Corporate Accounting Solved Question Papers Dibrugarh UniversityCorporate Accounting Solved Paper May 2016 (New Course)COMMERCE (General/Speciality)Course: 203 (Corporate Accounting )The figures in the margin indicate full marks for the questionsFull Marks: 80Pass Marks: 24Time: 3 hours
a) Out of the face value of shares, at least 5% is payable with application under Section 39 of the Companies Act, 2013.
b) Capital Reserve is not used for issue of Bonus shares.
c) The dividend which is declared in between two annual general meetings of a company is called Interim dividend.
d) Section 2(87) of the Companies Act, 2013 defines a subsidiary company.
(b) State the following statements whether ‘True’ or ‘False’: 1x4=4
a) Shares can be converted into debentures. False
b) Accounting Standard – 14 relates to Accounting for Amalgamation. True
c) Under Income-tax Act, 1961, companies are required to pay advance income tax on their expected profits. True
d) If the holding company has 100% shares in a subsidiary company, then only assets of the subsidiary company belongs to the holding company. False
2. Write brief notes on any four of the following: 4x4=16
a) Securities Premium Reserve A/c.
b) Sinking Fund.
c) Advance Payment of Tax.
d) Reduction of share capital.
e) Consolidated Balance Sheet.
Ans: a) Securities Premium Reserve A/c.
If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act, 2013 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Reserve Account.
Under Section 52 of the Company Act 2013, the amount of securities premium reserve account may be used only for the following purposes:
a) To write off the preliminary expenses of the company.
b) To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
c) To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
d) To issue fully paid bonus shares to the shareholders of the company.
e) In purchasing its own shares (buy back).
b) Sinking Fund.
Ans: Sinking fund is a fund into which a company sets aside money over time, in order to retire its preferred stock, bonds or debentures. Such fund is created mainly for some specific purposes which are:
1. To redeem or repay long term liabilities. For example: debentures, long term loans etc.
2. To replace wasting assets. For example: mines etc.
3. To replace an asset of depreciable nature. For example fixed assets.
Creation of Sinking fund for redemption of debentures:
For redemption of debentures or other long term liabilities, a fixed amount is kept aside yearly as sinking fund for the specific purpose and the same amount is invested in securities etc. for a specific period so that the sufficient amount is available at the time of redemption of long term liabilities. The amount to be set aside can be determined with the help of Sinking fund table. The amount kept aside should not be debited to Profit and loss account but to Profit and loss appropriation account because the same is an allocation of profit not expenditure.
c) Advance Payment of Tax.
Ans: Under Income Tax Act 1961, companies are required to pay advance tax on their expected profits. When advance payment of tax is made, the entry is:
Advance Income Tax Account ………………………………………………………………….. Dr.
To Bank Account
(Being payment of tax in advance)
|
L/f
|
Amount
|
Amount
|
Since the actual amount payable as income tax will be known long after the preparation of the Profit and Loss Account (i.e. when the assessment is made by the Income Tax Department), the liability for taxes has to be estimated while preparing the Profit and Loss Account so that dividend to shareholders may be made from revenue profits and not from capital profits. So, liability for taxes is estimated and provided for in the books. The entry is:
Profit and Loss Account……………………………………………………………..…………... Dr.
To Provision for Income Tax Account
(Being provision for income tax for the year)
|
L/f
|
Amount
|
Amount
|
When the actual assessment of tax is made, balances appearing in Provision for Income Tax Account, Advance Income Tax Account and tax deducted at source on income earned by the company are transferred to Income Tax Account. If the actual assessment of tax comes to be more than the provision made, the balance is deducted from the Surplus in the Balance Sheet. The amount is not debited to the Profit and Loss Account because tax assessed related to the profits of the last year. Similarly, if the actual assessment of tax is less than the amount provided for, the difference is added to the Surplus Account shown in the Balance Sheet.
d) Reduction of share capital.
Ans: Reduction of Capital: Sometimes there may be a genuine necessity for the reduction of capital. This power is, given by Section 66 of the Companies Act, 2013, subject to the compliance of conditions. According to this, a company may,
(1) Extinguish or reduce the liability on any of its shares in respect of share capital not paid up
(2) cancel any paid-up share capital which is lost or is unrepresented by any available assets;
(3) pay off any paid-up share capital which is in excess of what is required by the company. Conditions for effecting a reduction
Following conditions are required to be fulfilled by a company to reduce its share capital –
(a) The Articles of Association of the company must permit it to reduce its capital;
(b) The company in general meeting shall pass a special resolution to reduce its capital; and
(c) The approval of National Company Law Tribunal (previously Court) shall be obtained for the scheme of reduction in share capital.
e) Consolidated Balance Sheet.
