CU-BCOM-SEM-IV-Corporate Accounting-Second Draft

arrangement, the borrower agrees that a particular asset or a group of assets will be realized and the proceeds there from will be applied to repay the loan in the event that the amount due, cannot be paid. Sometimes companies issue their own debentures as collateral security for a loan or a fluctuating overdraft. When the loan is repaid on the due date, these debentures are at once released with the main security. In case, the company cannot repay its loan and the interest thereon on the due date, the lender becomes the debenture holder who can exercise all the rights of a debenture holder. The holder of such debentures is entitled to interest only on the amount of loan, but not on the debentures. Accounting Entries There are two methods of showing these types of debentures in the accounts of a company. Method 1 Under this method, no entry is made in the books of account of the company at the time of making issue of such debentures. In the ‘Notes to Accounts’ of Balance Sheet, the fact of the debentures being issued and outstanding is shown by a note under the liability secured Method 2 Under this method, the following entry is made to record the issue of such debentures: Debentures Suspense Account Dr. To % Debentures Account (Being the issue of…debentures collaterally as per Board’s Resolution No…...dated) The Debentures Suspense Account will appear on the assets side of the Balance Sheet under Other Noncurrent Assets and Debentures on the liabilities side of the Balance Sheet. When the loan is repaid, the entry is reversed in order to cancel it. 9.7 PROBLEMS ON ISSUE OF DEBENTURES Illustration No.1 X Ltd. made an issue of 10,000 12% Debentures of Rs. 100 each, payable as follows: Rs. 25 on Application Rs. 25 on Allotment Rs. 50 on First and Final Call. Applications were received for 12,000 debentures and the directors allotted 10,000 debentures rejecting applications for 2,000 debentures. The money received on applications for 2,000 debentures rejected was duly refunded. The call was made, and the moneys were duly received. 151 CU IDOL SELF LEARNING MATERIAL (SLM)

Show the necessary cash book and journal entries to record the above transactions and above the relevant items in the balance sheet of the company. 152 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.2 B Ltd. issued 2,000, 13% Debentures of Rs. 100 each at Rs. 110 payable as follows: On Application Rs. 25 On Allotment Rs. 35 (including premium) On First and Final Call Rs. 50 The debentures were fully subscribed, and the moneys were duly received. Prepare cash book, pass the necessary journal entries and about the relevant portions of the balance sheet of the company. 153 CU IDOL SELF LEARNING MATERIAL (SLM)

154 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.3 Optimist Ltd. purchased building worth Rs.1,20,000 and plant and machinery worth Rs. 1,00,000 from Depressed Ltd. for an agreed purchase consideration of Rs. 2,00,000 to be satisfied by the issue of 2,000, 12% Debentures of Rs. 100 each. Show the necessary journal entries in the books of Optimist Ltd. Illustration No.4 Priya Ltd. issued 25,00,000, 12% debentures of Rs. 10 each at a discount of 10% redeemable at par at the end of 10th year. Money was payable as follows : Rs. 4 on application Rs. 5 on allotment Record necessary journal entries regarding issue of debenture. 155 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.5 Journalize the following transactions. Narration is not required: Issue of 12% 1,00,000 debentures of Rs. 100 each 1. at par and redeemable at par. 2. at 10% discount and redeemable at par. 3. at 10% premium and redeemable at par. 4. at 10% premium and redeemable at a premium of 5%. 5. at par and redeemable at a premium of 5%. 6. at 10% discount and redeemable at a premium of 5% Particulars Journal Credits ’000 Debits ’000 10000 1. Bank A/c Dr. 10,000 10000 To 12% Debentures A/c 10000 1000 2. Bank A/c Dr. 9000 10000 Discount on Issue of Debentures A/c Dr. 1000 1000 500 To 12% Debentures A/c 10000 3. Bank A/c Dr. 11000 500 To 12% Debentures A/c 156 To Securities Premium A/c 4. Bank A/c Dr. 11000 Loss on issue of debenture A/c Dr. 500 To 12% Debentures A/c To Securities Premium A/c To Prem. on redemption of debentures A/c 5. Bank A/c Dr. 10000 Loss on issue of Debentures A/c Dr. 500 To 12% Debentures A/c To Prem. on redemption of DebenturesA/c CU IDOL SELF LEARNING MATERIAL (SLM)

6.Bank A/c Dr. 9000 Loss on Issue of Debentures A/c ** Dr. 1500 To 12% Debentures A/c 10000 500 To Prem. on redemption of Debentures A/c Illustration No.6 The XYZ Company Ltd. took over assets of Rs. 230 Lakh and liabilities of Rs. 30 Lakh of PQR Company Ltd. for the purchase consideration of Rs. 220 Lakh. The XYZ Company Ltd. paid the purchase consideration issuing debentures of Rs. 100 each at 10% premium. Give journal entries in the books of the XYZ Company Ltd. Illustration No.7 X Ltd. issued 1,00,000 12% Debentures of Rs.100 each at a discount of 10% payable in full on application by 31st May 2020. Applications were received for 1,20,000 debentures. Debentures were allotted on 9th June 2020. Excess monies were refunded on the same date. Pass necessary Journal Entries. Also show necessary ledger accounts 157 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.8 Tim Tim Limited issued 10,000 8% Debentures of the nominal value of Rs.10,00,000 as follows: 158 CU IDOL SELF LEARNING MATERIAL (SLM)

