Related Aspects of Company Accounts: formula sheet

Key formulas

Overall limit

Maximum buy-back ≤ 25% × (paid-up capital + free reserves)

Section 68(2)(c). For equity shares, the 25% is applied to total paid-up equity capital in that financial year, as the proviso states.

Board-approval limit

Buy-back ≤ 10% × (paid-up equity capital + free reserves)

Board resolution at a meeting is enough only up to this limit. Above it, a special resolution is needed.

Debt-equity test

Total secured + unsecured debts after buy-back ≤ 2 × (paid-up capital + free reserves after buy-back)

Section 68(2)(d). Central Government may notify a higher ratio for a class of companies. Compute reserves after the buy-back.

CRR transfer

CRR = nominal value of shares bought back out of free reserves or securities premium

Section 69(1). Not the buy-back price. Not needed to the extent paid from a fresh issue.

Time rules

Complete within 1 year; destroy shares within 7 days; no new issue for 6 months; return within 30 days; no new offer for 1 year

Sections 68(4), 68(7), 68(8), 68(10) and the proviso to 68(2).

Penalty

Fine ₹1,00,000 to ₹3,00,000 on company and on each officer in default

Section 68(11) as amended in 2020.

CRR required

CRR = Nominal value of shares redeemed − Nominal value of fresh shares issued (proceeds used for redemption)

The CRR applies only to the part redeemed out of profits. If the fresh issue is at a premium, count only the face value of the new shares, not the premium.

Fresh issue needed for full redemption without CRR

Fresh issue proceeds = Amount payable on redemption (nominal value, excluding premium if premium is met from profits)

If the premium is paid from profits or securities premium, the proceeds of the fresh issue need only equal the nominal value redeemed.

Number of new shares

Number of shares = Proceeds to be raised ÷ Issue price per share

Round up when the answer is not a whole number. The issue price includes any premium.

Proceeds needed under a stated profit limit

Minimum fresh issue (face value) = Nominal value redeemed − Profits available for CRR

Use when profits available for dividend are limited.

Premium on redemption

Premium = (Redemption price − Nominal value) × Number of shares

Provide for it before redemption, out of profits or securities premium as the law and question allow.

Amount to credit to Debentures

Debentures A/c = Face value × number of debentures

Always credit at face value, whatever the issue price.

Discount on issue

Discount = Face value − Issue price

Debit Discount or Loss on Issue of Debentures. It is a capital loss, written off over the life.

Loss on issue of debentures

Loss = Discount on issue + Premium payable on redemption

Shown as a single loss when both exist. Write off over the debenture life.

Cash received on issue

Bank = Issue price × number of debentures

Cash comes in at the issue price, not the face value.

Redemption payment

Cash paid = Face value + Redemption premium, if any

The premium payable was provided for at issue, so clear that liability.

Capital Redemption Reserve for shares

CRR = Nominal value of shares bought back out of free reserves or securities premium (section 69(1)); CRR = Nominal value of preference shares redeemed out of profits (section 55(2)(c))

CRR is for shares only. It is not created when preference shares are redeemed out of a fresh issue of shares. Do not mix it with DRR for debentures.

Sinking fund annual instalment

Annual instalment = Amount needed ÷ Future value factor (annuity) at the given rate

Use the factor given in the question. Instalment × factor = amount needed.

Sinking fund investment interest

Interest = Opening investment × rate

Interest is credited to Sinking Fund A/c and reinvested, so the fund grows each year.

Time ratio

Time ratio = months (or days) from takeover to incorporation : months (or days) from incorporation to year-end

Use for costs that accrue with time, such as salaries, rent, insurance, general expenses and depreciation.

Sales ratio

Sales ratio = sales before incorporation : sales after incorporation

Use for gross profit and for costs that vary with sales, such as discount allowed, commission on sales, carriage outwards, bad debts and advertisement (unless told it is time based).

Gross profit split

Pre-incorporation gross profit = Total gross profit × pre-incorporation sales ÷ total sales

If the question gives separate trading accounts or the gross profit rate differs by period, use those figures instead.

Profit or loss for each period

Profit (or loss) for a period = Gross profit of that period − expenses charged to that period + income charged to that period

Pre-period profit plus post-period profit must equal total profit for the year. Use this as a check.

Expenses wholly post-incorporation

Charge 100% to the post-incorporation period

Typical items: directors' fees, debenture interest where debentures were issued after incorporation, preliminary expenses written off, company audit fees, debenture discount written off, dividend-related items.

Treatment of result

Pre-incorporation profit → Capital Reserve (or set off against Goodwill if directed). Pre-incorporation loss → Goodwill.

Post-incorporation profit goes to the Profit and Loss Account.

Sources of bonus issue (Section 63)

Free reserves, Securities premium account, Capital redemption reserve

Revaluation reserve cannot be capitalised. Bonus cannot be paid in lieu of dividend.

Bonus issue entry

Reserve A/c Dr. ; To Bonus to Shareholders A/c ; then Bonus to Shareholders A/c Dr. ; To Equity Share Capital A/c

Amount = number of bonus shares × face value. Shares are fully paid.

Number of bonus shares

Existing shares × bonus ratio

For 1:5 (one bonus for every five held), bonus shares = existing shares ÷ 5.

Theoretical ex-rights price

(Shares before × Cum-rights price + New shares × Issue price) ÷ (Shares before + New shares)

Cum-rights price is the market price before the rights issue.

