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CHAPTER, , 7, , REDEMPTION OF, PREFERENCE SHARES, LEARNING OUTCOMES, After studying this chapter, you will be able to–, , , , , understand the meaning of redemption and the purpose of, issuing redeemable preference shares;, learn various provisions of the Companies Act, 2013, regarding preference shares and their redemption;, familiarise yourself with various methods of redemption of, fully paid-up preference shares by:, (i), , Fresh issue of shares; Or, , (ii) Capitalisation of divisible or undistributed profits; Or, (iii) Combination of (i) and (ii) above;, , , , understand the logic behind the creation of Capital, Redemption Reserve;, learn the accounting treatment for redemption of:, (i), , fully paid-up preference shares;, , (ii) partly called-up preference shares; and, (iii) fully called-up but partly paid-up preference shares., © The Institute of Chartered Accountants of India

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7.2, , ACCOUNTING, , Methods of redemption of Preference shares, (a), By, , Fresh issue of, shares, , (b), , By Capitalisation, of undistributed, profits, , Section 52 of the Companies, Act, 2013 provides that the, securities premium account may, be applied by the company:, , [NOTE:, Certain, class, of, Companies whose financial, statements comply with the, Accounting, Standards, as, prescribed under Section 133 of, the Companies Act, 2013, can’t, apply the securities premium, account for the purposes (b), and (d)], , (c), By, , Combination of, (a) and (b), , (a) Towards issue of un-issued shares of the, company to be issued to members of the, company as fully paid bonus securities, , (b) To write off preliminary expenses of the, company, , (c) To write off the expenses of, or commission, paid, or discount allowed on any of the, securities or debentures of the company, , (d) To provide for premium on the redemption, of redeemable preference shares or debentures, of the company., , (e) For the purchase of its own shares or other, securities., , 1. INTRODUCTION, Redemption is the process of repaying an obligation, at prearranged amounts and, timings. It is a contract giving the right to redeem preference shares within or at, the end of a given time period at an agreed price. These shares are issued on the, terms that shareholders will at a future date be repaid the amount which they, invested in the company (apart from the frequent payments of a specified amount, © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 7.3, , of dividend as return on investment during the tenure of the preference shares)., The redemption date is the maturity date, which specifies when repayment is, scheduled to take place and is usually printed on the preference share certificate., Through the process of redemption, a company can also adjust its financial, structure, for example, by eliminating preference shares and replacing those with, other securities if future growth of the company makes such change advantageous., , 2. PURPOSE, OF, ISSUING, PREFERENCE SHARES, , REDEEMABLE, , A company may issue redeemable preference shares because of the following:, 1., , It is a proper way of raising finance in a dull primary market., , 2., , A company may face difficulty in raising share capital, as its shares are not, traded on the stock exchange. Potential investors, hesitate in putting money, into shares that cannot easily be sold, may be encouraged to invest if the, shares are redeemable by the company., , 3., , The preference shares may be redeemed when there is a surplus of capital, and the surplus funds cannot be utilised in the business for profitable use., , 4., , No dividend is required to be paid, if there is loss or no profit, whereas,, interest is payable on debentures or loans even in case of loss., , In India, the issue and redemption of preference shares is governed by Section 55, of the Companies Act, 2013., , 3. PROVISIONS OF, (SECTION 55), , THE, , COMPANIES, , ACT, , A company limited by shares if so authorised by its Articles, may issue preference, shares which at the option of the company, are liable to be redeemed within a, period, normally not exceeding 20 years from the date of their issue. It should be, noted that:, (a), , no shares can be redeemed except out of divisible or distributable profit, (i.e., out of the profit of the company which would otherwise be available for, dividend) or out of proceeds of fresh issue of shares made for the purpose of, redemption;, , (b), , no such shares can be redeemed unless they are fully paid;, , © The Institute of Chartered Accountants of India

