Authorised capital of a company is Rs. 5 lacs; 40% of it is paid up. Loss incurred during the year is Rs. 50,000. Accumulated loss carried from last year is Rs. 2 lac. The company has a Tangible Net Worth of:

Question

Prepp Team · Accepted Answer

Understanding Tangible Net Worth

The question asks us to calculate the Tangible Net Worth of a company based on its authorised capital, paid-up capital percentage, current year loss, and accumulated loss from previous years.

Tangible Net Worth is a measure of a company's worth that excludes intangible assets like goodwill, patents, trademarks, etc. It is typically calculated as:

Shareholder's Funds − Intangible Assets

Shareholder's Funds, also known as Net Worth, generally include Share Capital (Equity and Preference), Reserves and Surplus, less Accumulated Losses and Miscellaneous Expenditure not written off.

In this problem, we are given information about share capital and losses. There is no mention of reserves, surplus, intangible assets, or miscellaneous expenditure. Therefore, we will assume:

Shareholder's Funds = Paid-up Share Capital − Total Accumulated Losses
Tangible Net Worth = Shareholder's Funds (since there are no intangible assets mentioned)

Calculating Paid-up Capital

The authorised capital of the company is Rs. 5 lacs.

The paid-up capital is given as 40% of the authorised capital.

Paid-up Capital = 40% of Rs. 5,00,000

Calculation:

\begin{equation*} \text{Paid-up Capital} = \frac{40}{100} \times 5,00,000 \end{equation*}

\begin{equation*} \text{Paid-up Capital} = 0.40 \times 5,00,000 \end{equation*}

\begin{equation*} \text{Paid-up Capital} = 2,00,000 \text{ Rs.} \end{equation*}

So, the Paid-up Capital is Rs. 2,00,000.

Calculating Total Accumulated Losses

The question provides two components of loss:

Loss incurred during the current year: Rs. 50,000
Accumulated loss carried from last year: Rs. 2,00,000

Total Accumulated Losses = Loss incurred during the year + Accumulated loss carried from last year

Calculation:

\begin{equation*} \text{Total Accumulated Losses} = 50,000 + 2,00,000 \end{equation*}

\begin{equation*} \text{Total Accumulated Losses} = 2,50,000 \text{ Rs.} \end{equation*}

The total accumulated losses amount to Rs. 2,50,000.

Determining Tangible Net Worth

Now we can calculate the Tangible Net Worth using the formula for Shareholder's Funds (Net Worth) assuming no intangible assets, reserves, or miscellaneous expenditure.

Shareholder's Funds = Paid-up Share Capital − Total Accumulated Losses

Calculation:

\begin{equation*} \text{Shareholder's Funds} = 2,00,000 - 2,50,000 \end{equation*}

\begin{equation*} \text{Shareholder's Funds} = -50,000 \text{ Rs.} \end{equation*}

Since Tangible Net Worth = Shareholder's Funds (assuming no intangible assets),

\begin{equation*} \text{Tangible Net Worth} = -50,000 \text{ Rs.} \end{equation*}

The Tangible Net Worth of the company is Rs. (-)50,000.

Let's summarise the values in a table:

Item	Amount (Rs.)
Authorised Capital	5,00,000
Paid-up Capital (40% of Authorised Capital)	2,00,000
Loss incurred during the year	50,000
Accumulated loss carried from last year	2,00,000
Total Accumulated Losses	2,50,000
Tangible Net Worth (Paid-up Capital - Total Accumulated Losses)	-50,000

Comparing this result with the given options, we find that Rs. (-)50,000 matches one of the choices.

Revision Table: Key Concepts

Concept	Definition/Formula
Authorised Capital	The maximum amount of share capital a company is allowed to issue.
Paid-up Capital	The amount of capital that shareholders have actually paid to the company.
Accumulated Loss	The total losses incurred by a company over its existence, carried forward in the balance sheet.
Shareholder's Funds (Net Worth)	Represents the owner's stake in the company; calculated as Assets − Liabilities or Share Capital + Reserves − Accumulated Losses − Miscellaneous Expenditure.
Tangible Net Worth	Shareholder's Funds − Intangible Assets. Indicates the company's net worth backed by physical assets.

Additional Information on Company Valuation

Understanding a company's Tangible Net Worth is crucial for financial analysis and valuation. It provides a view of the company's value based purely on its physical assets and liabilities, excluding subjective valuations of intangible assets.

A positive Tangible Net Worth indicates that the company's tangible assets exceed its liabilities and accumulated losses.
A negative Tangible Net Worth, as in this case, suggests that the accumulated losses exceed the paid-up capital (and any reserves, if applicable). This indicates financial weakness.
Investors and creditors often look at Tangible Net Worth to assess the fundamental value and financial health of a company, especially when evaluating loan applications or potential investments.
Other valuation methods include market capitalization, book value, and discounted cash flow analysis, each providing a different perspective on a company's worth.

Calculating Tangible Net Worth helps in understanding the equity value attributable to tangible assets, which is a more conservative measure compared to total net worth that includes intangibles.