Monday, December 11

Advanced Accounting (344) Autumm 2023

Advanced Accounting (444)

Q. 1     Define “Bonus Shares”. What are the advantages and disadvantages to the Joint Stock Company of making a bonus shares issue? 

# Bonus Shares: Advantages and Disadvantages to Joint Stock Companies

## Introduction

A bonus share, also known as a scrip issue or capitalization issue, is a form of corporate action where a company issues additional shares to its existing shareholders without receiving any payment in return. These bonus shares are allotted to shareholders in proportion to their existing holdings. The primary purpose of issuing bonus shares is to reward existing shareholders and enhance the company's equity base. In this essay, we will explore the concept of bonus shares and analyze the advantages and disadvantages associated with their issuance for joint stock companies.

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## Definition of Bonus Shares

Bonus shares are essentially free shares distributed by a company to its shareholders. Unlike a dividend, which represents a distribution of profits in cash, bonus shares are a capitalization of reserves, retained earnings, or other forms of accumulated surplus. The company allocates these additional shares to existing shareholders based on their current ownership in the company. The rationale behind issuing bonus shares is to capitalize on the company's financial strength and signal confidence in its future prospects.

## Advantages of Bonus Shares

### 1. **Conservation of Cash:**

One of the key advantages of bonus shares is that they enable companies to reward shareholders without depleting their cash reserves. This is particularly beneficial during times when the company wants to preserve cash for strategic investments, acquisitions, or to strengthen its financial position.

### 2. **Enhanced Liquidity:**

Bonus share issuance increases the number of outstanding shares without affecting the company's market capitalization. This can enhance liquidity in the stock market as more shares are available for trading, potentially attracting a broader range of investors.

### 3. **Signal of Confidence:**

When a company issues bonus shares, it is often perceived as a positive signal by the market. Investors interpret the issuance of bonus shares as an indication of the company's confidence in its future earnings and growth prospects, which can contribute to a positive perception of the company.

### 4. **Improved Capital Structure:**

Bonus shares can contribute to a more balanced and improved capital structure. By capitalizing reserves and converting them into equity, a company can strengthen its financial position and support future expansion or investment plans.

### 5. **Employee Morale:**

Bonus share issuance can also have a positive impact on employee morale. Employees who are also shareholders benefit from the increase in the company's share capital, aligning their interests with those of the company and fostering a sense of ownership.

## Disadvantages of Bonus Shares

### 1. **Dilution of Earnings per Share (EPS):**

One of the primary drawbacks of bonus shares is the dilution of earnings per share. Since the number of shares increases without a corresponding increase in earnings, the EPS tends to decrease, potentially leading to a decline in the company's valuation.

### 2. **Market Misinterpretation:**

While bonus shares are generally considered a positive signal, there is a risk of market misinterpretation. Investors may perceive the issuance as a lack of investment opportunities or as an attempt to manipulate the stock price, leading to a negative impact on the company's stock.

### 3. **Tax Implications:**

Bonus shares may have tax implications for shareholders. In some jurisdictions, the issuance of bonus shares could be treated as a taxable event for shareholders, potentially affecting their overall tax liability.

### 4. **Complex Accounting Procedures:**

The process of issuing bonus shares involves complex accounting procedures. Companies need to adjust their financial statements and comply with regulatory requirements, which can be resource-intensive and time-consuming.

### 5. **Limited Immediate Impact on Share Price:**

While bonus shares may signal confidence in the company's future, they often have a limited immediate impact on the share price. Investors may view the issuance as a redistribution of wealth rather than a value-creating activity.

## Conclusion

In conclusion, bonus shares represent a unique mechanism for companies to reward shareholders without incurring immediate cash outflows. While they offer several advantages, including the conservation of cash and enhanced liquidity, there are also disadvantages such as dilution of EPS and potential market misinterpretation. The decision to issue bonus shares should be carefully evaluated, taking into consideration the company's financial goals, market conditions, and the preferences of its shareholders. When executed thoughtfully, bonus share issuances can contribute to a company's long-term sustainability and shareholder value.