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7.4, (c), , (i), , ACCOUNTING, , in case of such class of companies, as may be prescribed and whose, financial statement comply with the accounting standards prescribed, for such class of companies under Section 133, the premium, if any,, payable on redemption shall be provided for out of the profits of the, company, before the shares are redeemed:, Provided also that premium, if any, payable on redemption of any, preference shares issued on or before the commencement of this Act, by any such company shall be provided for out of the profits of the, company or out of the company’s securities premium account, before, such shares are redeemed., , (ii), , in case of other companies (not falling under (i) above), the premium, if, any payable on redemption shall be provided for out of the profits of, the company or out of the company’s securities premium account,, before such shares are redeemed., (Refer to the Note given in para 4.1 for the basis applied in the, Illustrations in this Chapter.), , (d), , where any such shares are proposed to be redeemed out of the profits of the, company, there shall, out of the divisible profits, i.e. the profits which would, otherwise have been available for dividends, be transferred to a reserve, account to be called Capital Redemption Reserve Account, a sum equal to the, nominal amount of the shares redeemed; and the provisions of the Act, relating to the reduction of the share capital of a company shall, except as, provided in the Section, apply as if the Capital Redemption Reserve (CRR), Account were the paid-up share capital of the company. The utilisation of, CRR Account is further restricted to issuance of fully paid-up bonus shares, only., , From the legal provision outlined above, it is apparent that on the redemption of, redeemable preference shares out of accumulated divisible profits, it will be, necessary to transfer to the Capital Redemption Reserve Account an amount equal, to the amount repaid on the redemption of preference shares on account of face, value less proceeds of a fresh issue of shares made for the purpose of redemption., The object is that with the repayment of redeemable preference shares, the security, for creditors/ bankers, etc. should not be reduced. At times, a part of the preference, share capital may be redeemed out of accumulated divisible profits and the balance, out of a fresh issue., , © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 7.5, , 4. METHODS OF REDEMPTION OF FULLY PAIDUP SHARES, Redemption of preference shares means repayment by the company of the obligation, on account of shares issued. According to the Companies Act, 2013, preference shares, issued by a company must be redeemed within the maximum period (normally 20, years) allowed under the Act. Thus, a company cannot issue irredeemable preference, shares. Section 55 of the Companies Act, 2013, deals with provisions relating to, redemption of preference shares. It ensures that there is no reduction in shareholders’, funds due to redemption and, thus, the interest of outsiders is not affected. For this, it, requires that either fresh issue of shares is made, or distributable profits are retained, and transferred to ‘Capital Redemption Reserve Account’., The rationale behind these provisions is to protect the interest of outsiders to, whom the amount is payable before redemption of preference share capital. The, interest of outsiders is protected if the nominal value of capital redeemed is, substituted, thus, ensuring the same amount of shareholders fund. In case of, redemption of preference shares out of proceeds of a fresh issue of shares,, replacement of capital and tangible assets is obvious. But, if redemption is done, out of distributable profits, replacement of capital is ensured in an indirect manner, by retention of profit by transfer to Capital Redemption Reserve. In this case, the, amount which would have gone to shareholders in the form of dividend is retained, in the business and is used for settling the claim of preference shareholders. Thus,, there is no additional drain from the net assets of the Company. The transfer of, divisible profits to Capital Redemption Reserve makes them non-divisible profits., As Capital Redemption Reserve can be used only for issue of fully paid bonus, shares, profits retained in the business ultimately get converted into share capital., Security cover available to outside stakeholders depends upon called-up capital as, well as uncalled capital to be demanded by the company as per its requirements., To ensure that the interests of outsiders are not reduced, Section 55 provides for, redemption of only fully paid-up shares., From the above paras, it can be concluded that the ‘gap’ created in the company’s, capital by the redemption of redeemable preference shares must be filled in by:, (a), , the proceeds of a fresh issue of shares; or, , (b), , the capitalisation of undistributed profits; or, , (c), , a combination of (a) and (b) above., , © The Institute of Chartered Accountants of India

