Meaning: Redemption means Repayment. Preference Shares are always redeemable. Preference Shares can be redeemed either at par or at premium.

Size: px

Start display at page:

Download "Meaning: Redemption means Repayment. Preference Shares are always redeemable. Preference Shares can be redeemed either at par or at premium."

Camron Richardson
6 years ago
Views:

1 Meaning: Redemption means Repayment. Preference Shares are always redeemable. Preference Shares can be redeemed either at par or at premium.

2 Redemption at Par: It means face value of preference shares is repaid. a) Preference share capital A/c Dr To Preference Shareholder A/c b) Preference Shareholder A/c Dr To Cash/Bank A/c

3 Redemption at Premium: It means more than face value is to be repaid. The excess amount paid is called premium on redemption. a) Preference Share Capital A/c Dr Premium on Redemption A/c Dr To Preference Shareholder A/c b) Preference Shareholder A/c Dr To Cash/Bank A/c Premium on Redemption is a loss it must be written off against share premium or any other reserve. a) Share Premium A/c Dr or General Reserve/P & L A/c Dr To Premium on redemption A/c

4 Conditions to be fulfilled :- 1) Only fully paid (not partly paid) preference shares be redeemed. a) If all preference shares are partly paid up before redemption these should be made fully paid up by making call. a) Final Call A/c Dr To Preference Share Capital b) Cash/Bank A/c Dr To Final Call A/c b) If there are call in arrears either the amount is received Cash/bank A/c Dr To calls in arrears A/c or the shares will be forfeited. Preference share Capital A/c Dr To calls in arrears A/c To Shares forfeited A/c

5 c) If there are two types of preference shares fully paid & partly paid. In absence of information only fully paid preference shares can be redeemed. 2) For the purpose of redemption company must make issue of either equity or preference shares. The issue is to be made in such a way that proceeds of fresh issue are at least equal to preference capital to be redeemed. Proceed = Face value or Amt received whichever is less Face value Amt received Proceeds At Discount At Premium At Par

6 3) If the proceeds of right issue are inadequate. Company should create Capital Redemption Reserve (CRR) out of its divisible profit means those profit which can be distributed as dividend like General Reserve or Profit & loss A/c or Reserve fund etc. GR / P & L A/c / Reserve Fund A/c Dr To Capital Redemption Reserve A/c. CRR can be utilized only for issue of fully paid bonus shares. Equations :- 1) Face value of = Proceeds of + Divisible Profits [CRR] Preference Shares fresh issue 2) Premium on Redemption = Share Premium + Divisible Profits (GR)

7 Limited Company s profit Revenue Divisible -> Used for dividend. General Reserve, Profit & Loss(Cr), Dividend Equalization Reserve, Revenue Reserve, Sinking fund, Insurance Fund & Workman - Compensation Fund.=>can be used for creating CRR. Capital Non-divisible ->not used for dividend Share Premium, Capital Reserve, Profit prior to Incorporation, Capital Redemption Reserve, Share Forfeiture, Development Rebate Reserve. =>not to be used for Creating CRR.

8 Order of accounting entries :- 1) Sell of any fixed assets (investment) 2) Making partly paid preference shares fully paid up 3) Fresh issue 4) Capital Redemption Reserve 5) Redemption 6) Payment 7) Writing off premium on redemption 8) Bonus shares. Bonus Shares :- Capitalization of reserves or converting reserve into share capital or reducing reserves and increasing share capital. Method of distributing profit without reducing cash / bank balances.

9 Converting Partly paid equity shares into fully paid a) Final Call A/c Dr To Equity Share Capital A/c Issue of fully paid bonus i.e. issue of equity shares without collecting cash a) Reserve A/c Dr To Bonus to Shareholder A/c b) Reserves A/c Dr To Bonus to Shareholder A/c b) Bonus to Shareholder A/c Dr To Equity Share Capital A/c c) Bonus to Shareholder A/c Dr To Final Call A/c

10 Points :- 1) Bonus is given only to equity shareholders & not to preference shareholders. 2) While giving bonus Capital profit or non divisible profit are to be utilized first & only in absence of that divisible profits are to be used. 3) CRR and share premium cannot be used for converting partly paid equity into fully paid up, this can be use for the purpose of fully paid bonus shares. 4) Capital reserve arising from revaluation of assets cannot be used for bonus. Reserve orders to be used while issuing bonus shares :- Capital Redemption Reserve, Share Premium, Capital Reserve, General Reserve & Profit & Loss.

11 Objective Test Q1 Fill in the blanks :- 1) Debenture Redemption Reserve balance divisible profit available for redemption of preference shares. 2) Preference shares redeemable within years can be issued. 3) Capital Redemption Reserve may be used for issuing shares. 4) Where a company redeems preference shares from out of profits it is necessary for the company to transfer the nominal value of shares redeemed to a a/c. 5) A company may issue redeemable preference shares if so authorized by its. Ans : 1- is not, 2-20, 3- Bonus, 4-Capital Redemption Reserve, 5- Articles.

12 Q2 State whether true or false :- 1) Redemption of redeemable preference shares can be made only out of the proceeds of fresh issue of equity shares. 2) A company can redeem only fully paid preference shares. 3) Premium payable on redemption of redeemable preference shares must be debited against profits only. 4) Capital Redemption Reserve account can be utilized for writing off miscellaneous expenditure and losses. 5) To the extent redemption of preference shares takes place from out of profits an equal amount should be transferred to General Reserve. Ans :- 1- false, 2- true, 3- false, 4- false, 5-false.

REDEMPTION OF PREFERENCE SHARES

CHAPTER 7 REDEMPTION OF PREFERENCE SHARES LEARNING OUTCOMES After studying this chapter, you will be able to r understand the meaning of redemption and the purpose of issuing redeemable preference shares