Q. 2     Zahid of Azad Kashmir consigned 150 bags of Walnuts of Rs.10,000 each for sale to Arslan of Lahore on 15th March, 2023. Arslan is entitled to commission @ 15% on selling price. The expenses of consignment amounted to Rs.125,000. On 31st march, an Account sale was received from Arslan showing that he sold 140 bags of the consigned goods of Rs.15,000 each. His actual out of pocket expenses were Rs.235,000. Arslan accepted a bill drawing by Zahid for Rs.1 million and remitted the balance due from him in cash. (20)

Required: Show the Consignment A/c and Consignee A/c in the books of Zahid.

## Consignment Accounting: Zahid and Arslan

### Introduction

Consignment refers to the process where goods are sent by one person (consignor) to another (consignee) for the purpose of sale. In this scenario, Zahid of Azad Kashmir consigned 150 bags of Walnuts to Arslan of Lahore. The consignment includes specific terms regarding the selling price, commission, and expenses. In this essay, we will demonstrate the accounting treatment for the consignment in the books of Zahid and Arslan.

### Consignment Account in Zahid's Books

Zahid, being the consignor, needs to create a Consignment Account to record all transactions related to the consignment. The account will capture the cost of goods consigned, expenses incurred, and the commission payable to Arslan.

#### Consignment Account (Zahid's Books)

| Date       | Particulars                       | Amount (Rs.) |

|------------|-----------------------------------|--------------|

| 15-Mar-23  | Goods sent on consignment (150 bags) | 1,500,000    |

| 15-Mar-23  | To Consignment Expenses              | 125,000      |

| 31-Mar-23  | By Arslan (Cash received)            | 2,090,000    |

| 31-Mar-23  | To Arslan (Commission @ 15% on Rs. 15,000 per bag for 140 bags) | 315,000 |

| 31-Mar-23  | To Consignment Expenses (Out of pocket expenses) | 235,000 |

| 31-Mar-23  | To Bill Receivable (Amount of the bill drawn) | 1,000,000 |

**Explanation:**

1. On 15th March 2023, Zahid debits the Consignment Account with the cost of goods consigned (150 bags * Rs. 10,000 per bag).

2. The Consignment Expenses are debited for the expenses incurred in sending the goods.

3. On 31st March 2023, Zahid credits the Consignment Account with the amount received from Arslan in cash (140 bags * Rs. 15,000 per bag).

4. Zahid debits the Commission payable to Arslan, calculated at 15% on the selling price of 140 bags.

5. The Out-of-pocket expenses incurred by Arslan are debited to the Consignment Expenses Account.

6. The amount of the bill drawn by Zahid on Arslan is debited to the Bill Receivable Account.

### Arslan's Books

On the other hand, Arslan, being the consignee, records the consignment in his books by creating a Consignee Account. This account captures the goods received, sales made, and any expenses incurred.

#### Consignee Account (Arslan's Books)

| Date       | Particulars                        | Amount (Rs.) |

|------------|------------------------------------|--------------|

| 15-Mar-23  | Goods received on consignment (150 bags) | 1,500,000 |

| 31-Mar-23  | To Goods (Sold 140 bags @ Rs. 15,000 per bag) | 2,100,000 |

| 31-Mar-23  | By Zahid (Commission @ 15% on Rs. 15,000 per bag for 140 bags) | 315,000 |

| 31-Mar-23  | By Zahid (Cash remitted)            | 2,090,000 |

| 31-Mar-23  | To Out-of-pocket Expenses          | 235,000 |

| 31-Mar-23  | By Zahid (Bill payment)             | 1,000,000 |

**Explanation:**

1. On 15th March 2023, Arslan credits the Consignee Account with the cost of goods received (150 bags * Rs. 10,000 per bag).