(a) To sundry persons for cash at 90% of nominal value of Rs. 5,00,000. (b) To a vendor for purchase of fixed assets worth Rs. 2,00,000 – Rs. 2,50,000 nominal value. (c) To the banker as collateral security for a loan of Rs. 2,00,000 – Rs. 2,50,000 nominal value. You are required to prepare necessary Journal Entries Illustration No.9 Pure Ltd. issues 1,00,000 12% Debentures of Rs. 10 each at Rs. 9.40 on 1st January 2018. Under the terms of issue, the Debentures are redeemable at the end of 5 years from the date of issue. Calculate the amount of discount to be written-off in each of the 5 years. 159 CU IDOL SELF LEARNING MATERIAL (SLM)

Total amount of discount comes to Rs. 60,000 (Rs. 0.6 X 1, 00,000). The amount of discount to be written-off in each year is calculated as under: Illustration No.10 Koinal Chemicals Ltd. issued 20,00,000, 10% debentures of Rs.50 each at premium of 10%, payable as Rs. 20 on application and balance on allotment. Debentures are redeemable at par after 6 years. All the money due on allotment was called up and received. Record necessary entries when premium money is included in allotment money 9.8 SUMMARY  Issue of redeemable debentures can be categorized into the following: 1. Debenture issued at par and redeemable at par or at a discount; 2. Debenture issued at a discount and redeemable at par or at discount; 160 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Debenture issued at premium and redeemable at par or at discount; 4. Debenture issued at par and redeemable at premium; 5. Debenture issued at a discount and redeemable at premium. 6. Debenture issued at premium and redeemable at premium. Note: In practical life redemption at a discount is rare,  Collateral security means secondary or supporting security for a loan, which can be realised by the lender in the event of the original loan not being repaid on the due date.  Under this arrangement, the borrower agrees that a particular asset or a group of assets will be realized and the proceeds there from will be applied to repay the loan in the event that the amount due, cannot be paid. Sometimes companies issue their own debentures as collateral security for a loan or a fluctuating overdraft.  Debentures can also be issued for consideration other than for cash, such as for purchase of land, machinery, etc.  The discount on issue of debentures is amortized over a period between the issuance date and redemption date. Loss on issue of debentures is also a capital loss and should be written off in a similar manner as discount on debentures issued. In the balance sheet both the items (Discount and Loss) are shown as Non-current/current assets depending upon the period for which it has to be written off 9.9 KEYWORDS  Collateral Security: Collateral security means secondary or supporting security for a loan, which can be realised by the lender in the event of the original loan not being repaid on the due date.  Convertible debentures - These are debentures which will be converted into equity shares (either at par or premium or discount) after a certain period of time from the date of its issue. These debentures may be fully or partly convertible. In future, these debenture holders get a chance to become the shareholders of the company.  Amortisation: a period in which a debt is reduced or paid off by regular payments. 9.10 LEARNING ACTIVITY 1.Certain companies may issue secured debentures for a period exceeding ten years but not exceeding thirty years, What are they? ___________________________________________________________________________ _______________________________________________________________________ 161 CU IDOL SELF LEARNING MATERIAL (SLM)

2.Explain how Debenture interest payment gives tax advantage to the company. ___________________________________________________________________________ _______________________________________________________________________ 9.11 UNIT END QUESTIONS A.Descriptive Questions Short Questions 1. Country Crafts Ltd. issued 1,00,000, 8% debentures of Rs. 100 each at premium of 5% payable fully on application and redeemable at premium of Rs. 10 Pass necessary journal entries at the time of issue 2.Explain the Accounting treatment of Debentures issued as collateral security 3.Explain the Accounting treatment of Loss on Issue of debentures 4.Describe the term Debenture Suspense. 5.Explain the categorisation of Issue of redeemable debentures. Long Questions 1. X Company Limited issued 10,000 14% Debentures of the nominal value of ₹50,00,000 as follows: (a) To sundry persons for cash at 90% of nominal value of ₹25,00,000. (b) To a vendor for purchase of fixed assets worth ₹10,00,000 – ₹12,50,000 nominal value. (c) To the banker as collateral security for a loan of ₹10,00,000 – ₹12,50,000 nominal value. Pass necessary Journal Entries. 2. Y Company Limited issue 10,000 12% Debentures of the nominal value of Rs. 60,00,000 as follows : (i) To a vendor for purchase of fixed assets worth Rs. 13,00,000 - Rs. 15,00,000 nominal value. (ii) To sundry persons for cash at 90% of nominal value of Rs. 30,00,000. (iii) To the banker as collateral security for a loan of Rs. 14,00,000 - Rs. 15,00,000 nominal value, You are required to pass necessary Journal Entries 3. Krishna Ltd issued 10,000 12% Debentures of Rs.10 each at a discount of 6%. Applications were received for 7,500 debentures. Journalise the transactions assuming all money has been received. 4. BGP Ltd. invited applications for issuing 15,000, 11% debentures of ₹ 100 each at a premium of ₹ 50 per debenture. The full amount was payable on application. 162 CU IDOL SELF LEARNING MATERIAL (SLM)