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7.6, , ACCOUNTING, , 4.1 REDEMPTION OF PREFERENCE SHARES BY FRESH ISSUE OF SHARES, One of the methods for redemption of preference shares is to use the proceeds of, a fresh issue of shares. A company can issue new shares (equity shares or preference, shares) and the proceeds from such new shares can be used for redemption of, preference shares., The proceeds from issue of debentures cannot be utilised for the purpose., A problem arises when a fresh issue is made for the purpose of redemption of, preference shares, at a premium. The point to ponder is that whether the proceeds, of a fresh issue of shares will include the amount of securities premium for the, purpose of redemption of preference shares., For securities premium account, Section 52 of the Companies Act, 2013 provides, that the securities premium account may be applied by the company;, (a), , Towards issue of un-issued shares of the company to be issued to members, of the company as fully paid bonus securities, , (b), , To write off preliminary expenses of the company, , (c), , To write off the expenses of, or commission paid, or discount allowed on any, of the securities or debentures of the company, , (d), , To provide for premium on the redemption of redeemable preference shares, or debentures of the company., , (e), , For the purchase of its own shares or other securities., , Note: It may be noted that certain class of Companies whose financial statements, comply with the Accounting Standards as prescribed under Section 133 of the, Companies Act, 2013, can’t apply the securities premium account for the purposes, (b) and (d) mentioned above., Note: All the questions in this chapter have been solved on the basis that the, companies referred in the questions are governed by Section 133 of the Companies, Act, 2013 and comply with the Accounting Standards prescribed for them., Accordingly the balance in securities premium account has not been utilized for, the purpose of premium payable on redemption of preference shares., Any other way, except the above prescribed ways, in which securities premium, account is utilised will be in contravention of law., Thus, the proceeds of a fresh issue of shares will not include the amount of, securities premium for the purpose of redemption of preference shares., © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 7.7, , 4.1.1 Reasons for issue of New Equity Shares, A company may prefer issue of new equity shares for the following reasons:, (a), , When the company has come to realise that the capital is needed, permanently and it makes more sense to issue Equity Shares in place of, Redeemable Preference Shares as Preference Shares carry a fixed rate of, dividend., , (b), , When the balance of profit, which would otherwise be available for dividend,, is insufficient., , (c), , When the liquidity position of the company is not good enough., , 4.1.2 Advantages of redemption of preference shares by issue of fresh equity, shares, Following are the advantages of redemption of preference shares by the issue of, fresh equity shares:, (1), , No cash outflow of money – now or later., , (2), , New equity shares may be valued at a premium., , (3), , Shareholders retain their equity interest., , 4.1.3 Disadvantages of redemption of preference shares by issue of fresh, equity shares, The disadvantages are:, (1), , There will be dilution of future earnings;, , (2), , Share-holding in the company is changed., , 4.1.4 Accounting Entries, 1., , When new shares are issued at par, Bank Account, , Dr., , To Share Capital Account, (Being the issue of …….shares of `……each for the purpose of redemption, of preference shares, as per Board’s Resolution No…… dated……. ), 2., , When new shares are issued at a premium, Bank Account, To Share Capital Account, , © The Institute of Chartered Accountants of India, , Dr.

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7.8, , ACCOUNTING, , To Securities Premium Account, (Being the issue of ……..shares of `……each at a premium of `……each, for the purpose of redemption of preference shares as per Board’s, Resolution No….. dated……), 3., , When preference shares are redeemed at par, Redeemable Preference Share Capital Account, , Dr., , To Preference Shareholders Account, 4., , When preference shares are redeemed at a premium, Redeemable Preference Share Capital Account, , Dr., , Premium on Redemption of Preference Shares Account, , Dr., , To Preference Shareholders Account, 5., , When payment is made to preference shareholders, Preference Shareholders Account, , Dr., , To Bank Account, 6., , For adjustment of premium on redemption, Profit and Loss Account, , Dr., , To Premium on Redemption of Preference Shares Account, Illustration 1, Hinduja Company Ltd. had 5,000, 8% Redeemable Preference Shares of ` 100 each,, fully paid up. The company decided to redeem these preference shares at par by the, issue of sufficient number of equity shares of ` 10 each fully paid up at par. You are, required to pass necessary Journal Entries including cash transactions in the books of, the company., Solution, In the books of Hinduja Company Ltd., Journal Entries, Date, , Particulars, Bank A/c, , To Equity Share Capital A/c, , © The Institute of Chartered Accountants of India, , Dr. (`), Dr., , 5,00,000, , Cr. (`), 5,00,000