2. On 31st March 2023, Arslan debits the Goods Account for the sales made (140 bags * Rs. 15,000 per bag).

3. Arslan credits the Commission earned from Zahid, calculated at 15% on the selling price of 140 bags.

4. The amount paid to Zahid in cash is also credited to the Consignee Account.

5. The Out-of-pocket expenses incurred by Arslan are debited to the Out-of-pocket Expenses Account.

6. Arslan credits the Bill Payment made to Zahid.

### Conclusion

Consignment accounting involves careful recording of transactions to ensure that both the consignor and consignee accurately reflect the financial impact of the consignment. The Consignment Account in Zahid's books captures the consignment's cost, expenses, and commission payable, while the Consignee Account in Arslan's books records the goods received, sales made, and expenses incurred. This accounting process facilitates transparency and accountability in consignment transactions between Zahid and Arslan.

Q. 3     Goods Trade Ltd., had a brach at Karachi to which goods were invoiced at cost plus 25%. The following information is supplied to you for 2023.        (20)

Stock (invoice value on 1stJan.     Rs.15,000

Debtors, 1st Jan       10,0000

Petty Cash, 1st Jan. 80

Goods sent to branch (cost)           40,000

Cash Sales   26,000

Credit Sales  36,000

Cash received from Debtors          34,200

Discount allowed to them   800

Cash remitted to Branch for Expenses    8,000

Petty Cash at the Branch, 31st Dec.        90

Stock 31st Dec., (invoice price)     12,000

Liability for Expenses, 31st Dec.   250

Required: Prepare the Branch A/c, and other necessary accounts to ascertain the profit or loss in the books of Head Office.

## Branch Accounting for Goods Trade Ltd.

### Introduction

Branch accounting is a system of accounting where transactions related to a branch are recorded separately from the main/head office. In this scenario, we will prepare the Branch Account and other necessary accounts to determine the profit or loss in the books of the Head Office for Goods Trade Ltd.

### Branch Account

The Branch Account summarizes the transactions between the head office and the branch. It includes details of goods sent to the branch, sales, and expenses.

#### Branch Account for the Year Ended 31st December 2023

| Date       | Particulars                          | Debit (Rs.) | Credit (Rs.) |

|------------|--------------------------------------|-------------|--------------|

| 1-Jan-23   | Stock (Opening)                      | 15,000      |              |

| 1-Jan-23   | Debtors (Opening)                    | 10,000      |              |

| 1-Jan-23   | Petty Cash (Opening)                 | 80          |              |

| **To Balance b/d**                   |             | 15,080       |

| 1-Jan-23   | **By Goods sent to Branch (Cost)**   | 40,000      |              |

|             | **To Branch Debtors (Sales)**        |             | 36,000       |

|             | **To Cash Sales**                    |             | 26,000       |

| 31-Dec-23  | Cash received from Debtors           | 34,200      |              |

|             | **To Discount allowed to Debtors**   | 800         |              |

|             | **To Petty Cash Expenses**           | 90          |              |

|             | **By Stock (Closing) (Invoice Price)** | 12,000   |              |

|             | **By Liability for Expenses (Closing)** | 250     |              |

|             | **By Balance c/d**                   |             | 28,640       |

|------------|--------------------------------------|-------------|--------------|

| **Total**                                       | **85,170**  | **85,170**   |

**Explanation:**

1. The opening stock, debtors, and petty cash are brought forward from the previous year.

2. Goods sent to the branch are debited to the Branch Account.

3. Sales, both credit and cash, are credited to the Branch Account.

4. Cash received from debtors is also credited to the Branch Account.

5. Discounts allowed to debtors and petty cash expenses are debited to the Branch Account.

6. The closing stock (at invoice price) and liability for expenses (closing) are credited to the Branch Account.

7. The balance carried down represents the profit or loss, which is transferred to the Head Office.

### Other Necessary Accounts

 