Applications were received for 25,000 debentures. Applications for 5,000 debentures were rejected and the application money was refunded. Debentures were allotted to the remaining applicants on pro-rata basis. Pass the necessary journal entries for the above transactions in the books of BGP Ltd. 5. ‘UZ Ltd.’ purchased Plant and Machinery from Elk Machine Ltd. for Rs 6,90,000. Elk Ltd. was paid by accepting a draft of Rs. 90,000 payable after three months and the balance by issue of 6% debentures of Rs. 100 each at a discount of 20%. Pass necessary journal entries for the above transactions in the books of ‘UZ Ltd.’ B.Multiple choice Questions 1. Premium on redemption of debentures account appearing in the balance sheet is _______. a. A nominal account - expenditure b. A nominal account - income c. A personal account d. None of these 2. F Ltd. purchased Machinery from G Company for a book value of Rs. 4, 00,000. The consideration was paid by issue of 10% debentures of Rs. 100 each at a premium of 25%. The debenture account was credited with ______. a. Rs. 4,00,000 b. Rs. 5,00,000 c. Rs. 3,20,000 d. None of these 3. When debentures are issued as collateral security, the final entry for recording the collateral debentures in the books is __________. a. Credit Debentures A/c and debit Cash A/c. b. Debit Debenture suspense A/c and credit Debentures A/c. c. Debit Debenture suspense A/c and credit Cash A/c. d. No Entry 163 CU IDOL SELF LEARNING MATERIAL (SLM)

4. When debentures are redeemable at different dates, the total amount of discount on issue of debentures should be written off a. Every year by applying the sum of the year’s digit method b. Every year by applying the straight-line method c. To profit and loss account in full in the year of final or last redemption d. All of these 5. Debenture interest _________ a. Is payable before the payment of any dividend on shares b. Accumulates in case of losses or inadequate profits c. Is payable after the payment of preference dividend but before the payment of equity dividend d. None of these Answers 1-c,2-c,3-b,4-b,5-a 9.12 REFERENCES Textbooks/Reference books  Advanced Accountancy – M.C. Shukla and T.S. Grewal, Sultan Chand, Publications, New Delhi  Advanced Accounting – R.L. Gupta and Radha swamy, Sultan Chand, Publications, New Delhi  Advanced Accounting – Dr. Arulnandam and Dr. Raman, Himalaya Publishing house, Mumbai  Advanced Accounting – S.P. Iyengar, Chand & Sons, New Delhi 164 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 10DIVISIBLE PROFITS STRUCTURE 10.0 Learning Objectives 10.1 Introduction 10.2 Meaning of Dividend 10.3 Declaration and payment of dividend 10.4 Transfer of reserves 10.5 Summary 10.6 Keywords 10.7 Learning Activity 10.8 Unit end Questions 10.9 References 10.0 LEARNING OBJECTIVES After studying this unit Students will be able to:  Explain the provisions relating to Dividend  Discuss the provisions in companies Act relating to declaration and payment of dividend  Explain about Transfer of divisible profits to reserves 10.1 INTRODUCTION One of the important functions of company accounting is to determine the amount of profits which is available for distribution to the shareholders as dividend. This is necessary since the amount of profits disclosed by the Profit & Loss Account, in every case, is not available for distribution. The availability of profits for distribution depends on a number of factors, e.g., their composition, the amount of provisions and appropriations that must be made out of them in priority, etc. 10.2 MEANING OF DIVIDEND (a) A dividend is a distribution of divisible profit of a company among the members according to the number of shares held by each of them in the capital of the company and the rights attaching thereto. 165 CU IDOL SELF LEARNING MATERIAL (SLM)

(b) Such a distribution may or may not entail a release of assets; it would be where a distribution involves payment of cash. (c) But when profits are capitalised and the amount distributed is applied towards payment of bonus shares, issued free to the shareholders, no part of the assets of the company can be said to have been released since, in such a case, profits are only capitalised, thereby increasing the paid up capital of the company. The company does not give up any asset. As per Section 2 (35) of the Companies Act, 2013, term “Dividend” includes interim dividend also. Under Section 123 (1) of the Companies Act, 2013, no dividend should be declared or paid by a company for any financial year except- (a) Out of the profits of the company for that financial year arrived at after providing for depreciation in accordance with the provisions of section 123(2), or (b) Out of the profits for any previous financial years arrived at after providing for depreciation in accordance with the provisions of that sub section and remaining undistributed; or (c) Out of both the above; (d) Out of the moneys provided by the Central Government or any State Government for the payment of dividend by the Company in pursuance of any guarantee given by that government Provided that no dividend should be declared or paid by a company from its reserves other than free reserves. Declaration of a dividend presupposes that there is a trading profit or a surplus available for distribution, arrived at after providing for depreciation on assets, not only for the year in which the profits were earned but also for any arrears of depreciation of the past years, calculated in the manner prescribed by sub-section (2) of Section 123. Sub-section (3) of Section 124 further states that the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend should not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. NOTE: Dividends cannot be declared except out of profits. Capital cannot be returned to the shareholders by way of dividend. 166 CU IDOL SELF LEARNING MATERIAL (SLM)

