Auditing and EthicsQuestion 5678 of 212
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6. Mr. D, an Articled Clerk, was performing audit procedures related to Reserves and Surplus in PQ Ltd. tell him that which statement are correct in respect of Reserves and Surplus? (I) Reserves are the amounts appropriated out of profits for commitment. (II) Securities premium is a capital reserve. (III) A debit balance in the statement of profit and loss account shall be shown as a negative figure under the head 'surplus'. (IV) All reserves can be used to augment the working capital of the Company.

Options

AI & II above
BII & III above
CIII & IV above
DII & IV above (2 Marks)
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Correct Answer

Option BII & III above

All Options:

  • AI & II above
  • BII & III above
  • CIII & IV above
  • DII & IV above (2 Marks)

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Detailed Solution & Explanation

Correct Answer: Option **B**

Explanation:
Let's analyze each statement from first principles under the Companies Act, 2013 and Schedule III:

- **Statement (I)**: Incorrect. Reserves are amounts set aside out of profits and other surpluses to strengthen the financial position or meet future contingencies. They are *not* earmarked for any specific liability or commitment known at the date of the balance sheet. (It is "provisions" that are created for specific liabilities/commitments).
- **Statement (II)**: Correct. Securities Premium is a capital reserve representing premium received on the issue of shares. Its usage is restricted under Section 52(2) of the Companies Act, 2013.
- **Statement (III)**: Correct. Under Schedule III, a debit balance in the Statement of Profit and Loss (accumulated loss) is shown as a negative figure under the head "Surplus". The balance of the "Reserves and Surplus" head is shown net of this negative balance.
- **Statement (IV)**: Incorrect. Certain reserves (like Capital Redemption Reserve, Securities Premium, and Revaluation Reserve) are restricted reserves. By law, they can only be used for specific statutory purposes (such as issuing fully paid bonus shares or writing off preliminary expenses) and *cannot* be used to augment general working capital.

Thus, statements (II) and (III) are correct, which corresponds to Option B.

Hence, **Option B** is the correct answer.

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