REDEMPTION OF PREFERENCE SHARES a) Redemption of preference shares means paying back (or repayment to) preference shareholders their money.

Section 80 of the Companies Act permits a company, limited by shares, to issue redeemable preference shares if it is so authorised by its articles of association.

b) Preference shares may be redeemed either on a specific date which is the maturity date printed on the

preference shares certificate or these shares may be redeemed earlier at the option of the company.

c) However the redemption period cannot exceed 20 years from the date of issue of such shares as provided in

Sub-section 5A of Section 80. d) The company thus enjoys the flexibility in redemption of the preference shares within the maximum specified

period of 20 years.

e) The Companies Act has abolished the category of irredeemable preference shares with effect from 1-3-1997 as a result of the Companies (Amendment) Act 1996. (80A)

f) Redemption of preference shares involves repayment of capital before paying creditors of the company. It

may affect the interest of creditors.

g) In addition to that the working capital of the company will be depleted as a result of outflow of cash due to

redemption.

h) Amount of the capital redemption reserve account will not be available for distribution of dividend.

i) Preferred stock/ preferred shares or preference shares j) (w.e.f 1/3/97, no preference chares can be issued which are not redeemed within 20 years) k) Convert partly paid shares into fully paid shares: l) Source for redemption should be out of undistributed profit/ distributable profit(otherwise available for

dividend ,) or out of PROCEEDS of fresh issue of shares or both

m) Premium on redemption of pref shares should be should be provided out of securities premium or capital reserve in cash (i.e profit on revaluation not to be considered) or profit and loss account or general reserve

account.

n) The amount of capital redemption reserve But only for bonus shares issue o) CRR- If the shares are redeemed out of undistributed profit , the nominal value of share capital, so

redeemed should be transferred to Capital Redemption Reserve Account. p) The redemption of preference shares under this section by a company shall not be taken as reducing the

amount of its authorized share capital

PROCESS FOR REDEMPTION:

Make PS fully paid and pass entry for Sale of Asset/bank Loan

Make New Issue entry if required and arrange for cash if required

Create CRR

W/o Premium on shares

Make Payment of Pref Shares

Issue Bonus Shares

Make due entry for Preference Shares

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NUMERICAL QUESTIONS 1. From the following information, calculate the amount that should be transferred to capital redemption reserve

account in each of the following cases :

Preference Shares to be Redeemed Fresh Issue of Share Capital for

the Purpose of Redemption

(i) Rs. 12,00,000 at par Rs. 10,00,000 at par

(ii) Rs. 12,00,000 at premium of 5% Rs. 10,00,000 at par

(iii) Rs. 12,00,000 at par Rs. 10,00,000 at premium of 10%

(iv) Rs. 12,00,000 at premium of 10% Rs. 10,00,000 at discount of 10%

(v) Rs. 12,00,000 at par Rs. 10,00,000 at discount of 5%

2. From the following information, determine the amount of fresh issue of shares for the purpose of redemption of

preference shares.

Preference Shares to be Available Amount of Reserves

Redeemed and Surplus

(i) Rs. 12,00,000 at par Securities Premium Account 4,00,000

General Reserve Account 8,00,000

(ii) Rs. 12,00,000 at a premium Profit and Loss Account 10,00,000

of 10% Securities Premium Account 80,000

(iii) Rs. 12,00,000 at a premium of Securities Premium Account 40,000

10% Profit and Loss Account 6,00,000

General Reserve 3,00,000

Capital Reserve 60,000

Dividend Equalisation Reserve50,000

3. The balance sheet of Vivek Ltd. as at 31 March is as follows :

Liabilities Rs. Assets Rs.

Share Capital : Fixed Assets :

Issued and Fully Paid : Land and Building 20,00,000

50,000, 9% Preference Shares Plant 5,00,000

of Rs. 20 each fully paid 10,00,000 Fixtures and Fittings 1,00,000

90,000 Equity Shares of Motor Vans 40,000

Rs. 20 each fully paid 18,00,000 Current Assets :

Reserves and Surplus : Stock 6,60,000

Securities Premium Debtors 2,40,000

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Account 2,00,000 Investments 6,00,000

General Reserve 4,00,000 Bank 3,60,000

Profit and Loss Account 5,00,000

Current Liabilities 6,00,000

45,00,000 45,00,000

The company exercises its option to redeem all the preference shares at a premium of 5% on 1 April. To finance the

redemption all the investments were sold realising Rs. 5,60,000. A fresh issue of 10,000 ordinary shares of Rs. 20 was

made at Rs. 24 per share payable in full on 1 April. These were duly subscribed for and the full amount was received on

that date. The directors wish that only minimum reduction be made in the revenue reserves. You are required to draft

journal entries, including those relating to cash, to record the above transactions and to set out the balance sheet of the

company as it would then appear. 4. Following is the Balance Sheet of NUPUR Textiles Ltd. as on 30the June 2005 : -

Authorised Share Capital :

40,000 10% Redeemable

Preference shares of Rs. 10 each

1,00,000 Equity Shares of Rs. 10

Each

Paid up Capital :

30,000 10% Redeemable

Preference Shares of Rs. 10 each

50,000 Equity Shares Rs. 10 each

Profit & Loss A/c

Accounts Payable

Rs.