Dividend can be declared and paid by a company only out of the profits or free reserves (other than moneys provided by Central or State Govt.) as the payment of dividend from any other source will amount to payment of dividend from capital units. Section 123(2) states that depreciation must be provided to the extent specified in Schedule II to the Companies Act, 2013.Further, when the assets are sold, discarded, demolished or destroyed in any financial year, the excess of the written down value over its sale proceeds as scrap, if any should be written off in the same financial year. 10.3 DECLARATION AND PAYMENT OF DIVIDEND For the purpose of second proviso to sub-section (1) of section 123, a company may declare dividend out of the accumulated profits earned by it in previous years and transferred by it to the reserves, in the event of inadequacy or absence of profits in any year, subject to the fulfilment of the following conditions as per Companies (Declaration and Payment of Dividend) Rules, 2014: (1) The rate of dividend declared should not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year: provided that this sub- rule should not apply to a company, which has not declared any dividend in each of the three preceding financial years. (2) The total amount to be drawn from such accumulated profits should not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement. (3) The amount so drawn should first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared. (4) The balance of reserves after such withdrawal should not fall below 15% of its paid up share capital as appearing in the latest audited financial statement. (5) No company should declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid. 10.4 TRANSFER TO RESERVES I The Board of Directors are free and can appropriate a part of the profits to the credit of a reserve or reserves as per section 123 (1) of the Companies Act, 2013. II Appropriation of a part of profit is sometimes made under law. 167 CU IDOL SELF LEARNING MATERIAL (SLM)

(a) For example, under the Banking Regulation Act, a fixed percentage of the profit of a banking company must first be transferred to the General Reserve before any dividend can be distributed. (b) Transfer of a part of profit to a reserve is also necessary where the company has undertaken, at the time of raising of loan, that before any part of its profit is distributed, a specified percentage of the profit every year should be credited to a reserve for the repayment of the loan and until the time for repayment arrives, the amount should remain invested in a specified manner. III Apart from appropriations aforementioned, it may also be necessary to provide for losses and arrears of depreciation and to exclude capital profit, as mentioned earlier, to arrive at the amount of divisible profit. 10.5 SUMMARY  Determining amount of profits available for distribution is an important function and depends on a number of factors, like their composition, the amount of provisions and appropriations that must be made out of them in priority, etc.  Capital cannot be returned to shareholders by way of dividend.  Appropriating a part of profits may be done as a result of decision of Board of directors or as per law.  Dividend may be declared out of reserves subject to certain conditions. Dividends cannot be declared except out of profits. 10.6 KEYWORDS  Appropriation: Appropriation is the act of setting aside money for a specific purpose.  Dividend: means the profit of a company, which is not retained in the business and is distributed among the shareholders in proportion to the amount paid-up on the shares held by them  Accumulated Profits: Retained Earnings 10.7 LEARNING ACTIVITY 1.What is the reason for “ No depreciation No dividend” provision of companies Act 2013 ___________________________________________________________________________ _______________________________________________________________________ 168 CU IDOL SELF LEARNING MATERIAL (SLM)

2.There are companies which are by its Constitution prohibited from paying dividend to its members, what are they? ___________________________________________________________________________ _____________________________________________________________________ 10.8 UNIT END QUESTIONS A.Descriptive Questions Short Questions 1.Explain the term divisible profits. 2.Explain the term dividend as given in companies Act 2013 3.Can dividend be paid for partly paid up shares? 4.Are calls in advance entitled to payment of Dividend? 5.What are the sources for declaration and payment of Dividend ? Long Questions 1.Discuss about the Meaning of the term Dividend in detail 2.Explain the provisions relating to declaration and payment of dividend as given in companies Act 2013 3.Discuss the provisions of Section 123 of Companies Act 2013 4.Explain about Transfer of Profits to reserves 5. Explain fulfilment of the conditions as per Companies (Declaration and Payment of Dividend) Rules, 2014 for declaration and payment of dividend B.Multiple Choice Questions 1. The rate of dividend declared should not exceed the average of the rates at which dividend was declared by it in the _______years immediately preceding that year a. 3 b. 2 c. 1 d. 5 2. The balance of reserves after withdrawal for declaration and payment of dividend should not fall below _________ of its paid-up share capital as appearing in the latest audited financial statement 169 CU IDOL SELF LEARNING MATERIAL (SLM)

a. 25 b. 50 c. 30 d. 15 3. The total amount to be drawn from such accumulated profits for payment of dividend should not exceed ___________of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement. a. One fifth b. One tenth c. One fourth d. One third 4.Declaration of dividend for a company is_______________ a. Compulsory b. Should be declared if there are preference shares c. The decision of the board d. None of these 5. The amount of profits that must be transferred to reserve of the companyis_______________ a. Compulsory b. Should be declared if there are preference shares c. The decision of the board d. None of these Answers 170 1- a,2-d,3-b, 4-c, 5-c 10.9 REFERENCES Reference books CU IDOL SELF LEARNING MATERIAL (SLM)