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REDEMPTION OF PREPERENCE SHARES, , 7.9, , (Being the issue of 50,000 Equity Shares of, `10 each at par for the purpose of, redemption of preference shares, as per, Board Resolution No. ……..dated……..), , 8% Redeemable Preference Share Capital, A/c, , Dr., , Preference Shareholders A/c, , Dr., , To Preference Shareholders A/c, (Being the amount payable on redemption, of preference shares transferred to, Preference Shareholders Account), , 5,00,000, 5,00,000, , To Bank A/c, (Being the amount paid on redemption of, preference shares), , 5,00,000, , 5,00,000, , Illustration 2, C Ltd. had 10,000, 10% Redeemable Preference Shares of ` 100 each, fully paid, up. The company decided to redeem these preference shares at par, by issue of, sufficient number of equity shares of ` 10 each at a premium of ` 2 per share as, fully paid up. You are required to pass necessary Journal Entries including cash, transactions in the books of the company., Solution, In the books of C Ltd., Journal Entries, Date, , Particulars, , Dr. (`), , Bank A/c, , Dr., , To Equity Share Capital A/c, , 12,00,000, , To Securities Premium A/c, , (Being the issue of 1,00,000 Equity, Shares of `10 each at a premium of `2, per share as per Board’s Resolution, No….. dated……….), 10% Redeemable, Capital A/c, , Preference, , © The Institute of Chartered Accountants of India, , Share, , Cr. (`), 10,00,000, , 2,00,000, , Dr., , 10,00,000

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7.10, , ACCOUNTING, , To Preference Shareholders A/c, (Being the amount payable on, redemption of preference shares, transferred to Preference Shareholders, A/c), Preference Shareholders A/c, , To Bank A/c, (Being the amount paid on redemption, of preference shares), , 10,00,000, , Dr., , 10,00,000, , 10,00,000, , Note: Amount required for redemption is ` 10,00,000. Therefore, face value of, equity shares to be issued for this purpose must be equal to ` 10,00,000. Premium, received on new issue cannot be used to finance the redemption., Illustration 3, G India Ltd. had 9,000 10% redeemable Preference Shares of ` 10 each, fully paid, up. The company decided to redeem these preference shares at par by the issue of, sufficient number of equity shares of ` 9 each fully paid up., You are required to pass necessary Journal Entries including cash transactions in, the books of the company., Solution, , In the books of G India Limited, Journal, , Date, , Bank A/c, , Particulars, , To Equity Share Capital A/c, , (Being the issue of 10,000 Equity Shares of `9, each at par, as per Board’s Resolution, No…….Dated…..), , 10% Redeemable Preference Shares Capital, A/c, , To Preference Shareholders A/c, (Being the amount payable on redemption of, preference shares transferred to Preference, Shareholders A/c), , © The Institute of Chartered Accountants of India, , Dr., , Dr., , Dr. (`), , 90,000, , Cr. (`), 90,000, , 90,000, 90,000

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REDEMPTION OF PREPERENCE SHARES, Preference Shareholders A/c, , To Bank A/c, (Being the amount paid on redemption of, preference shares), , 7.11, Dr., , 90,000, , 90,000, , 4.1.5 Calculation of Minimum Fresh Issue of Shares, Sometimes, examination problem does not specify the number of shares to be issued, for the purpose of redemption of preference shares and requires that the minimum, number of shares should be issued to ensure that provisions of Section 55 of the, Companies Act, 2013, are not violated. This is done in four steps as given below:, (1), , In such cases, the maximum amount of reserves and surplus available for, redemption is ascertained taking into account the balances appearing in the, balance sheet before redemption and the additional information provided in, the problem. For example, if balance of general reserve in the balance sheet is, `1,00,000 and additional information provides that the Board of Directors have, decided that the balance of general reserve should not be less than `40,000, under any circumstances, then, the maximum amount of general reserve, available for redemption is ` 60,000., , (2), , After ascertaining the maximum amount of reserves and surplus available for, redemption, adjustment for premium on redemption payable out of profits is, made and then it is compared with the nominal value of shares to be redeemed., By comparison, one gets the minimum proceeds of fresh issue as Section 55, permits redemption either out of proceeds of fresh issue or out of divisible, profits. Thus,, Minimum Proceeds of Fresh Issue of shares :, Nominal value of preference shares to be redeemed – Maximum amount of, reserve and surplus available for redemption., , (3), , After computation of minimum proceeds, the minimum number of shares to, be issued are determined by dividing minimum proceeds by the proceeds of, one share. This is done as follows:, Minimum Number of Shares = Minimum proceeds to comply with Section 55/, face value of one share, Proceeds of one share mean the par value of a share issued, if it is issued at, par or premium. However, in case of issue of share at a discount, it refers to, the discounted value., , © The Institute of Chartered Accountants of India