4,00,000

10,00,000

Fixed Assets

Rs.

10,80,000

4,20 000

14,00,000

3,00,000

5,00,000

4,50,000

2,50 000

15,00,000 15,00,000

On 5th July 2005 the preference shares were redeemed at a premium of Rs. 2 per share. The company could not yet

trace the holders of 2,000 Preference Shares. On 1st August, 2005 a bonus issue of two fully paid equity shares for five

shares was made. Show the journal entries and the revised Balance Sheet. 5. In the following case, give journal entries necessary to record the redemption of preference shares :

(i) A company redeems 9,500, 10% preference shares of Rs. 100 each at par, out of profits otherwise

available for dividend,9,500 10% preference shares of Rs. 100 each at a premium of 10% out of profits

otherwise available for dividend.

(ii) A company issues 75,000 equity shares of Rs. 10 each at par in order to utilize the proceeds to redeem

7,500 10% preference shares of Rs. 100 each at a premium of 10%. The new issue is fully subscribed and

paid for.

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(iii) A company issue 75,000 equity shares of Rs. 10 each at par in order to utilize the proceeds to redeem

7,500, 10% preference shares of Rs. 100 each at a premium of 10%. The new issue is fully subscribed and

paid for.

(iv) A company issues 75,000 equity shares of Rs. 10 each at a premium of 20% in order to utilize the proceeds

to redeem 7,500, 10% preference shares of Rs. 100 each at a premium of 10%. The new issue is fully

subscribed and paid for.

(v) A company decides to redeem Rs. 7,50,000, 10% preference shares at a premium of 10%. 30,000 equity

shares of Rs. 10 each are issued for cash at a premium of 5% for the purpose of redemption, the balance at

the credit of its profit and loss account being Rs. 15,00,000.

6. Comment on the following :

(i) Shagun Ltd. which has been suffering losses, has to redeem 50,000, 12% preference shares of Rs. 25

each. It issues 14% debentures for Rs. 12,50,000 and carries out the redemption. The company creates

capital redemption reserve account by increasing the loss in its profit and loss account.

(ii) Deepti Ltd. company had issued in 1991, 10,000, 12% preference shares of Rs. 100 each, Rs. 80 paid up.

The shareholders in general meeting pass a resolution stating that the company need not make any call on

these shares and these shares be redeemed forthwith out of the profits.

(iii) Redemption of 5,000 preference shares of Rs. 100 each was carried out by utilisation of general reserves

and by the issue of 2,000 equity shares of 100 each at Rs. 125. The company credited to capital redemption

reserve account Rs. 2,00,000.

(iv) Redemption of Rs. 10,00,000 preference shares was carried out by the issue of 5,000 equity shares of Rs.

100 each @ Rs. 95. The company credited the capital redemption reserve account by Rs. 5,00,000 by

debiting profit and loss appropriation account.

7. Nikita Ltd. has the following balance sheet as on 31.03.2008 :

Liabilities

10,000 Ordinary Shares of Rs. 100

each

5,000 Preference Shares of Rs. 100

each

Capital Reserve

Share Premium Account

General Reserve

Profit and Loss Account

Current Liabilities

Rs.

10,00,000

5,00,000

1,00,000

1,00,000

2,00,000

1,00,000

10,00,000

Assets

Fixed Assets

Current Assets

Rs.

22,00,000

8,00,000

30,00,000

30,00,000

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The Preference shares are to be redeemed at 10% premium. Fresh issue of equity shares to be made to the extent

it is required under the Companies Act for the purpose of this redemption. The shortfall in funds after utilizing the

proceeds of fresh issue is to be made by taking a bank loan. Show journal entries (CRR-3,00,000 and New Issue-2,00,000,Loan-350000). 8. Determine the amount of fresh issue of shares from the following information relating to Shagoon Leather

Works Ltd. : (i) Redeemable preference shares- Rs. 2,00,000; (ii) Premium on redemption – 10%; (iii) Divisible

profits available – Rs. 60,000; (iv) Balance in general reserve – Rs. 40,000; (v) Share Premium Accounts – Rs.

15,000; (vi) Fresh issue to be made at a discount of 10 %.(1,16,667) 9. The ledger accounts of M.N. Ltd. show the following balances :

Rs.

14% Preference Share Capital 3,00,000

General Reserve 80,000

Securities Premium 20,000

Profit and Loss Account 38,600

Investment Allowance Reserve 50,000

The company redeems preference shares at a premium of 10% by issue of equity shares of Rs. 10 each at a premium of

20%. Fresh issue of shares is made in lots of 100 shares for such amount as is necessary after utilising the available

sources to the maximum extent.

Calculate (i) Number of fresh shares issued. (ii) Amount transferred to Capital Redemption Reserve. (iii) Journal

entry for transfer