Ans: In India, the law does not compel a holding company to prepare a consolidated Balance Sheet & Profit & Loss Account. It is only for convenience that these statements are prepared. Shareholders of a holding company are interested in knowing the affairs of the subsidiary company as part of their money given to the holding company is invested in subsidiary company. So it becomes safe for directors of the holding company to disclose to the shareholders of the holding company the extent to which they are entitled to the net assets of the subsidiary company. By way of consolidated Balance Sheet, the investments of the holding company in the subsidiary company are replaced by assets.
Consolidation of Balance Sheet & Profit & Loss Account means the combining of the separate Balance Sheet & the separate Profit & Loss Accounts of the Holding company & its subsidiary company or companies into Single Balance Sheet & a Single Profit & Loss Account.
The purpose of a Consolidated Balance Sheet & Profit & Loss Account is to show the financial position & Operating results of a group consisting of a holding company & one or more subsidiaries. The consolidated statements are reports of notional accounting entity which subsist on the view that the holding & subsidiary companies are to be treated as one economic unit. The Financial position & Operating results reported through the consolidated statements are portrayed from the interest of the members of the holding company.
3. (a) A company invited the public to subscribe for 100000 equity shares of Rs. 10 each at a premium of Rs. 1 per share payable on allotment. Payments were to be made as follows:
On application – Rs. 3 per share.
On allotment – Rs. 3 per share.
On first call – Rs. 3 per share.
On final call – Rs. 2 per share.
Applications were received for 130000 shares. Applications for 20000 shares were rejected and allotment was made proportionately to the remaining applicants. Both the calls were made and all the money received expect the final call on 3000 shares which were forfeited after due notice. Later on these shares were reissued as fully paid at Rs. 8.50 per share. Pass Journal Entries in the books of the company. 14
Journal Entries
Particulars
|
L/F
|
Amount (Dr.)
|
Amount (Cr.)
|
Bank A/c Dr.
To Equity Share Application A/c
(Being the application money received on 1,30,000 shares @ Rs. 3 per share)
|
3,90,000
|
3,90,000
| |
Equity Share Application A/c Dr.
To Equity Share Capital a/c
To Bank A/c (20,000 x 3)
To Equity Share Allotment a/c (10,000 x 3)
(Being the application money on 1,00,000 shares transferred to equity share capital and excess adjusted)
|
3,90,000
|
3,00,000
60,000
30,000
| |
Equity Share Allotment A/c Dr.
To Equity Share Capital A/c
To Securities Premium Reserve A/c
(Being the allotment money due on 1,00,000 shares @ Rs.3 per share including premium @ Rs. 1 per share)
|
3,00,000
|
2,00,000
1,00,000
| |
Bank A/c Dr.
To Equity Share Allotment A/c
(Being the allotment money received)
|
2,70,000
|
2,70,000
| |
Equity Share 1st Call A/c Dr.
To Equity Share Capital a/c
(Being the first call money due on 1,00,000 shares @ Rs. 3 per share)
|
3,00,000
|
3,00,000
| |
Bank A/c Dr.
To Equity Share 1st Call A/c
(Being the first call money received on 1,00,000 shares @ Rs. 3 per share)
|
3,00,000
|
3,00,000
| |
Equity Share Final Call A/c Dr.
To Equity Share Capital A/c
(Being the final call money due on 1,00,000 shares @ Rs. 2 per share)
|
2,00,000
|
2,00,000
| |
Bank A/c Dr.
Calls in arrear A/c Dr.
To Equity Share Final Call A/c
(Being the final call money received on 97,000 shares @ Rs. 2 per share)
|
1,94,000
6,000
|
2,00,000
| |
Equity Share Capital A/c Dr.
To Forfeited Share A/c (3,000 x 8)
To Calls in arrear A/c (3,000 x 2)
(Being the 3,000 shares forfeited due to nonpayment of final call)
|
30,000
|
24,000
6,000
| |
Bank A/c (3,000 x 8.50) Dr.
Forfeited Share A/c (3,000 x 1.50) Dr.
