Tag: reserve and fund

Questions Related to reserve and fund

If vendors are issued fully paid shares of Rs. $1,00,000$ in consideration of net assets of Rs. $1,20,000$ the balance of Rs. $20,000$ will be credited to _____________.

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. Goodwill account

  2. Capital Reserve account

  3. Vendor's account

  4. Profit and loss account

Show answer
Correct Option: B

When two firms amalgamate, general reserve is transferred to:

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. New firm's account

  2. Revaluation account

  3. Partner's account

  4. Equal Ratio

Show answer
Correct Option: C
Explanation:

When two or more partnership firms are amalgamated, the books of old firm are closed and books of new firm are opened.

While closing the books of the old firm :
1. Each firm should prepare a revaluation account relating to its own assets and liabilities and transfer the balance to the partner's capital account in the profit sharing ratio.
2. Entries of raising goodwill should be passed.
3. Transferring reserve to old partners capital account in old ratio.
4. Assets and liabilities not taken over by the new firm should be transferred to the capital accounts of partners in the ratio of their capitals.
5. The new firm should be debited with the difference between the value of assets and liabilities taken over by it; the assets should be credited and the liabilities debited.
6. Partner's capital account should be transferred to the new firm's account.

A provision is a ___________.

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. General reserve

  2. Specific reserve

  3. Capital reserve

  4. None of these

Show answer
Correct Option: B
Explanation:
Specific reserve.
A Provision is the amount written off or retained by way of providing depreciation, renewals or diminution in the value of assets or retained by way providing for any liability of which the amount cannot be determined with substantial accuracy. In other words, Provision is an amount set aside out of income or profits. It is a retention of profir, made temporily, for a specific purpose. Therefore, provision may be considered as specific reserve.

A company wishes to redeem its preference shares amounting to Rs. 1,00,000 at a premium of $5\%$ and for this purpose issues 5,000 equity shares of Rs. 10 each at a premium of $5\%$. The company also has a balance of Rs. 1,00,000 as general reserves  and Rs. 50,000 in profit & loss account. The amount to be transferred to capital redemption reserves account for the purpose of redemption is:

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. Rs. 47,500

  2. Rs. 50,000

  3. Rs. 52,500

  4. Rs. 1,05,000

Show answer
Correct Option: B
Explanation:

From the above conditions it is clear that if the preference shares are redeemed out of accumulated profit it will be necessary to transfer an amount equal to the amount repaid on redemption to capital redemption reserve account. if the company issues any fresh shares for redemption purpose the transferred amouunt will be the difference between nominal value of hare redeemed and the nominal value of share issued.

CRR = Nominal value of share redeemed - Nominal value of share issued

Therefore, in the given question amount should be transferred to capital redemption reserve account is :

Rs. 100000 - Rs. 50000 = Rs. 50000

(Rs. 100000 = Nominal value of share redeemed)

(Rs. 50000 = Nominal value of share issued)

(Rs. 50000 = Capital redemption reserve)

Redeemable preference shares of $Rs. 2,00,000$ are redeemed at par for which purpose fresh equity capital of $Rs. 80,000$ is issued at par. What amount should be transferred to Capital Redemption Reserve account?

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. Nil

  2. $Rs. 80,000$

  3. $Rs. 1,20,000$

  4. $Rs. 2,00,000$

Show answer
Correct Option: C
Explanation:

Redeemable preference shares :                                             $Rs.200000$

Fresh Equity Shares                                                                  $Rs.80000$
                                                                                                  -------------------
Balance Amount                                                                        $Rs.120000$
                                                                                                  --------------------
                                                                                                                               
An amount of $Rs.120000$ need to be transferred to Capital Redemption Reserve Account. 

Redeemable preference shares of $Rs.2,00,000$ are redeemed at par for which purpose fresh equity capital of $Rs.80,000$ is issued at a discount of $10\%$.
What amount should be transferred to Capital Redemption Reserve account?

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. $Rs. 1,20,000$

  2. $Rs. 1,28,000$

  3. $Rs. 2,00,000$

  4. $Rs. 72,000$

Show answer
Correct Option: B
Explanation:

Redeemable preference shares :                                             $Rs.200000$

Fresh Equity Shares                                           $Rs.80000$
Less: Discount on issue of shares @10%          $Rs.  8000$
                                                                           -----------------------   $Rs. 72000$
                                                                                                       ----------------------
Balance amount                                                                             $Rs.128000$
                                                                                                          -------------------
An amount of $Rs.128000$ need to be transferred to Capital Redemption Reserve Account. 

Capital reserve is_______.

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. created out of revenue profits

  2. created out of capital profits

  3. used for meeting revenue losses

  4. used for manipulating profit and loss

Show answer
Correct Option: B
Explanation:

Reserves which are created out of capital profit are known as capital reserve. Generally these reserves are not available for distribution as dividend among shareholders. Example of such reserves are - Profit prior to incorporation, Profit on forfeiture of shares, etc. In short, all capital profits are regarded as capital reserves.

Over provision of liabilities result into creation of ________.

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. secret reserves

  2. general reserves

  3. capital reserve

  4. none of the above

Show answer
Correct Option: A
Explanation:

Secret reserve is a reserve, the existence and/ or the amount of which is not disclosed in the balance sheet. It is also called as "Hidden Reserves or Internal Reserves."

Secret reserves are created by :
  • Excessive depreciation on the asset.
  • Excessive overvaluation of liability
  • Showing a contingent liability of an actual liability or as provision.
  • Charging capital expenditure to revenue or crediting revenue receipts to an asset.

Secret reserve is created by way of_________.

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. excess provision of bad debts

  2. undervaluation of closing stock

  3. excess provision of depreciation

  4. all the three

Show answer
Correct Option: D
Explanation:

Secret reserve is a reserve, the existence and/ or the amount of which is not disclosed in the balance sheet. It is also called as "Hidden Reserves or Internal Reserves."

Secret reserves are created by :
  • Excessive depreciation on the asset.
  • Excessive overvaluation of liability
  • Showing a contingent liability of an actual liability or as provision.
  • Charging capital expenditure to revenue or crediting revenue receipts to an asset.

The balance of Capital Redemption Reserve Account is available for ___________.

book keeping and accountancy reserve and fund kinds of reserves secret reserve reserves

  1. redemption of redeemable preference shares

  2. redemption of redeemable debentures

  3. re-organisation of share capital

  4. issue of bonus shares

Show answer
Correct Option: D
Explanation:
Section 63 of the companies Act, 2013 deals with the issue of bonus shares. According to Sub-section (1) of this section, a company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of -
1. its free reserves;
2. the securities premium account; or
3. the capital redemption reserve account.