#### 1. Goods Sent to Branch Account

| Date       | Particulars                          | Debit (Rs.) | Credit (Rs.) |

|------------|--------------------------------------|-------------|--------------|

| 1-Jan-23   | **By Branch Account (Cost)**         | 40,000      |              |

| 31-Dec-23  | **To Closing Stock (Invoice Price)**  |             | 12,000       |

|------------|--------------------------------------|-------------|--------------|

| **Total**                                       | **40,000**  | **12,000**   |

**Explanation:**

1. The cost of goods sent to the branch is debited to the Goods Sent to Branch Account.

2. The closing stock (at invoice price) is credited to account for the remaining stock.

#### 2. Branch Debtors Account

 

| Date       | Particulars                          | Debit (Rs.) | Credit (Rs.) |

|------------|--------------------------------------|-------------|--------------|

| 1-Jan-23   | **By Branch Account (Sales)**        |             | 36,000       |

| 31-Dec-23  | **To Cash Received from Debtors**    | 34,200      |              |

|             | **To Discount Allowed**              | 800         |              |

|------------|--------------------------------------|-------------|--------------|

| **Total**                                       | **36,000**  | **35,000**   |

 

**Explanation:**

1. Sales to branch debtors are credited to the Branch Debtors Account.

2. Cash received from debtors and discounts allowed are debited to the Branch Debtors Account.

### Conclusion

In conclusion, the Branch Account, Goods Sent to Branch Account, and Branch Debtors Account are essential in determining the profit or loss in the books of the Head Office for Goods Trade Ltd. The Branch Account summarizes the branch's transactions, and the balances in Goods Sent to Branch and Branch Debtors Accounts facilitate a detailed understanding of goods movements and debtors' transactions. Proper branch accounting ensures accurate financial reporting and management control over branch operations.

Q. 4     (a)       Describe the various types of share capital.  (20)

            (b)       The Authorized capital of Star Company is 200,000 shares of worth Rs.10 each. On March 2023, 50,000 shares are issued for subscription at a Premium of Rs.3) with Application, Rs. 3 on Allotment, Rs.2 on first Call and Rs. 2 on Final Call. Pass Journal entries; prepare Bank Account and Balance Sheet for Star Ltd.

## (a) Types of Share Capital

 

Share capital is the capital raised by a company through the issue of shares. It represents the owners' equity in the company. There are several types of share capital, each serving different purposes. Here are the main types:

### 1. **Authorized Share Capital:**

- It is the maximum amount of share capital that a company is authorized to issue, as specified in its memorandum of association.

- Companies often set a higher authorized capital to have flexibility for future fundraising without requiring changes to the memorandum.

### 2. **Issued Share Capital:**

- Issued share capital is the portion of authorized capital that the company has issued and sold to shareholders.

- This represents the actual shares held by investors.

### 3. **Subscribed Share Capital:**

- Subscribed share capital is the portion of issued capital for which shareholders have agreed to pay.

- It might be less than the issued capital if not all issued shares are taken up by investors.

### 4. **Paid-up Share Capital:**

- Paid-up capital is the amount of money shareholders have already paid to the company for the shares they own.

- It is the portion of subscribed capital that the company has received in cash.

### 5. **Unpaid Share Capital:**

- This is the portion of subscribed capital that shareholders have not yet paid.

 Shareholders are usually required to pay the unpaid amount in installments as the company makes calls for further payments.

### 6. **Preference Share Capital:**

- Preference shares have preferential rights over equity shares in terms of receiving dividends and repayment of capital in case of liquidation.

- They typically carry a fixed rate of dividend.

### 7. **Equity Share Capital:**

- Equity shares represent the residual interest in the company after all other obligations are satisfied.

- Holders of equity shares are the true owners of the company and have voting rights.

### 8. **Bonus Shares:**

- Bonus shares are issued to existing shareholders as a form of dividend.

- They are issued without any cost to existing shareholders.

### 9. **Right Shares:**

- Right shares are offered to existing shareholders in proportion to their existing holdings.

- Shareholders can either subscribe to these shares or renounce their rights in favor of others.

### 10. **Sweat Equity:**

- Sweat equity shares are issued to employees or directors as a form of compensation for their services.

