unit. Shares make the holder an owner: the money is capital, the return is a dividend, it is paid only out of profit and only if declared. Debentures make the holder a creditor: the money is a loan, the return is interest, it is a charge against profit and is paid whether the company earns or not. Everything the paper asks — how a premium is recorded, why calls in arrears is shown as a deduction, what happens on forfeiture, where interest on debentures goes — follows from that one distinction. This chapter takes the two instruments in turn and then the entries that are asked as one-mark questions.

Share Capital: the Words the Balance Sheet Uses

The five capital terms are asked directly and they are asked as a sequence, each smaller than the last. Authorised capital is the maximum the memorandum permits. Issued capital is what the company has actually offered out of it. Subscribed capital is what the public applied for. Called-up capital is the part of the subscribed amount the company has demanded so far, and paid-up capital is what has actually come in — called-up minus calls in arrears. The one relation to hold: paid-up capital is what the balance sheet reports as capital, and the unpaid part is shown as a deduction from called-up capital rather than as an asset.

Shares against debentures, on every axis the paper tests
Axis	Equity share	Debenture
What the holder is	An owner, with voting rights.	A creditor, with no vote.
The return	Dividend — an appropriation of profit, paid only if declared.	Interest — a charge against profit, payable whether or not there is profit.
Repayment	Not repaid during the company’s life, except by buy-back or reduction.	Redeemed on a fixed date, out of profits or a sinking fund.
On the balance sheet	Shareholders’ funds — equity share capital.	Non-current liabilities — long-term borrowings.
On winding up	Paid last, out of whatever remains.	Paid before any shareholder, as a debt.

⚠️ Securities Premium is not a profit

A share of face value 10 issued at 15 brings in 15, of which 10 is share capital and 5 is Securities Premium — a reserve under Shareholders’ Funds, never revenue. It cannot be distributed as dividend, and Section 52 limits its use to a named list: issuing fully paid bonus shares, writing off preliminary expenses or the discount and expenses on an issue of shares or debentures, providing for the premium on redemption of debentures or redeemable preference shares, and buy-back. An option that spends it on anything else is wrong on the section rather than on the arithmetic.

The Issue, Stage by Stage

Application money received — Bank is debited and Share Application is credited. Application money must be at least 5% of the face value under the Act.
Allotment — Share Application is debited and Share Capital (with Securities Premium, if any) is credited. Excess application money is either refunded or adjusted against allotment.
Calls — Share Call is debited on the call being made and credited to Share Capital; Bank is debited as the money arrives.
Calls in arrears is money called and not received: shown as a deduction from called-up capital, and interest at up to 10% a year may be charged on it. Calls in advance is money received before the call: a liability, on which up to 12% a year may be paid, and it carries no dividend.
Forfeiture cancels the shares of a defaulter: Share Capital is debited with the amount CALLED UP, the unpaid calls are credited, and the balance goes to Share Forfeiture (a temporary reserve). On reissue, any discount allowed is debited to Share Forfeiture and the remaining balance is transferred to Capital Reserve.

🧠 Reissue at a discount has a ceiling

Forfeited shares may be reissued at a discount, but the discount cannot exceed the amount already forfeited on those shares — otherwise the company would be issuing capital below value. So if 500 was forfeited on 100 shares, the maximum discount on reissuing those 100 shares is 500, and whatever of the 500 is left after the discount goes to Capital Reserve. A question that offers a reissue price implying a bigger discount is testing this ceiling.

Debentures: Issue, Interest and Redemption

A debenture can be issued at par, at a premium or at a discount, and it can be redeemable at par or at a premium — and the paper likes the combinations. The rule that resolves all of them: the loss on issue is recognised at the time of issue, so if debentures are issued at a discount and redeemable at a premium, both the discount and the premium payable on redemption are debited as Loss on Issue of Debentures, with Premium on Redemption credited as a liability. Interest is a charge, so it is debited to the Statement of Profit and Loss, is paid whether or not there is profit, and is subject to tax deducted at source.

Interest is computed on the face value, never on the issue price. 1,000 debentures of 100 each at 9% carry interest of 9,000 a year whether they were issued at 95 or at 105.
Debentures issued as collateral security may be recorded by either method: no entry at all with a note in the balance sheet, or a full entry debiting Debenture Suspense and crediting Debentures.
Debentures issued for consideration other than cash — for assets bought — are recorded against the vendor, and any excess of the purchase consideration over the net assets is Goodwill.

Key takeaways

A share makes the holder an owner — dividend, an appropriation of profit, paid only if declared. A debenture makes the holder a creditor — interest, a charge against profit, payable whether the company earns or not, and computed on face value.
Authorised, issued, subscribed, called-up, paid-up — each smaller than the last. The balance sheet reports paid-up capital, and calls in arrears is a deduction from called-up capital, not an asset.
Securities Premium is a reserve, not revenue: no dividend out of it, and Section 52 limits its use to bonus shares, writing off preliminary expenses and issue expenses, premium on redemption, and buy-back.
On forfeiture, Share Capital is debited with the amount CALLED UP. On reissue, the discount cannot exceed the forfeited amount, and whatever is left of it goes to Capital Reserve.