To Equity Share Capital a/c
(Being the 3,000 forfeited shares reissued @ Rs. 8.5 per share)
|
25,500
4,500
|
30,000
| |
Forfeited share A/c Dr.
To Capital Reserve A/c
(Being the profit on reissue of forfeited shares transferred to capital reserve)
|
19,500
|
19,500
|
For Solutions Click Here:
Or
CORPORATE ACCOUNTING SOLVED QUESTION PAPERS (2010 Till Date)
Also Read:
Also Read:
Ans: Preference shares: Sec. 43 (b) of the Companies Act, 2013 defines preference shares as those shares which carry preferential rights as the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. Thus, both the preferential rights viz.
(a) Preference in payment of dividend and
(b) Preference in repayment of capital in case of winding up of the company, must attach to preference shares.
The rate of dividend on these shares is fixed and the dividend on these shares must be paid before any dividend is paid to ordinary shares. Directors, however, may decide not to pay any dividend to any class of shareholders even if there are sufficient profits. But, if any how, they decide to pay the dividend, preference shareholders will get the priority to pay the ordinary shareholders.
Conditions for redemption of Preference Shares: Under section 55 of the Companies Act, 2013, a company should have to follow the conditions:
1) No authorization is required in the articles to redeem the preference shares of a company.
2) The redeemable preference shares must be fully paid up. If there is any partly paid share, it should be converted in to fully paid shares before redemption.
3) The redeemable preference shareholders should be paid out of undistributed profit/ distributable profit or out of fresh issue of shares for the purpose of redemption.
4) If the shares are redeemed at a premium, it should be should be provided out of securities premium or out of profits of the company.
5) The proceeds from fresh issue of debentures cannot be utilized for redemption.
6) The amount of capital reserve cannot be used for redemption of preference shares.
7) If the shares are redeemed out of undistributed profit, the nominal value of share capital, so redeemed should be transferred to Capital Redemption Reserve Account. This is also known as capitalization profit.
CRR may be utilised only for the purpose of issuing fully paid bonus shares to the members.
4. (a) Draw a company Balance Sheet as per Schedule VI of the Companies Act, 2013. Write a short note on International Financial Reporting Standard – 2, 3 and 5 (IFRS – 2, 3 and 5). 7+7=14
Ans:
Proforma of Balance Sheet
Name of the Company …………………………………….
Balance Sheet as at……………………………………..
Particulars
|
Note
No.
|
Amount
(Current Year)
|
Amount
(Previous Year)
|
I. EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share capital
(b) Reserves and surplus
(c) Money received against share Warrants
(2) Share application money pending allotment
(3) Non – current liabilities
(a) Long term borrowings
(b) Deferred tax liabilities (net)
(c) Other long term liabilities
(d) Long term provisions
(4) Current liabilities
(a) Short term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short term provisions
| |||
Total
| |||
II ASSETS
(1) Non-Current Assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work in progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other non-current assets
(2) Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short term loans and advances
(f) Other current assets
| |||
Total
|
Explanation of Some Important IFRS
IFRS 2 - Share-based payment: The major objective of this IFRS is to reflect the effect of share based transitions in the financial statements of an entity, including expenses associated with transactions in which share options are granted to employees. It is entailed for an entity to mention all the transactions which are associated with employees or other parties to be settled either in cash or other equity instruments of the business entity.
IFRS 3 - Business combinations: The major objective of this IFRS is to specify all requirements for an entity when it undertakes a business. Business combination means combining two separate entities in to a single economic entity. As a result of this, an enterprise obtains the control over the net assets or operations of other enterprises.
IFRS 5 - Non-current assets held for sale and discontinued operations: The main purpose of this IFRS is to measure the accounting for the assets held for sale, and the preparation and disclosure of discontinued operations in the financial statements of an entity. Particularly, the IFRS requires those assets which can be categorized as held for sale to be measured at the lower degree of carrying amount and fair value less costs to sell, and the amount of depreciation on such assets to cease.