Value of a right

Cum-rights price − Ex-rights price

Also equals the value of the rights attached to the shares held.

Rights issue entry (cash received)

Bank A/c Dr. ; To Equity Share Capital A/c ; To Securities Premium A/c

Premium, if any, goes to securities premium; this account is treated as paid-up capital for reduction rules.

Average profit

Average maintainable profit = Σ adjusted profits ÷ number of years

Adjust each year's profit for abnormal items, and for any change in remuneration, before averaging.

Goodwill by average profit method

Goodwill = Average profit × number of years' purchase

The number of years is given in the question.

Normal profit

Normal profit = Capital employed × normal rate of return ÷ 100

Capital employed is usually net assets, excluding goodwill and non-trading assets.

Super profit

Super profit = Average (maintainable) profit − Normal profit

If the result is zero or negative, goodwill by this method is nil.

Goodwill by super profit method

Goodwill = Super profit × number of years' purchase

Used when the question says to purchase super profit for some years.

Goodwill by capitalisation of super profit

Goodwill = Super profit × 100 ÷ normal rate of return

Treats super profit as a perpetual stream.

Goodwill by capitalisation of average profit

Capitalised value = Average profit × 100 ÷ normal rate; Goodwill = Capitalised value − Capital employed

Both methods give the same answer when the same capital employed and normal rate are used.

Net asset (intrinsic) value per share

Value per share = (Assets − outside liabilities − preference capital) ÷ number of equity shares

Use real values of assets. Include goodwill only if it is valued.

Yield value per share

Value per share = (Expected rate of earning ÷ Normal rate of return) × paid-up value per share

Expected rate is profit available to equity ÷ paid-up equity capital × 100.

Fair value per share

Fair value = (Net asset value + Yield value) ÷ 2

Use this only when the question asks for fair value or an average of the two.

Quick revision

• Preference shares: no irredeemable shares; redemption within twenty years, subject to the articles and prescribed conditions (infrastructure projects can exceed this).
• Only fully paid preference shares can be redeemed.
• Redemption is out of distributable profits or the proceeds of a fresh issue made for the purpose.
• If redeemed out of profits, transfer the nominal value of the shares redeemed to Capital Redemption Reserve.
• Capital Redemption Reserve can be used to issue fully paid bonus shares.
• Securities premium can be used for bonus shares, preliminary expenses, issue expenses and premium on redemption, and for buy-back.
• Buy-back sources: free reserves, securities premium, or proceeds of an issue of shares or securities, but not an earlier issue of the same kind.
• Buy-back needs authority in the articles and a special resolution; the Board alone can approve if it is 10% or less of paid-up equity capital and free reserves.
• Buy-back limit: 25% or less of paid-up capital plus free reserves; for equity shares, 25% of paid-up equity capital in that year; post-buy-back debt not more than twice paid-up capital plus free reserves.
• Complete the buy-back within one year, destroy the securities within seven days, and wait one year between offers; no further issue of the same kind for six months, except exceptions.
• Declaration of solvency is signed by at least two directors, and the return is filed within thirty days of completion.
• Section 70 bars buy-back through subsidiaries or investment companies, and where there is an unremedied default, until three years after the default has ceased.

Common mistakes

• Transferring the buy-back price to CRR instead of the nominal value. Fix: CRR equals only the nominal value of shares bought back out of free reserves or securities premium.
• Using capital and reserves before the buy-back in the debt test. Fix: Section 68(2)(d) says debts after buy-back. Reduce capital and free reserves by the buy-back cost, then multiply by two.
• Computing CRR on the premium or on the total amount paid Fix: CRR equals only the nominal value redeemed out of profits, less the face value of the fresh issue. Premium never goes into CRR.
• Subtracting the fresh issue proceeds including premium when finding CRR Fix: Use the face value of new shares only. The premium received goes to securities premium.
• Crediting Debentures at the issue price instead of the face value. Fix: The liability is the face value. Put the difference in Discount on Issue or Loss on Issue of Debentures.
• Treating the premium payable on redemption as an income at issue. Fix: A premium on redemption is a liability and a loss. Credit Premium Payable on Redemption and debit Loss on Issue.
• Dividing gross profit by the time ratio instead of the sales ratio. Fix: Gross profit always follows sales. Only expenses that accrue with time follow the time ratio.
• Charging directors' fees, debenture interest or preliminary expenses partly to the pre-incorporation period. Fix: Ask: could this cost arise before the company existed? If not, charge it wholly to the post-incorporation period.
• Using revaluation reserve to fund a bonus issue. Fix: Section 63 bars capitalising reserves created by revaluation of assets. Skip it and use other permitted sources.
• Showing cash received for bonus shares. Fix: Bonus is a transfer within equity. No bank entry is passed.

Exam tips

• Write the section number beside each condition. ICSI answers earn marks for provision, application and conclusion.
• Always end a limit question with a clear line: permitted or not permitted, and why.
• Show the CRR entry separately. It is a frequent scoring point.
• State the time rules in theory answers: one year to complete, seven days to destroy, six months no new issue, thirty days for the return.
• List the Section 70 prohibitions in short bullets, including the three-year remedy rule for defaults.
• Write the source of redemption first. Examiners give marks for stating that shares are fully paid and redeemed out of profits or fresh issue.
• Show the CRR calculation as a separate working note. Marks are given for method even if a figure slips.
• Cite Section 55 for redemption and CRR, Section 52 for use of securities premium and Section 68 for buy-back in any theory part.