(a) A Limited invited applications for 160000 shares of ₹ 10 each at a premium of ₹ 2.50 per share payable as follows : On…

(a) Journal entries

Working. Applications for 3,40,000 shares at ₹3 = ₹10,20,000. Rejected 20,000 shares: refund ₹60,000. Applicants left: 3,20,000 for 1,60,000 shares, so allotment is 1 for every 2 applied. Application money on allotted shares = 1,60,000 × ₹3 = ₹4,80,000; the other ₹4,80,000 is adjusted against allotment. Allotment due = 1,60,000 × ₹4.50 = ₹7,20,000 (capital ₹2 = 3,20,000; premium ₹2.50 = 4,00,000).

Kapil applied for 8,000 shares and paid ₹24,000; ₹12,000 stays on application and ₹12,000 is adjusted against allotment of ₹18,000, leaving ₹6,000 unpaid. Ramu applied for 4,800 shares and paid ₹14,400; ₹7,200 stays and ₹7,200 is adjusted against allotment of ₹10,800, so he paid ₹3,600 in cash.

1. Bank A/c Dr 10,20,000; To Share Application A/c 10,20,000 (application money received).
2. Share Application A/c Dr 60,000; To Bank A/c 60,000 (refund to rejected applicants).
3. Share Application A/c Dr 9,60,000; To Share Capital A/c 4,80,000; To Share Allotment A/c 4,80,000 (application money applied).
4. Share Allotment A/c Dr 7,20,000; To Share Capital A/c 3,20,000; To Securities Premium A/c 4,00,000 (allotment due).
5. Bank A/c Dr 2,34,000; Calls-in-Arrears A/c Dr 6,000; To Share Allotment A/c 2,40,000 (net allotment money received; Kapil's ₹6,000 unpaid).
6. Share First Call A/c Dr 3,20,000; To Share Capital A/c 3,20,000 (1,60,000 × ₹2).
7. Bank A/c Dr 3,07,200; Calls-in-Arrears A/c Dr 12,800; To Share First Call A/c 3,20,000 (Kapil ₹8,000 and Ramu ₹4,800 unpaid).
8. Share Capital A/c Dr 28,000; Securities Premium A/c Dr 6,000; To Calls-in-Arrears A/c 14,000; To Share Forfeiture A/c 20,000 (Kapil's 4,000 shares forfeited; capital called ₹7 × 4,000; ₹6,000 of unpaid allotment was premium; he had paid ₹24,000, of which ₹4,000 was premium, so ₹20,000 is forfeited).
9. Share Final Call A/c Dr 4,68,000; To Share Capital A/c 4,68,000 (1,56,000 shares × ₹3).
10. Bank A/c Dr 4,60,800; Calls-in-Arrears A/c Dr 7,200; To Share Final Call A/c 4,68,000 (Ramu's ₹7,200 unpaid).
11. Share Capital A/c Dr 24,000; To Calls-in-Arrears A/c 12,000; To Share Forfeiture A/c 12,000 (Ramu's 2,400 shares forfeited; he paid ₹18,000, of which ₹6,000 was premium).
12. Bank A/c Dr 38,400; Share Forfeiture A/c Dr 9,600; To Share Capital A/c 48,000 (4,800 shares reissued at ₹8 as fully paid: Kapil's 4,000 and Ramu's 800).
13. Share Forfeiture A/c Dr 14,400; To Capital Reserve A/c 14,400 (Kapil: 20,000 − 8,000 discount = 12,000; Ramu's 800 shares: 4,000 − 1,600 = 2,400).

The balance in Share Forfeiture A/c is ₹8,000 (20,000 + 12,000 − 9,600 − 14,400), relating to Ramu's 1,600 shares not yet reissued.

(b) Division as an independent profit centre: ROI and residual income

A division becomes an independent profit centre when it has the authority to decide on selling prices, output and costs, so that it earns revenue and incurs costs as if it were a separate business. Its manager is held accountable for divisional profit, which motivates initiative, speeds up local decisions and frees top management. It needs clear transfer pricing, uniform policies and guards against sub-optimisation.

Rate of return (ROI) measures divisional profit as a percentage of the investment in the division: ROI = (Divisional profit ÷ Divisional investment) × 100. It is relative, so divisions of different sizes can be compared. But a manager whose ROI is high may reject a project earning more than the cost of capital but less than the current ROI, and may cut investment to lift the ratio, which can harm growth.

Residual income (RI) is divisional profit less a capital charge at the required rate: RI = Profit − (Required rate × Investment). It is an absolute amount. Any project earning above the required rate raises RI, so the manager's aims line up with the company's. Its weaknesses are that it favours large divisions and depends on a fair cost of capital and asset valuation.

So ROI gives a size-neutral measure but can mislead on acceptance of projects, while RI gives better goal congruence but is not comparable between divisions of different scale.

(c) Gratuity and leave encashment under the Income-tax Act, 1961

(i) Gratuity. Gratuity received on retirement, death, resignation or termination is exempt under Section 10(10). Government and local authority employees: fully exempt. Employees covered by the Payment of Gratuity Act, 1972: the least of the gratuity received, ₹20 lakh, and 15 days' salary (last drawn, basic plus dearness allowance) for each completed year of service or part over six months (15/26 × last salary × years). Other employees: the least of the gratuity received, ₹20 lakh, and half a month's average salary of the last 10 months for each completed year. The balance is taxed as salary.

(ii) Leave encashment at retirement. Under Section 10(10AA), government employees are fully exempt. Non-government employees get the least of: the amount received; ₹25 lakh (raised from ₹3 lakh from 1.4.2023); 10 months' average salary of the 10 months before retirement; and the cash equivalent of unavailed leave up to 30 days per year of service. Salary here means basic, dearness allowance forming part of pay, and commission on a fixed turnover. Encashment while in service is fully taxable. The Income-tax Act, 2025 (from 1.4.2026) carries these exemptions forward.