Which statements are correct about capital reserve?

(A) It is necessary to create capital reserves out of capital profits, if any.

(B) It cannot be used to issue bonus shares.

(C) It can be used to write off capital losses or to issue bonus shares any time during the lifetime of the company.

(D) It is not shown on the company balance sheet.

Choose the correct answer from the options given below:

(A) and (C) only

The correct answer is option 1- (A) and (C) only.

A Capital Reserve is a reserve created from capital profits—profits that arise from non-operational activities of a company. These profits are not distributable as dividends and are used for specific purposes like writing off capital losses or issuing bonus shares. Examples of capital profits: Profit on sale of fixed assets, Premium on issue of shares, Profit from revaluation of assets (if realized) etc.

(A) It is necessary to create capital reserves out of capital profits, if any. This is correct. Capital profits (like profit on sale of fixed assets) are not distributed as dividends but transferred to Capital Reserve. For example, if a company sells a building and earns a profit, that profit goes to the Capital Reserve.

(B) It cannot be used to issue bonus shares. This is incorrect.  Capital Reserve can be used to issue bonus shares. 

(C) It can be used to write off capital losses or to issue bonus shares any time during the lifetime of the company. This is correct. Capital Reserve may be used to write off capital losses or to issue bonus shares, as long as it's allowed by the laws and company articles.

(D) It is not shown on the company balance sheet. This is incorrect. Capital Reserve is shown under the subhead “Reserves and Surplus” with main head shareholders funds on the equities and liabilities side of the balance sheet.