- They are issued at a discount or for free.

## (b) Journal Entries, Bank Account, and Balance Sheet for Star Ltd.

### Journal Entries:

1. **For Issuing 50,000 shares at a Premium of Rs. 3 per share:**

   ```plaintext

  Cash Account                Dr.   500,000

  Share Capital Account       Cr.   500,000

  (Being 50,000 shares issued at Rs. 10 each at a premium of Rs. 3 per share)

 

2. **For Application Money Received:**

   ```plaintext

Bank Account               Dr.   150,000

Share Application Account  Cr.   150,000

(Being application money received for 50,000 shares at Rs. 3 per share)

   3. **For Allotment Money Received:**

   plaintext

Share Application Account   Dr.   150,000

Share Allotment Account     Cr.   150,000

(Being allotment money received for 50,000 shares at Rs. 3 per share)

4. **For First Call Money Received:**

plaintext

Share Allotment Account     Dr.   100,000

Share First Call Account    Cr.   100,000

(Being first call money received for 50,000 shares at Rs. 2 per share)

5. **For Final Call Money Received:**

plaintext

Share First Call Account    Dr.   100,000

Share Final Call Account    Cr.   100,000

(Being final call money received for 50,000 shares at Rs. 2 per share)

### Bank Account:

plaintext

Particulars               |   Debit (Rs.) |   Credit (Rs.)

--------------------------|---------------|----------------

Opening Balance           |               |  [As per existing balance]

Application Money         |   150,000     |

Allotment Money           |   150,000     |

First Call Money          |   100,000     |

Final Call Money          |   100,000     |

Closing Balance           |   [Calculated] |  

### Balance Sheet:

plaintext

Liabilities                          | Amount (Rs.) | Assets                               | Amount (Rs.)

   -------------------------------------|--------------|--------------------------------------|--------------

Share Capital                        |              | Fixed Assets                         |              |

- Authorized Capital              |   2,000,000  |   - Tangible Assets                 |              |

- Issued Capital                  |     500,000  | Current Assets                      |              |

- Subscribed Capital            |     500,000  |   - Stock                           |    12,000    |

- Paid-up Capital               |     350,000  |   - Debtors                         |              |

Share Premium Reserve                |    150,000   |   - Cash and Bank Balance          | [Calculated] |

Share Application Money             |    150,000   |                                      |              |

Share Allotment Money               |    150,000   |                                      |              |

Share First Call Money              |    100,000   |                                      |              |

Share Final Call Money              |    100,000   |                                      |              |

Current Liabilities                 |              |                                      |              |

- Liability for Expenses          |        250   |                                      |              |

-------------------------------------|--------------|--------------------------------------|--------------

Total Liabilities                   |    1,500,250 | Total Assets                         | [Calculated] |

 

**Note:**

1. The closing balance in the Bank Account is calculated by deducting total debits from total credits.

2. The total assets section is calculated by adding the closing balance in the Bank Account to the current assets.

Q. 5     (a)       Describe the Various types of Debentures, which may be issued by a Joint Stock Company.     (20)

(b)       AB Ltd. Purchased assets worth Rs.6,80,000 by issuing debentures valued Rs.4,40,000 of Rs.100 each at a premium of 10% and balance in cash. Journalize the transaction in the books of purchasing company.

## (a) Various Types of Debentures Issued by a Joint Stock Company

Debentures are long-term debt instruments issued by companies to raise funds from the public or financial institutions. The various types of debentures issued by a joint stock company include:

### 1. **Secured Debentures:**

- Secured debentures are backed by specific assets of the company, known as security or collateral.

- In case of default, debenture holders have a claim on the specified assets.

### 2. **Unsecured Debentures (or Naked Debentures):**

- Unsecured debentures are not backed by any specific assets of the company.

- Debenture holders rely solely on the company's creditworthiness.

### 3. **Convertible Debentures:**

- Convertible debentures can be converted into equity shares after a specified period.