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7.12, (4), , ACCOUNTING, , Minimum number of shares calculated as per (3) above, needs to be adjusted, due to various reasons. Firstly, shares fractions cannot be issued. Thus, if, minimum number of shares as per (3) above includes a fraction, it must be, approximated to the next higher figure to ensure that provisions of Section, 55 are not violated. Secondly, if the examination problem states that the, proceeds/number of shares should be a multiple of say, 10 or 50 or 100, then, again the next higher multiple should be considered., , Illustration 4, The Board of Directors of a Company decided to issue minimum number of equity, shares of ` 9 to redeem ` 5,00,000 preference shares. The maximum amount of, divisible profits available for redemption is ` 3,00,000. Calculate the number of shares, to be issued by the company to ensure that the provisions of Section 55 are not, violated. Also determine the number of shares if the company decides to issue shares, in multiples of ` 50 only., Solution, Nominal value of preference shares, , ` 5,00,000, , Maximum possible redemption out of profits ` 3,00,000, Minimum proceeds of fresh issue, , ` 5,00,000 – 3,00,000 = ` 2,00,000, , Proceed of one share, , =`9, , Minimum number of shares, , =, , 2,00,000, = 22,222.22 shares, 9, , As fractional shares are not permitted, the minimum number of shares to be issued, is 22,223 shares., If shares are to be issued in multiples of 50, then the next higher figure which is a, multiple of 50 is 22,250. Hence, minimum number of shares to be issued in such a, case is 22,250 shares., 4.1.6 Fresh Issue at a Premium and Minimum Fresh Issue, The calculation of minimum number of shares, when fresh issue is at a premium, should be handled very carefully Minimum fresh issue cannot be calculated unless, one knows the profits available for replacement of preference shares and profit, available for replacement cannot be determined unless one knows the portion of, profit available for redemption which is required for paying premium on, redemption. To tackle this, assume that profits available for redemption is not, required for paying premium on redemption of preference shares. In other words,, © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 7.13, , it means that securities premium including premium on fresh issue is comparatively, more than premium on redemption., If the above assumption holds good, minimum number of shares can be calculated, in a simple manner without use of equation. But, if above condition does not hold, good, then an equation is used to determine the minimum number of shares., 4.1.7 Minimum Fresh Issue to Provide Funds for Redemption, Besides, ensuring compliance with Section 55, the fresh issue of shares is made to, provide funds for making payment to preference shareholders. To calculate, minimum number of fresh shares to be issued to provide funds, amount payable to, preference shareholders is compared with funds available for redemption and the, balance of funds to be raised by fresh issue of shares are calculated. The amount, to be raised is divided by the issue price of a share (amount payable by shareholder, including premium, if any, on fresh issue) to compute the minimum number of, shares to be issued., Illustration 5, X Ltd. gives you the following information as at 31st March, 20X3:, Particulars, , `, , EQUITY AND LIABILITIES, 1. Shareholders’ funds, a, , Share capital, , b, , Reserves and Surplus, , 2,90,000, 48,000, , 2. Current liabilities, Trade Payables, , 56,500, , ASSETS, 1. Property, Plant and Equipment, 2. Non-current investments, , 3,45,000, 18,500, , 3. Current Assets, Cash and cash equivalents (bank), , 31,000, , The share capital of the company consists of ` 50 each equity shares of ` 2,25,000, and ` 100 each Preference shares of `65,000(issued on 1.4.20X1). Reserves and, Surplus comprises Profit and Loss Account only., , © The Institute of Chartered Accountants of India

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7.14, , ACCOUNTING, , In order to facilitate the redemption of preference shares at a premium of 10%, the, Company decided:, (a), , to sell all the investments for ` 15,000., , (b), , to finance part of redemption from company funds, subject to, leaving a bank, balance of ` 12,000., , (c), , to issue minimum equity share of ` 50 each share to raise the balance of funds, required., , You are required to pass:, The necessary Journal Entries to record the above transactions and prepare the, balance sheet as on completion of the above transactions., Solution, Journal, Date, , Bank A/c, , Particulars, , Dr., , To Share Application A/c, , Dr. (`), 37,500, , (For application money received on 750, shares @ ` 50 per share), Share Application A/c, , Dr., , 37,500, , Preference Share Capital A/c, , Dr., , 65,000, , Preference Shares A/c, , Dr., , 6,500, , Dr., , 15,000, , To Equity Share Capital A/c, , (For disposition, received), , of, , application, , money, , Premium on Redemption of, , To Preference Shareholders A/c, , (For amount payable on redemption of, preference shares), Bank A/c, , Profit and Loss A/c (loss on sale) A/c, , © The Institute of Chartered Accountants of India, , Dr., , 3,500, , Cr. (`), 37,500, , 37,500, , 71,500