 T. P. Ghosh, A. Banerjee Principles and Practice of Accounting, Galgotia Publishing Company, New Delhi-5. & K.M. Bansal  P. C. Tulsian Financial Accounting, Sultan Chand & Company, New Delhi.  R. Narayanaswamy Financial Accounting – A Managerial Prospective; PHI Learning Pvt. Ltd.  Ashish K. Bhattacharyya Essentials of Financial Accounting; PHI Learning Pvt. Ltd. 171 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 11 DIVIDEND STRUCTURE 11.0 Learning Objectives 11.1 Introduction 11.2 Declaration of dividend 11.3 Dividend on preference shares 11.4 Dividend on Partly paid shares 11.5 Payment of Dividend 11.6 Summary 11.7 Keywords 11.8 Learning Activity 11.9 Unit end questions 11.10 References 11.0 LEARNING OBJECTIVES After studying this unit, students will be able to  Explain the provisions as laid down in Companies Act 2013 relating to payment of dividend  Discuss the provisions relating to Section 125 of Companies Act 2013  Describe regarding eligibility and payment of dividend to preference shares, partly paid up shares 11.1 INTRODUCTION In the previous chapter we had discussed about Conditions for declaration and payment of dividend and transfer to reserves in this chapter we shall continue our discussion on some more provisions of Declaration and payment of Dividend The term ‘dividend’ has been defined under Section 2(35) of the Companies Act, 2013. The term “Dividend” includes any interim dividend. It is an inclusive and not an exhaustive definition. According to the generally accepted definition, “dividend” means the profit of a company, which is not retained in the business and is distributed among the shareholders in proportion to the amount paid-up on the shares held by them. Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits is 172 CU IDOL SELF LEARNING MATERIAL (SLM)

available. Dividend for a financial year of the company (which is called ‘final dividend’) are payable only if it is declared by the company at its annual general meeting on the recommendation of the Board of directors. Sometimes dividends are also paid by the Board of directors between two annual general meetings without declaring them at an annual general meeting (which is called ‘interim dividend’) 11.2 DECLARATION OF DIVIDEND As per Section 123 of the Companies Act, 2013, Board of Directors of a company may declare dividend including interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend should not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. The amount of the dividend, including interim dividend, should be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend. No dividend should be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and should not be payable except in cash: Provided that nothing in Section 123 should be deemed to prohibit the capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company: Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend. Dividend shall not be declared out of the Securities Premium Account or the Capital Redemption Reserve or Revaluation Reserve or Amalgamation Reserve or out of profits on reissue of forfeited shares or out of profits earned prior to incorporation of the company Dividend out of capital profits Certain profits do not arise in the normal course of business as they are earned out of capital transactions. These profits are known as capital profits and are not available for distribution as Dividend. However, profit on sale of fixed assets, though capital profit, can be utilised for distribution if such profit is actually realised in cash and such distribution is not contrary to the Memorandum and Articles of Association of the company 11.3 DIVIDEND ON PREFERENCE SHARES (a) Holders of preference shares are entitled to receive a dividend at a fixed rate before any dividend is declared on equity shares. 173 CU IDOL SELF LEARNING MATERIAL (SLM)

(b) But such a right can be exercised subject to there being profits and the Directors recommending payment of the dividend. 11.4 DIVIDEND ON PARTLY PAID SHARES: A company may if so, authorised by its Article, pay a dividend in proportion to the amount paid on each share (Section 51 of the Companies Act, 2013). Calls in Advance Calls paid in advance do not rank for payment of dividend. 11.5 PAYMENT OF DIVIDEND As per Section 124 of the Companies Act, 2013: (1) Where a dividend has been declared by a company but has not been paid or claimed within thirty days from the date of the declaration to any shareholder entitled to the payment of the dividend, the company should, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account. (2) The company should, within a period of ninety days of making any transfer of an amount under this section to the Unpaid Dividend Account, prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the website of the company, if any, and also on any other website approved by the Central Government for this purpose, in such form, manner and other particulars as may be prescribed. (3) If any default is made in transferring the total amount or any part thereof to the Unpaid Dividend Account of the company, it should pay, from the date of such default, interest on so much of the amount as has not been transferred to the said account, at the rate of 12% per annum and the interest accruing on such amount should ensure to the benefit of the members of the company in proportion to the amount remaining unpaid to them. (4) Any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed. (5) Any money transferred to the Unpaid Dividend Account of a company in pursuance of this section which remains unpaid or unclaimed for a period of seven years from the date of such transfer should be transferred by the company along with interest accrued, if any, thereon to the Fund “Investor Education and Protection Fund” established section 125 and the company should send a statement in the prescribed form of the details of such transfer to the authority which administers the said Fund and that authority should issue a receipt to the company as evidence of such transfer. 174 CU IDOL SELF LEARNING MATERIAL (SLM)