Or
(b) Following is the Trial Balance of Luit Co. Ltd. as on 31st March, 2016:
Dr. Balances
|
Cr. Balances
| |
Stock, 1st April, 2015
Sales
Purchases
Wages
Discount
Furniture and Fittings
Salaries
Rent
Sundry Expenses
Surplus A/c, 1st April, 2015
Dividend paid
Share Capital
Debtors and Creditors
Plant and Machinery
Cash at Bank
Reserve fund
Patents and Trade Mark
|
75,000
2,45,000
50,000
17,000
7,500
4,950
7,050
9,000
37,500
29,000
16,200
4,830
|
3,50,000
5,000
15,030
1,00,000
17,500
15,500
|
5,03,030
|
5,03,030
|
Prepare the Statement of Profit and Loss for the year ended 31st March, 2016 and Balance sheet as on that date. Take into consideration of the following adjustments: 7+7=14
a) Stock on 31st March, 2016 was valued at Rs. 82,000.
b) Depreciation on fixed assets @ 10% p.a.
c) Make a provision for income tax @ 50% p.a.
d) Ignore corporate dividend tax.
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5. (a) What do you mean by amalgamation? What are its features? Discuss ‘pooling of interest method’ of amalgamation. 2+4+8=14
Ans: Amalgamation: Amalgamation means the merging of two or more than two companies for eliminating competition among them or for growing in size to achieve the economies of scale. Amalgamation is a broad term which includes mergers (uniting of two existing companies) and acquisition (one company buying out another company). There are two types of amalgamation. According to AS-14 amalgamation is divided into the following two categories for accounting purposes:
(A) Amalgamation in the nature of merger; and
(B) Amalgamation in the nature of purchase.
Features of Amalgamation
1) Two or more companies are liquidated in the process of amalgamation.
2) Amalgamation involves formation of a new company.
3) Normally companies of same size and same nature are amalgamated for the purpose of expansion.
4) Amalgamation of companies results in combination of companies.
Pooling of Interest Method: In preparing financial statements of the transferee company, assets, liabilities and reserves of the transferor company should be recorded as existing carrying amounts and in the same form at the date of amalgamation, balance of the profit and loss account of the transferor company should be aggregated with the corresponding balance of the transferee company or transferred to general reserve if any. If at the time of amalgamation the accounting policies followed by the transferor company and transferee company are in conflict, it should be resolved, and brought in line with the policies of the transferee company. The difference between the amount recorded in share capital issued and the amount of share capital issued by the transferor company should be adjusted in reserves and surplus.
Features of Pooling of Interest method:
1) In the pooling of interest method all the reserves of the transferor Co. are also recorded by the transferee Co. in its books of account.
2) In the pooling of interest method all the reserves of the transferor Co. are also recorded by the transferee Co. in its books of account.
3) Under the pooling of interest method, the difference between the consideration paid and the share capital of the transferor company is adjusted in the general reserve or other reserves of the transferee company.
4) In this method, the statutory reserves are recorded by the transferee co. like all other reserves without opening Amalgamation and Adjustment A/c.
Treatment of Reserve in case of amalgamation
When amalgamation is in the nature of merger, there is no distinction between statutory or other reserves. In this type of amalgamation, the identity of the reserves of the transferor company is preserved and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company.
Or
(b) The ledger balances of HiFi Ltd. as on 31st March, 2016 are as follows:
Cr. Balances
|
Amount
|
Dr. Balances
|
Amount
|
Share Capital:
Authorized Capital:
50000 Preference shares of Rs. 10 each
50000 Equity shares of Rs. 10 each
Issued and Paid-up:
25000 Preference shares of Rs. 10 each
25000 Equity shares of Rs. 10 each
Current Liabilities:
Sundry Creditors
Bank Overdraft
|
5,00,000
5,00,000
10,00,000
2,50,000
2,50,000
40,000
36,000
|
Goodwill
Leasehold Premises
Plant and Machinery
Patents
Stock
Debtors
Cash
Surplus A/c (negative balance)
|
20,000
1,07,000
60,000
1,73,900
34,000
56,000
100
1,25,000
|
5,76,000
|
5,76,000
|
The company proved unsuccessful and resolutions were passed to carry out the following scheme of reconstruction by reduction of capital:
1) That the Preference Shares be converted to an equal number of fully paid shares of Rs. 5 each.
2) That the Equity shares be reduced to an equal number of fully paid shares of Rs. 2.50 each.
3) That the amount so available be utilized towards wiping out losses and reduction of assets as follows:
Goodwill and Surplus A/c (negative balance) to be written off entirely; Rs. 27,000 to be written off from Leasehold Premises, Rs. 14,000 to be written off from Stock; Rs. 6,000 to be provided for Doubtful debts, 20% should be written off from Plant and Machinery and the balance be written off from patents.
