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CA Intermediate · Advanced Accounting · Financial Statements of Companies

Kaveri Foods Ltd has a securities premium balance of ₹6,00,000. It has 1,00,000 equity shares of ₹10 each fully paid. During the year the company issued fully paid bonus shares in the ratio 1:5 out of the securities premium account, and wrote off preliminary expenses of ₹50,000 against it. The board also wished to pay ₹1,00,000 as dividend out of the same account, but this was not done as it is not permitted. What is the closing balance of securities premium?

The closing securities premium is ₹3,50,000. Bonus shares of ₹2,00,000 and preliminary expenses of ₹50,000 are permitted applications and are deducted from ₹6,00,000. Dividend is not a permitted use of securities premium, so the ₹1,00,000 is not deducted.

  1. A₹3,50,000Correct
  2. B₹2,50,000
  3. C₹4,00,000
  4. D₹5,50,000

Explanation

Bonus shares: 1,00,000 / 5 = 20,000 shares × ₹10 = ₹2,00,000. Preliminary expenses written off: ₹50,000. Both uses are permitted by the Companies Act. Closing balance = ₹6,00,000 − ₹2,00,000 − ₹50,000 = ₹3,50,000. Deducting the dividend as well (₹2,50,000) is wrong because dividend cannot be paid out of securities premium.

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