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:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A) and (C) only
A capital reserve is built from capital profits, profits that do not come from normal trading, such as the profit on reissue of forfeited shares. Because it is not trading profit, it is kept back for capital purposes instead of being paid out as dividend.
(A) It is necessary to create capital reserves out of capital profits, if any. — True. Capital profits are set aside as a capital reserve.
(B) It cannot be used to issue bonus shares. — False. It contradicts (C): a capital reserve is one of the sources that can be used for issuing fully paid 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. — True. Capital purposes such as writing off capital losses or issuing bonus shares are the purposes for which the reserve is kept.
(D) It is not shown on the company balance sheet. — False. Capital reserve is shown in the balance sheet under Reserves and Surplus, within shareholders’ funds.
NCERT (2026-27 edition):
NCERT (2026-27 edition): |
