Page 310 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 13: Valuation of Preference Shares

Profit and Loss A/c 10,000 Debtors 1,35,000 Notes
Gratuity Fund 15,000 Cash 10,000
Workmen’s Compensation Fund 5,000 Prepaid Expenses 2,000
Depreciation Fund 10,000 Preliminary Expenses 3,000
Sundry Trade Creditors 25,000

Expenses – Creditors 5,000
Bank Overdraft 30,000
4,30,000 4,30,000
A shareholder holding 100 shares of ` 10 and 200 shares of ` 4 wants to dispose of all the
shares. Dividends paid for last three years were 12%, 11% and 13%. Normal expectation is
10%.

Fixed assets are worth ` 60,000, goodwill is to be increased by an amount equal to average
of book value and a valuation made at 4 years’ purchase of average super profit for the
last three years. Debtors are estimated to be worth ` 1,42,000. ` 3,000 of trade creditors are
outstanding for many years and it is estimated that this amount will not be payable. On the
other hand, ` 6,000 being disputed, bonus claim has not been provided in the accounts, but
it is likely that the amounts shall have to be paid.
Profits for three years after taxation are ` 35,000, ` 48,000 and ` 43,000.
(a) Find out break-up value, market value and fair value of the above two types of
shares.
(b) What should be the fair value of the shares if controlling interest of the managing
director is being sold?
4. You are given the following Balance Sheet of Dev Private Ltd. as on 31 December, 1991:
st
Liabilities ` Assets `
10,000; 6% Preference Shares of Sundry Assets 62,000
` 1 each fully paid 10,000 Discount on Debentures 2,000
40,000 Equity Shares of ` 1 each fully paid 40,000 Preliminary Expenses 17,000
7% Debentures 8,000
General Reserve 3,000
Depreciation Fund 2,000
Debenture Redemption Fund. 3,000
Sundry Creditors 15,000
81,000 81,000

The assets are worth their book value. Interest on debentures for one year is owing and the
dividends on the preference shares are in arrears of two years. You are required to find out
the value of each shares assuming:
(a) That the preference shares are preferential to capital and the arrears of dividends are
to be paid to preferential shareholders in winding up.
(b) The preference shares are not preferential to capital and arrears of dividends are
payable in priority.

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