(6) All shares in respect of which unpaid or unclaimed dividend has been transferred to “Investor Education and Protection Fund” should also be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed: Provided that any claimant of shares transferred above should be entitled to claim the transfer of shares from Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed. (7) If a company fails to comply with any of the requirements of this section, the company will be punishable with fine which will not be less than five lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default will be punishable with fine which will not be less than one lakh rupees, but which may extend to five lakh rupees. 11.6 SUMMARY  The term ‘dividend’ has been defined under Section 2(35) of the Companies Act, 2013. The term “Dividend” includes any interim dividend  The amount of the dividend, including interim dividend, once declared should be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend  Holders of preference shares are entitled to receive a dividend at a fixed rate before any dividend is declared on equity shares  Unclaimed dividend which remains unclaimed for a period of more than 7 years shall be transferred to IEPF  Any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed 11.7 KEYWORDS  IEPF: Investor education and protection Fund  Interim dividend: Interim dividend is declared when the company makes good profit in the first half of the financial year. I.e., declared before the end of the financial year  Unclaimed dividend: An unclaimed dividend is recorded when a shareholder fails to claim an already paid dividend 11.8 LEARNING ACTIVITY 1. Is dividend an Adjustable item in the balance sheet as per AS-4 175 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ _______________________________________________________________________ 2.Why do companies declare and pay Interim dividend when the same can be paid after completion of Financial year? ___________________________________________________________________________ _______________________________________________________________________ 11.9 UNIT END QUESTIONS A.Descriptive Questions Short Questions 1.Explain the terms Interim and Final dividend 2.Explain when Unclaimed dividend is transferred to IEPF. 3.Once declared dividend becomes a liability. Explain 4.When should the amount declared as dividend be transferred to unpaid dividend Account 5.A shareholder has paid call money in advance is he entitled for dividend for that portion as well? Long Questions 1.Explain the provisions relating to Payment of dividend as laid down in Companies Act 2013 2.Explain the provisions of Section 124 of Companies Act 2013 3.Explain the provisions of Section 125 of Companies Act 2013 4.Distinguish between unpaid and unclaimed dividend and provisions of Companies Act 2013 relating to Unclaimed dividend 5.Explain the provisions relating to payment of dividend to preference shareholders, calls in Arrears, Calls in Advance and partly paid up shares. B.Multiple choice Questions 1.The term IEPF stands for_________ a. Investor education and protection Fund b. Investment education and provident Fund c. Investor Eligibility and Primary Fund d. None of these 176 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Dividend declared and not claimed must be transferred to a separate bank Account within __________ days a. 7 b. 5 c. 10 d. 30 3.From Unclaimed dividend Account amount will be transferred to IEPF after ______ years a. 7 b. 5 c. 3 d. 2 4.In case of default by the company to pay _____ % interest on the amount not transferred to Unpaid dividend Account during the period of default. a. 7 b. 5 c. 12 d. 20 5.Which amongst the following is not eligible for Dividend? a. Preference share holders b. Partly paid-up shares c. Equity share holders d. Calls in advance Answers 177 1-a, 2-b, 3-a,4-c,5-d 11.10 REFERENCES Textbooks/Reference books CU IDOL SELF LEARNING MATERIAL (SLM)

 Advanced Accountancy – M.C. Shukla and T.S. Grewal, Sultan Chand, Publications, New Delhi  R. Narayanaswamy Financial Accounting – A Managerial Prospective; PHI Learning Pvt. Ltd.  Ashish K. Bhattacharyya Essentials of Financial Accounting; PHI Learning Pvt. Ltd. 178 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 12 ACCOUNTING TREATMENT(DIVIDEND) STRUCTURE 12.0 Learning Objectives 12.1 Introduction 12.2 Illustrations 12.3 Summary 12.4 Keywords 12.5 Learning Activity 12.6 Unit end Questions 12.7 References 12.0 LEARNING OBJECTIVES After studying this unit, students will be able to:  Explain the Accounting treatment of dividend  Pass Accounting entries for declaration and payment of dividend  Solve problems relating to dividend applying Conditions laid down in Companies Act 2013 12.1 INTRODUCTION Accounting treatment of dividend, dividend distribution tax transfer to reserves bonus, etc. 1. On Transfer of Profits to General Reserve (Board’s Option) Profit & Loss (Appropriation) A/c Dr. To General Reserve 3. On Declaration of Final Dividend for the previous year at Annual General Meeting Pref. Dividend A/c Dr. Equity Dividend A/c Dr. To Pref. Dividend Payable A/c To Equity Dividend Payable A/c 3. On Transfer of the amount of Dividend Payable to a Separate Bank Account Dividend Bank A/c Dr. 179 CU IDOL SELF LEARNING MATERIAL (SLM)