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REDEMPTION OF PREPERENCE SHARES, , 7.15, , To Investment A/c, , 18,500, , (For sale of investments at a loss of ` 3,500), Profit and Loss A/c, , To Capital Redemption Reserve A/c, , Dr., , 27,500, , Dr., , 71,500, , Dr., , 6,500, , (For transfer to CRR out of divisible profits an, amount equivalent to excess of nominal value, of preference shares over proceeds (face, value of equity shares) i.e., ` 65,000 - ` 37,500), Preference Shareholders A/c, To Bank A/c, , (For payment of preference shareholders), Profit and Loss A/c, , To Premium on Redemption of Preference, Shares A/c, , 27,500, , 71,500, , 6,500, , (For writing off premium on redemption out, of profits), , Balance Sheet (after redemption), Particulars, , Notes No., , `, , 1, , 2,62,500, , EQUITY AND LIABILITIES, , 1. Shareholders’ funds, a), , b), , Share capital, , Reserves and Surplus, , 2. Current liabilities, , 2, , Trade Payables, , 56,500, , Total, , 3,57,000, , ASSETS, , 1. Property, Plant and Equipment, 2. Current Assets, , Cash and cash equivalents (bank), Total, , © The Institute of Chartered Accountants of India, , 38,000, , 3,45,000, 3, , 12,000, 3,57,000

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7.16, , ACCOUNTING, , Notes to accounts, `, 1. Share Capital, Equity share capital (2,25,000 + 37,500), 2. Reserves and Surplus, , Capital Redemption Reserve, , Profit and Loss Account (48,000 – 6,500 – 3,500 – 27,500), 3. Cash and cash equivalents, , Balances with banks (31,000 + 37,500 +15,000 – 71,500), , 2,62,500, 27,500, 10,500, , 38,000, 12,000, , Working Note:, Calculation of Number of Shares:, Amount payable on redemption, Less: Sale price of investment, , `, 71,500, (15,000), 56,500, , Less: Available bank balance (31,000 - 12,000), Funds from fresh issue, , (19,000), 37,500, , ∴ No. of shares = 37,500/50=750 shares, , 4.2 REDEMPTION OF PREFERENCE SHARES BY CAPITALISATION OF, UNDISTRIBUTED DIVISIBLE PROFITS, Another method for redemption of preference shares, as per the Companies Act, is, to use the distributable profits in place of issuing new shares. When shares are, redeemed by utilising distributable profit, an amount equal to the face value of, shares redeemed is transferred to Capital Redemption Reserve Account by debiting, the distributable profit. In other words, some of the distributable profits are kept, aside to ensure that it can never be distributed to shareholders as dividend., Profit or a portion of profit that can be otherwise legally distributed as dividend to, the shareholders is known as Divisible or Distributable Profit., In this connection, the provisions of the Companies Act state that ‘When any such, shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall, out of profits which would otherwise have been available for dividend (i.e. out of, , © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 7.17, , divisible profits), be transferred to a reserve to be called the Capital Redemption, Reserve Account sum equal to the nominal amount of the shares redeemed’., Note: Only Divisible Profits can be used to create Capital Redemption Reserve,, Non-Divisible Profits cannot be used for this purpose., 4.2.1 Advantages of redemption of preference shares by capitalisation of, undistributed divisible profits, The advantages of redemption of preference shares by capitalisation of, undistributed divisible profits are:, (1), , No change in the percentage of equity share-holding of the company;, , (2), , Surplus funds can be used., , 4.2.2 Disadvantages of redemption of preference shares by capitalisation of, undistributed divisible profits, The disadvantage of redemption of preference shares by capitalisation of, undistributed profits is that there may be a reduction in liquidity., Accounting Entries, 1., , For transferring nominal amount of shares redeemed to Capital, Redemption Reserve Account, General Reserve Account, , Dr., , Profit and Loss Account, , Dr., , Or any other Divisible Profits, , Dr., , To Capital Redemption Reserve Account, (Being the amount transferred to Capital Redemption Reserve, Account as per the requirement of the Act)., 2., , When shares are redeemed at par, Redeemable Preference Share Capital Account, To Preference Shareholders Account, (Being the amount payable on redemption of preference, shares transferred to Preference Shareholders Account), , © The Institute of Chartered Accountants of India, , Dr.