Make Journal Entries in the books of the company and prepare Balance Sheet giving effect to the above scheme.
Journal Entries
In the books of Hifi Ltd.
Particulars
|
L/F
|
Amount
|
Amount
|
Equity Share Capital A/c (10) Dr.
To Equity Share Capital A/c (2.5)
To Capital Reduction A/c (7.5)
(Being the equity share capital reduced by Rs. 7.50 per share)
|
2,50,000
|
62,500
1,87,500
| |
Preference Share Capital A/c (10) Dr.
To Preference Share Capital A/c (5)
To Capital Reduction A/c (5)
(Being the preference share capital converted in equal no of shares of Rs. 5 each)
|
2,50,000
|
1,25,000
1,25,000
| |
Capital Reduction A/c Dr.
To Goodwill a/c
To Patents A/c
To Surplus a/c
To Leasehold Premises A/c
To Stock A/c
To Provision for bad debts A/c
To Plant & Machinery A/c
(Being the sundry assets written off)
|
3,12,500
|
20,000
1,08,500
1,25,000
27,000
14,000
6,000
12,000
|
Balance Sheet of HIFI LTd (And Reduced)
Particulars
|
Note No.
|
Amount
|
I. Equity & Liabilities:
1) Shareholders fund:
a) Share Capital
Equity Share Capital
Preference Share Capital
|
62,500
1,25,000
| |
2) Non Current Liabilities:
Current Liabilities
a) Short term borrowing
Bank Overdraft
b) Trade Payable
|
NIL
36,000
40,000
| |
Total (1 + 2 + 3)
|
2,63,500
| |
II. Assets:
1) Non Current Assets:
a) Fixed Assets
Tangible Fixed Assets:
Leasehold Premises (1,07,000 – 27,000)
Plant & Machinery (60,000 – 12,000)
Intangible Fixed Assets:
Patents (1,73,900 – 68,500)
2) Current Assets
a) Inventories (34,000 – 14,000)
b) Trade receivable (56,000 – 6,000)
c) Cash & cash equivalent
|
80,000
48,000
65,400
20,000
50,000
100
| |
Total (1 + 2)
|
2,63,500
|
6. (a) Following are the Balance Sheets of H Ltd. and its subsidiary company S Ltd. as on 31st March, 2014:
Liabilities
|
H Ltd.
|
S Ltd.
|
Assets
|
H Ltd.
|
S Ltd.
|
Share Capita:
Shares of Rs. 10 each fully paid-up
General Reserve
Profit & Loss A/c
Creditors
|
6,00,000
1,50,000
70,000
1,30,000
|
2,00,000
70,000
50,000
1,00,000
|
Machinery
Furniture
Investment:
70% Shares in S Ltd. at cost
Stock
Debtors
Cash at Bank
Preliminary Expenses
|
3,00,000
70,000
2,60,000
1,75,000
95,000
50,000
-
|
1,00,000
45,000
-
1,89,000
70,000
10,000
6,000
|
9,50,000
|
4,20,000
|
9,50,000
|
4,20,000
|
H Ltd. acquired the shares of S Ltd. as on 30th June, 2013. On 1st April, 2013, the balance of General Reserve and Profit & Loss A/c of S. Ltd. stood at Rs. 60,000 and Rs. 20,000 respectively. No part of preliminary expenses was written off during the year ended on 31st March, 2014. Prepare the Consolidated Balance Sheet of H. Ltd. and its subsidiary company S Ltd. as at 31st March, 2014. 14
Ans: a) H Ltd. = 70%; S Ltd. = 30%
b) Profit during the year = 50,000 – 20,000 + 10,000 (Transfer to reserve) = 40,000
c) Control Chart A:
Particulars
|
Total
|
H. Ltd
|
S. Ltd
|
Pre-acquisition Profit
General Reserve
Surplus upto (1-4-12) 20,000
Add:(40,000*3/12) 10,000
|
60,000
30,000
| ||
Less: Preliminary Expenses
|
90,000
6,000
| ||
84,000
|
58,800
|
25,200
| |
Post-acquisition Profit
General Reserve (70,000+60,000)
Surplus (40,000*9/12) 30,000
Less: Transfer to Reserve 10,000
|
10,000
20,000
| ||
30,000
|
21,000
|
9,000
| |
Share Capital
|
2,00,000
|
1,40,000
|
60,000
|
Minority Interest
|
94,200
|
d) Control Chart B:
Particulars
|
Amount (Rs.)
|
Cost of Investment
Less: (i) Pre-acquisition Profit in H Ltd.