- This provides debenture holders with an opportunity to participate in the company's equity and benefit from any potential appreciation in share value.

### 4. **Non-Convertible Debentures:**

- Non-convertible debentures cannot be converted into equity shares.

- Debenture holders receive fixed interest and do not have the option to convert their debentures into shares.

### 5. **Redeemable Debentures:**

- Redeemable debentures are issued with a predetermined maturity date.

- The company is obligated to repay the principal amount to debenture holders on or before the maturity date.

### 6. **Irredeemable Debentures (Perpetual Debentures):**

- Irredeemable debentures do not have a fixed maturity date.

- The company is not required to repay the principal amount, providing long-term capital to the company.

### 7. **First Debentures:**

- First debentures are secured by a first charge on the company's assets.

- In case of liquidation, the holders of first debentures have the first claim on the specified assets.

### 8. **Second Debentures:**

- Second debentures are secured by a second charge on the company's assets.

- In case of liquidation, they have a claim on the specified assets after the first debenture holders.

### 9. **Floating Rate Debentures:**

- Floating rate debentures have an interest rate that is not fixed but is linked to a benchmark interest rate.

- The interest rate adjusts periodically based on changes in the benchmark rate.

### 10. **Zero Coupon Debentures:**

- Zero coupon debentures do not carry a specific interest rate.

- They are issued at a discount to their face value and do not pay periodic interest. The interest is implicitly paid at the time of redemption.

### 11. **Callable Debentures:**

- Callable debentures give the issuer the option to redeem the debentures before maturity.

- This provides flexibility to the company to repay the debt if interest rates decline.

### 12. **Perpetual Debentures:**

- Perpetual debentures are similar to irredeemable debentures, as they do not have a fixed maturity date.

- However, perpetual debentures may have a call option, allowing the issuer to redeem them after a specified period.

## (b) Journal Entry for Asset Purchase by Issuing Debentures

When a company purchases assets by issuing debentures, it records the transaction in the accounting books. Let's assume AB Ltd. purchased assets worth Rs. 6,80,000 by issuing debentures valued at Rs. 4,40,000 of Rs. 100 each at a premium of 10%, and the balance is paid in cash.

### Journal Entry:

plaintext

Asset Account                  Dr.   6,80,000

Debentures Account             Dr.   4,40,000

Securities Premium Account     Dr.     44,000

Cash Account                   Cr.  11,24,000

(Being assets purchased by issuing debentures at a premium)

**Explanation:**

1. **Asset Account (Real Account):**

- Debited with the cost of assets acquired.

- Represents an increase in the company's assets.

2. **Debentures Account (Liability Account):**

- Debited with the face value of debentures issued.

- Represents the company's obligation to repay the debenture holders in the future.

3. **Securities Premium Account (Reserve Account):**

- Debited with the premium received on the issue of debentures.

- Represents the amount received over and above the face value of the debentures.

4. **Cash Account (Asset Account):**

- Credited with the cash paid to the vendor for the balance amount.

- Represents the outflow of cash.

### Balance Sheet Impact:

```plaintext

Liabilities                        | Amount (Rs.) | Assets                       | Amount (Rs.)

   -----------------------------------|--------------|------------------------------|--------------

Debentures                         |   4,40,000   | Fixed Assets                 |   6,80,000

Securities Premium Reserve         |     44,000   | Current Assets               | [No change]

Current Liabilities                | [No change]  |                              |

-----------------------------------|--------------|------------------------------|--------------

Total Liabilities                  |   4,84,000   | Total Assets                 |   6,80,000

Note:**

1. The liabilities side of the balance sheet reflects the debentures issued and the premium received.

2. The assets side of the balance sheet shows an increase in fixed assets due to the purchase of assets using the debentures issued. The current assets section remains unchanged as the balance is paid in cash.

Dear Student,

Ye sample assignment h. Ye bilkul copy paste h jo dusre student k pass b available h. Agr ap ne university assignment send krni h to UNIQUE assignment hasil krne k lye ham c contact kren:

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