Case Studies with MCQs
Chapter: Corporate Governance and Director Liabilities
Case Study 1: Tom & Jerry Pvt. Ltd. and Sweat Equity (Pg 1.14 of ICAI Module)
Tom & Jerry Pvt. Ltd. is an electronics company with a growing workforce. To incentivize employees, the company has issued sweat equity shares. However, there are discrepancies in how these shares are accounted for in the financial statements. The CEO, Tom Martinez, and CFO, Jerry Thomas, are working together to resolve this issue in compliance with the Companies Act, 2013.
Numerical Data
100,000 sweat equity shares were issued at a 10% discount. The original price of each share was ₹50. The paid-up share capital is ₹1,50,00,000.
MCQs
1. What is the total value of sweat equity shares issued at a 10% discount?
(a) ₹4,50,000
(b) ₹5,00,000
(c) ₹4,75,000
(d) ₹5,50,000
Answer: (a) ₹4,50,000
Solution: The total value of shares before discount is ₹50,00,000. After applying the 10% discount, it amounts to ₹4,50,000.
2. As per the Companies Act, 2013, what is the maximum limit of sweat equity shares that can be issued?
(a) 10% of paid-up share capital
(b) 25% of paid-up share capital
(c) 50% of paid-up share capital
(d) 75% of paid-up share capital
Answer: (b) 25% of paid-up share capital.
Solution: According to the Companies Act, sweat equity shares cannot exceed 25% of the paid-up share capital in a financial year.
3. If Tom & Jerry Pvt. Ltd. issues shares at a premium, what impact will it have on the financial statement?
(a) Increases paid-up share capital
(b) Increases reserves
(c) Decreases liabilities
(d) Increases authorized share capital
Answer: (b) Increases reserves.
Solution: Issuing shares at a premium contributes to the company’s reserves, increasing the surplus.
4. Under which section of the Companies Act, 2013 is the issuance of sweat equity shares regulated?
(a) Section 62
(b) Section 68
(c) Section 73
(d) Section 80
Answer: (b) Section 68.
Solution: Section 68 of the Companies Act, 2013, regulates the issuance of sweat equity shares.
5. How should the company report sweat equity shares in the cash flow statement?
(a) Under financing activities
(b) Under operating activities
(c) Under investing activities
(d) As a non-cash transaction
Answer: (d) As a non-cash transaction.
Solution: Sweat equity shares are typically non-cash transactions and should be reported as such.
Chapter: Company Conversion
Case Study 2: Flora Fauna Ltd. Conversion to Private Company (Pg 1.30 of ICAI Module)
Flora Fauna Ltd. is a public company with 230 members. The company’s Board of Directors has proposed converting the company to a private company to reduce operational costs. To proceed, Flora Fauna Ltd. needs to comply with the limit of 200 members as mandated for private companies. The company needs to adjust its joint shareholders to achieve this.
Numerical Data
Flora Fauna Ltd. has 50 directors and relatives holding shares, 15 employees, 10 ex-employees with shares, and 145 external members. There are 5 couples who hold shares jointly.
MCQs
1. After considering joint shareholding, how many total members does Flora Fauna Ltd. have?
(a) 200
(b) 205
(c) 195
(d) 210
Answer: (a) 200.
Solution: When accounting for joint shareholders as one, the total number of members is reduced to 200.
2. What is the maximum number of shareholders allowed in a private company under the Companies Act, 2013?
(a) 100
(b) 150
(c) 200
(d) 250
Answer: (c) 200.
Solution: The maximum number of shareholders allowed for a private company is 200.
3. To convert to a private company, what must Flora Fauna Ltd. do if it exceeds 200 members?
(a) Increase its paid-up share capital
(b) Apply for special permission
(c) Reduce its membership count
(d) File for voluntary dissolution
Answer: (c) Reduce its membership count.
Solution: The company must reduce its members to below 200 to comply with private company regulations.
4. What type of resolution is required for the conversion of Flora Fauna Ltd. into a private company?
(a) Ordinary resolution
(b) Special resolution
(c) Board resolution
(d) Shareholder approval
Answer: (b) Special resolution.
Solution: A special resolution is required for the conversion from a public to a private company.
5. Which section of the Companies Act governs the conversion of a public company to a private company?
(a) Section 2(68)
(b) Section 62
(c) Section 135
(d) Section 128
Answer: (a) Section 2(68).
Solution: Section 2(68) outlines the rules for converting a public company to a private company.
Chapter: Compliance and Auditing Standards
Case Study 3: Patrick & Co. – Audit Compliance (Pg 1.6 of ICAI Module)
Patrick & Co. Pvt. Ltd. is an IT consulting firm. The company is in the process of completing its financial audit for the year. During the audit, issues were raised regarding compliance with auditing standards. The CFO, Mr. Patrick Sullivan, is concerned about certain financial discrepancies and must resolve these in compliance with Section 143 of the Companies Act, 2013.
Numerical Data
The company’s audit has revealed unrecorded liabilities amounting to ₹10,00,000 and an incorrect treatment of depreciation for the year. The company now needs to adjust its financial statements accordingly.
MCQs
1. What is the total adjustment required for unrecorded liabilities?
(a) ₹5,00,000
(b) ₹7,50,000
(c) ₹10,00,000
(d) ₹12,50,000
Answer: (c) ₹10,00,000.
Solution: The audit revealed unrecorded liabilities totaling ₹10,00,000, which must be adjusted.
2. What section of the Companies Act, 2013 deals with auditing standards?
(a) Section 129
(b) Section 143
(c) Section 148
(d) Section 156
Answer: (b) Section 143.
Solution: Section 143 of the Companies Act, 2013, deals with the powers and duties of auditors and auditing standards.