To Bank A/c 4. On Payment of a Dividend Payable out of Dividend Bank Pref. Dividend Payable A/c Dr. Equity Dividend Payable A/c Dr. To Dividend Bank A/c Dividend declared after balance sheet data(AS-4 Revised) There are events which, although take place after the balance sheet date, are sometimes reflected in the financial statements because of statutory requirements or because of their special nature. For example, if dividends are declared after the balance sheet date but before the financial statements are approved, the dividends are not recognised as a liability at the balance sheet date because no obligation exists at that time unless a statute requires otherwise. Such dividends are disclosed in the notes. Thus, no liability for proposed dividends needs to be recognised in financial statements for financial year ended 31st March 2017 and subsequent years. Such proposed dividends are to be disclosed in the notes as per Companies (Accounting Standards) Amendment Rules, 2016 issued on 30 March 2016. NOTE: W.e.f., Assessment Year 2021-22,i.e., Financial year 20-21 the domestic company isn’t required to pay dividend distribution tax(DDT) on any amount declared, distributed or paid by such company by way of dividend. Illustrations solved below shall be done bearing in mind the conditions for declaration and payment of dividend discussed in Unit 10 12.2 ILLUSTRATIONS Illustration 1 Due to inadequacy of profits during the year ended 31st March, 20X2, XYZ Ltd. proposes to declare 10% dividend out of general reserves. From the following particulars, ascertain the amount that can be utilised from general reserves, according to the Companies (Declaration of dividend out of Reserves) Rules, 2014: 180 CU IDOL SELF LEARNING MATERIAL (SLM)

Solution Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1: Condition I Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared. Condition II Maximum amount that can be drawn from the accumulated profits and reserves should not exceed 10% of paid up capital plus free reserves i.e.. Rs. 12,25,000 [10% of (80,00,000+17,50,000+25,00,000)] Condition III The balance of reserves after drawl Rs. 18, 42,500 (Rs. 25, 00,000 - Rs. 6, 57,500) should not fall below 15 % of its paid up capital i.e.. Rs. 14,62,500 (15% of Rs. 97,50,000] Since all the three conditions are satisfied, the company can withdraw Rs. 6,57,500 from accumulated reserves (as per Declaration and Payment of Dividend Rules, 2014.) Illustration 2 The following is the Trial Balance of Omega Limited as on 31.3.20X2: 181 CU IDOL SELF LEARNING MATERIAL (SLM)

Additional Information: (i) The authorised share capital of the company is 40,000 shares of Rs. 10 each. (ii) The company on the advice of independent valuer wish to revalue the land at Rs. 3,60,000. (iii) Declared final dividend @ 10% on 2nd April, 20X2. (iv) Suspense account of Rs. 4,000 represents cash received for the sale of some of the machinery on 1.4.20X1. The cost of the machinery was Rs. 10,000 and the accumulated depreciation thereon being Rs. 8,000. (v) Depreciation is to be provided on plant and machinery at 10% on cost. You are required to prepare Omega Limited’s Balance Sheet as on 31.3.20X2 and Statement of Profit and Loss with notes to accounts for the year ended 31.3.20X2 as per Schedule III. Ignore previous years’ figures & taxation. Solution 182 CU IDOL SELF LEARNING MATERIAL (SLM)

183 CU IDOL SELF LEARNING MATERIAL (SLM)

184 CU IDOL SELF LEARNING MATERIAL (SLM)

Note: The final dividend will not be recognized as a liability at the balance sheet date (even if it is declared after reporting date but before approval of the financial statements) as per Accounting Standards. Hence, it has not been recognized in the financial statements for the year ended 31 March, 20X2. Such dividends will be disclosed in notes only. Illustration 3 You are required to prepare Balance sheet and statement of Profit and Loss from the following trial balance of Haria Chemicals Ltd. for the year ended 31st March, 20X1. 185 CU IDOL SELF LEARNING MATERIAL (SLM)

Additional information: Closing Inventory on 31-3-20X1: Rs. 8,23,000 186 Solution CU IDOL SELF LEARNING MATERIAL (SLM)

187 CU IDOL SELF LEARNING MATERIAL (SLM)

188 CU IDOL SELF LEARNING MATERIAL (SLM)

189 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 4 You are required to prepare a Statement of Profit and Loss and Balance Sheet from the following Trial Balance extracted from the books of the International Hotels Ltd., on 31st March, 20X2: 190 CU IDOL SELF LEARNING MATERIAL (SLM)

191 CU IDOL SELF LEARNING MATERIAL (SLM)

Depreciation : Furniture and Fittings @ 5% p.a. : Land and Building @ 2% p.a. The Equity capital on 1st April, 20X1 stood at Rs. 7,20,000, that is 6,000 shares fully paid and 2,000 shares Rs. 60 paid. The directors made a call of Rs. 40 per share on 1st October 20X1. A shareholder could not pay the call on 100 shares and his shares were then forfeited and reissued @ Rs. 90 per share as fully paid. The Directors declared a dividend of 8% on equity shares on 2nd April, 20X2, transferring any amount that may be required from General Reserve. Ignore Taxation. Solution 192 CU IDOL SELF LEARNING MATERIAL (SLM)