Practice questions (8)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

Which of these is a charge against profit rather than an appropriation of it?
1. Dividend on equity shares
2. Interest on debentures
3. Transfer to general reserve
4. Dividend on preference shares
Show answer
Answer: B — Interest on debentures
Interest on debentures is owed to a creditor, so it is debited to the Statement of Profit and Loss and paid whether or not the company earns a profit — that is what makes it a charge. Both dividends are appropriations: they are paid out of profit and only if declared, and preference dividend is the tempting choice because it is fixed in rate, but a fixed rate is not the same as an obligation, and it lapses in a year with no profit unless the shares are cumulative. A transfer to general reserve is an appropriation by definition, since it distributes profit that already exists.
A company issues a share of face value 10 at 15. The Securities Premium of 5 may be used for:
1. Paying dividend to equity shareholders
2. Issuing fully paid bonus shares
3. Paying the managing director’s salary
4. Meeting the year’s operating losses
Show answer
Answer: B — Issuing fully paid bonus shares
Securities Premium is a capital reserve whose uses Section 52 names, and issuing fully paid bonus shares is on that list along with writing off preliminary expenses, writing off the expenses or discount on an issue of shares or debentures, providing for the premium payable on redemption, and buy-back. Paying dividend out of it is specifically prohibited, and it is the most attractive wrong answer because the premium is cash that has actually come in. Salary and operating losses are revenue items, and charging a revenue item to a capital reserve is the error the section exists to prevent.
Calls in arrears appears in a company’s balance sheet as:
1. A current asset, since the money is receivable
2. A deduction from called-up capital in Shareholders’ Funds
3. A current liability
4. An expense in the Statement of Profit and Loss
Show answer
Answer: B — A deduction from called-up capital in Shareholders’ Funds
Capital is reported at what has actually been paid up, so the amount called and not received is deducted from called-up capital to arrive at it. Treating it as a current asset is the intuitive answer and the wrong one: the company has no enforceable asset of that kind against its own members in the balance-sheet sense, and showing it as an asset would overstate both sides. A current liability inverts the direction, since the shareholder owes the company. And it is not an expense at all — no cost has been incurred, only capital not yet collected, on which interest of up to 10% a year may be charged.
200 shares of face value 10, on which 8 had been called up and 6 paid, are forfeited. Share Capital is debited by:
1. 1,200
2. 1,600
3. 2,000
4. 400
Show answer
Answer: B — 1,600
On forfeiture Share Capital is debited with the amount CALLED UP, which is 200 x 8 = 1,600; the unpaid calls of 200 x 2 = 400 are credited to Calls in Arrears, and the 200 x 6 = 1,200 already received is credited to Share Forfeiture. So 1,200 is the amount that goes to the forfeiture account rather than the debit to capital, and it is the commonest wrong answer because the money received feels like the figure that matters. 2,000 is the full face value, which would be right only if the entire amount had been called. And 400 is the arrears alone.
1,000 debentures of 100 each carrying 9% interest are issued at 95. The annual interest is:
1. 8,550
2. 9,000
3. 9,500
4. 5,000
Show answer
Answer: B — 9,000
Interest on a debenture is always computed on face value, so it is 1,000 x 100 x 9% = 9,000 a year regardless of the issue price. 8,550 is 9% of the amount actually received (95,000) and is the trap the discount is there to set — the discount changes what the company collects, not what it has promised to pay. 9,500 is 10% of face value and matches no rate in the question. And 5,000 has no basis in the figures at all. The 5,000 discount itself is a separate item, written off as Loss on Issue of Debentures.
In the Schedule III balance sheet of a company, debentures are shown under:
1. Shareholders’ Funds
2. Non-current liabilities — long-term borrowings
3. Current liabilities — short-term borrowings
4. Reserves and surplus
Show answer
Answer: B — Non-current liabilities — long-term borrowings
A debenture is borrowed money repayable on a fixed future date, so it sits in non-current liabilities as a long-term borrowing. Shareholders’ Funds is where share capital and reserves go, and putting debentures there is the error that follows from thinking of debenture holders as investors rather than as lenders — they are creditors with no vote and no share in profit. Short-term borrowings would be right only for the portion falling due within twelve months, which is disclosed separately as a current maturity. And reserves and surplus holds appropriations of profit, which a loan is not.
Debentures of face value 100 are issued at 95 and are redeemable at 105. At the time of issue, Loss on Issue of Debentures per debenture is:
1. 5
2. 10
3. 15
4. Nothing, until redemption falls due
Show answer
Answer: B — 10
Two losses arise on the same debenture and both are recognised at issue: the 5 discount on issue and the 5 premium payable on redemption, giving 10. Premium on Redemption is credited as a liability at the same time, which is why the loss is booked now rather than in the year of repayment. Answering 5 counts only one of the two, and it is the commonest error because each half is a familiar figure on its own. 15 adds the redemption price to the discount instead of the premium. And deferring the whole thing to redemption contradicts the rule that a known future loss on a borrowing is recognised when the borrowing is raised.
100 shares forfeited after 600 had been received on them are reissued at a discount of 700. This reissue is:
1. Valid, since a company may reissue forfeited shares at any price it can get
2. Invalid, because the discount cannot exceed the 600 already forfeited on those shares
3. Valid, and the extra 100 is debited to Capital Reserve
4. Valid, and the extra 100 is debited to the Statement of Profit and Loss
Show answer
Answer: B — Invalid, because the discount cannot exceed the 600 already forfeited on those shares
The discount allowed on reissuing forfeited shares is capped at the amount forfeited on those very shares, because the forfeited money is what absorbs it; a discount of 700 against 600 forfeited would mean issuing capital below value, which the Act does not permit. The free-price option states the practice loosely and is the trap. Capital Reserve is a destination rather than a cushion: it receives whatever is LEFT of the forfeited amount after the discount, so it cannot be debited to fund an excess. And putting the excess through the Statement of Profit and Loss would charge shareholders’ capital shortfall to revenue, which no accounting standard allows.