Question

Explain Capital Reserve and uses of capital reserves.

Answer 1

A capital reserve is created out of capital profits. The examples of capital profits are premium on issue of shares, profit on a sale of fixed assets, a redemption of debentures at discount, profits prior to the incorporation, profit on revaluation of fixed assets, profit on forfeited shares etc. Capital Reserve cannot be used for the distribution of profits and dividend.

Uses of Capital Reserve

(i) Writing off preliminary expenses

(ii) Writing off discount on issue of share etc.

(iii) A premium on redemption of debentures

(iv) Writing off capital losses

(v) An issue

of bonus shares