(ii) H LTd Share in S Ltd Capital
|
2,60,000
58,800
1,40,000
|
Goodwill
|
61,200
|
e) Control Chart C:
Particulars
|
Machinery
|
Furniture
|
Stock
|
Debtors
|
Cash at Bank
|
Creditors
|
H Ltd.
S Ltd.
|
30,000
1,90,000
|
70,000
45,000
|
1,75,000
1,89,000
|
95,000
70,000
|
50,000
10,000
|
1,30,000
1,00,000
|
2,20,000
|
1,15,000
|
3,64,000
|
1,65,000
|
60,000
|
2,30,000
|
Consolidated Balance Sheet of H Ltd. & S Ltd
Particulars
|
Amount (Rs.)
|
I. Equity & Liabilities:
A) Shareholder’s Fund
a. Share Capital
b. Reserve & Surplus
General Reserve 1,50,000
Surplus 70,000
Add:RevenueProfit 21,000 91,000
B) Minority Interest
C) Non-Current Liabilities
D) Current Liabilities:
Trade Payable(Creditors)
|
6,00,000
2,41,000
94,200
NIL
2,30,000
|
Total (a + b + c + d)
|
11,65,200
|
I. Assets:
A) Non-Current Assets
Fixed Assets:
Tangible
Machinery
Furniture
Intangible: Goodwill
B) Current Assets:
a. Inventories
b. Trade Receivable (Debtors)
c. Cash & Cash Equivalent
|
4,00,000
1,15,000
61,200
3,64,000
1,65,000
60,000
|
Total (a + b)
|
11,65,200
|
Or
(b) (i) State the distinction between Holding Company and Subsidiary Company.
Ans: Holding Company: As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. According to this section, one company can become the holding company of another in any of the following three ways:
1. By holding more than 50% of nominal value of the equity shares of the other company i.e. the holding company holds the majority of voting power in the subsidiary company.
2. By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.
Meaning of “subsidiary Company”
As per Section 2(87) of the Companies Act, 2013, a company is a “subsidiary company” of another company, i .e.“holding company”, if that other company:
a) holds a majority of the voting rights in it, or
b) is a member of it and has the right to appoint or remove a majority of its board of directors, or
c) is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.
(ii) State three merits and three demerits of holding company. 8+6=14
Ans: Advantages of Holding Company: Following are the important advantages of holding company:
a) Easy Formation: The holding company can be formed very easily. There is no legal formality. Any company may purchase the majority shares from stock exchange and can become holding company.
b) Large Business: A holding company can collect the capital and expand the business on large scale.
c) Foreign Capital: The holding company may also attract the foreign capital for the expansion of a business.
d) A Stable Combination: The holding company is a very stable form of business organization. Its life is not affected by the disagreement of subsidiary company.
e) Goodwill: When the goodwill of the holding company is established in the market, it also improves the goodwill of its subsidiary company before the public.
f) Separate Position: The subsidiary companies can maintain their separate position under this system. They do not lose their identity.
g) Control on Production: A holding company can check the production and adjusts the supply according the demand. So over production cannot take place.
Disadvantages or Defects of Holding Company: Following are the main defects of the holding company:
a) Problem of Monopoly: A holding company tries to create monopoly over the market. Monopoly is always against the public interest. It fixes higher prices and consumer suffers a loss.
b) Unequal Distribution of Wealth: Due to holding companies wealth goes in few hands and society is divided into two classes, rich and poor. Rich class enjoys all the amenities of life while poor class faces poverty and hunger.
c) Costly Management: A holding company spends a lot of money on the officers and offices. All the units are managed by the central authority. So it is costly to maintain the proper control on large number subsidiary companies.
d) Minority Interest Ignored: The interest of the minority shareholders is ignored and the members of the holding company dispose of every resolution for their own interest.
e) Misuse of Funds: The director of the company enjoys unlimited powers and they take undue advantages. They misuse the funds also.
f) Over Capitalization: There is always a danger of over capitalization in the holding companies. It is very harmful for both the companies.
False Reports: Generally the directors of the company present false reports about the company's financial position. The true condition of the company nobody knows, and due to this sometimes creditors suffer a loss.