193 CU IDOL SELF LEARNING MATERIAL (SLM)

194 CU IDOL SELF LEARNING MATERIAL (SLM)

195 CU IDOL SELF LEARNING MATERIAL (SLM)

196 CU IDOL SELF LEARNING MATERIAL (SLM)

Note: The final dividend will not be recognized as a liability at the balance sheet date (even if it is declared after reporting date but before approval of the financial statements) as per Accounting Standards. Hence, it has not been recognized in the financial statements for the year ended 31 March, 20X2. Such dividends will be disclosed in notes only. 12.3 SUMMARY  Accounting entries for declaration and payment of dividend 1.On Declaration of Final Dividend for the previous year at Annual General Meeting Pref. Dividend A/c Dr. Equity Dividend A/c Dr. To Pref. Dividend Payable A/c To Equity Dividend Payable A/c 2.. On Transfer of the amount of Dividend Payable to a Separate Bank Account Dividend Bank A/c Dr. To Bank A/c 3. On Payment of a Dividend Payable out of Dividend Bank Pref. Dividend Payable A/c Dr. Equity Dividend Payable A/c Dr. To Dividend Bank A/c 12.4 KEYWORDS  DDT: Dividend distribution Tax  AS-4: Accounting standard 4, it deals with Contingencies and Events occurring After the balance sheet date  Final Dividend :means the Dividend recommended by the Board of Directors and declared by the Members at an Annual General Meeting. 12.5 LEARNING ACTIVITY 1.When a company declares Interim dividend, then is it a must to declare and pay final dividend as well? 197 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ _______________________________________________________________________ 2.Can dividends for any Previous financial years for which AGMs have been conducted be declared subsequently? ___________________________________________________________________________ _______________________________________________________________________ 12.6 UNIT END QUESTIONS A.Descriptive Questions Short Questions 1.Should Dividend declared for 21-22 Financial year be adjusted in the financial statements of 21-22? 2.Pass the Accounting entries for declaration and payment of dividend 3.Discuss the legal position as to dividend on partly paid up shares 4.Explain the Accounting treatment of Dividend declared after balance sheet date 5. X Ltd. provides you the following information: Long Questions 1. X Ltd. was registered with an authorised capital of Rs. 40,00,000 divided into 10,000 12% Preference Shares of Rs. 100 each and 3,00,000 Equity Shares of Rs. 10 each. On 1st April 2020, all the preference shares and 2,00,000 equity shares had been issued and were fully paid with the exception of 40,000 of equity shares on which only Rs. 5 per share had been called up. On 1st Nov. 2020 the director made the final call of Rs. 5 per share on the partly paid equity shares and the call was dully paid except by a shareholders-holding 2,000 shares. The recommendation of directors include the dividend on equity shares @ 15% p.a. Required: Calculate the amount of proposed dividend in each of the following 198 CU IDOL SELF LEARNING MATERIAL (SLM)

alternative cases: Case (a) If no other information is given; Case (b) If the shares on which calls were in arrears were duly forfeited before the end of the accounting 2. Y Ltd. was registered with an authorised capital of Rs. 40,00,000 divided into 10,000 12% Preference Shares of Rs. 100 each and 3,00,000 Equity Shares of Rs. 10 each. On 1st April 2020, all the preference shares and 2,00,000 equity shares had been issued and were fully paid with the exception of 40,000 of equity shares on which only Rs. 5 per share had been called up. On 1st Nov. 2020 the director made the final call of Rs. 5 per share on the partly paid equity shares and the call was dully paid except by a shareholders-holding 2,000 shares. The recommendation of directors include the dividend on equity shares @ 15% p.a. Required: Calculate the amount of proposed dividend in f the following case: If the shares on which calls were in arrears were duly forfeited and were reissued @ ` 9 per share before the end of the accounting year. 3. X Ltd provides you the following information: 4.Explain the conditions laid down in Companies Act 2013 for declaration and payment of dividend 5.What is Interim dividend, pass journal entries for the same and explain its Accounting treatment B.Multiple choice Questions 1. Declaration of dividends for current year is made after providing for a. Depreciation of past years only. b. Depreciation on assets for the current year and arrears of depreciation of past years (if any). c. Depreciation on current year only and by forgoing arrears of depreciation of past years. d. All of these 2. Which of the following is not a current liability as per Schedule III? 199 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Bank overdraft b. Net deferred tax liability c. Dividend declared. d. None of these 3. Which of the following is a current liability as per Schedule III? a. Final dividend declared b. Interim dividend declared and announced c. Bank overdraft d. b and c 4.Who amongst the following are entitled for Arrears of dividend? a. Equity share holders b. Preference share holders c. Cumulative preference share holders d. Equity shares with differential rights 5.Dividend cannot be declared out of___ a. Current year profits b. Previous year profits c. Amount provided by central government d. Securities premium Answers 1-c,2-c,3-d,4-c,5-d 12.7 REFERECNES Reference books  Advanced Accountancy – M.C. Shukla and T.S. Grewal, Sultan Chand, Publications, New Delhi 200 CU IDOL SELF LEARNING MATERIAL (SLM)