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7.18, 3., , ACCOUNTING, , When shares are redeemed at a premium, Redeemable Preference Share Capital Account, , Dr., , Premium on Redemptions of Preference Shares Account, , Dr., , To Preference Shareholders Account, (Being the amount payable on redemption transferred to, Preference Shareholders Account), 4., , When payment is made to preference shareholders, Preference Shareholders Account, , Dr., , To Bank Account, (Being the payment to preference shareholders as per terms), 5., , For adjustment of premium of redemption, Divisible Profit Account, , Dr., , To Premium on Redemption of Preference Shares Account, (Being the premium on redemption adjusted against Profit, and Loss Account), Illustration 6, The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st, December, 20X1., Share capital: 40,000 Equity shares of ` 10 each fully paid – ` 4,00,000; 1,000 10%, Redeemable preference shares of ` 100 each fully paid – ` 1,00,000., Reserve & Surplus: Capital reserve – ` 50,000; Securities premium – ` 50,000; General, reserve –` 75,000; Profit and Loss Account – ` 35,000, On 1st January 20X2, the Board of Directors decided to redeem the preference shares, at par by utilisation of reserve., You are required to pass necessary Journal Entries including cash transactions in the, books of the company., , © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 7.19, , Solution, In the books of ABC Limited, Journal Entries, Date, , Particulars, , Dr. (`), , Cr. (`), , 20X2, Jan 1, , 10% Redeemable Preference Share Capital, A/c, , Dr., , 1,00,000, , To Preference Shareholders A/c, , 1,00,000, , (Being the amount payable on redemption, transferred to Preference Shareholders, Account), Preference Shareholders A/c, , Dr., , 1,00,000, , To Bank A/c, , 1,00,000, , (Being the amount paid on redemption of, preference shares), General Reserve A/c, , Dr., , 75,000, , Profit & Loss A/c, , Dr., , 25,000, , To Capital Redemption Reserve A/c, , 1,00,000, , (Being the amount transferred to Capital, Redemption Reserve Account as per the, requirement of the Act), Note: Securities premium and capital reserve cannot be utilised for transfer to, Capital Redemption Reserve., , 4.3 REDEMPTION OF PREFERENCE SHARES BY COMBINATION OF, FRESH ISSUE AND CAPITALISATION OF UNDISTRIBUTED DIVISIBLE, PROFITS, A company can redeem the preference shares partly from the proceeds from new, issue and partly out of profits. In order to fill in the ‘gap’ between the face value of, shares redeemed and the proceeds of new issue, a transfer should be made from, distributable profits (Profit & Loss Account, General Reserve and other Free, Reserves) to Capital Redemption Reserve Account., © The Institute of Chartered Accountants of India

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7.20, , ACCOUNTING, , Formula:, (i), , Amount to be Transferred to Capital Redemption Reserve, `, Face value of shares redeemed, , ***, , Less: Proceeds from new issue, , ***, ***, , (ii), , Proceeds to be collected from New Issue, `, Face value of shares redeemed, , ***, , Less: Profits available for distribution as dividend, , ***, ***, , Illustration 7, C Limited had 3,000, 12% Redeemable Preference Shares of `100 each, fully paid up., The company had to redeem these shares at a premium of 10%., It was decided by the company to issue the following:, (i), , 25,000 Equity Shares of `10 each at par,, , (ii), , 1,000 14% Debentures of `100 each., , The issue was fully subscribed and all amounts were received in full. The payment, was duly made. The company had sufficient profits. Show Journal Entries in the books, of the company., Solution, In the books of C Limited, Journal Entries, Date, , Bank A/c, , Particulars, , To Equity Share Capital A/c, , (Being the issue of 25,000 equity shares of `, 10 each at par as per Board’s resolution, No……dated…..), , © The Institute of Chartered Accountants of India, , Dr., , Dr. (`), , 2,50,000, , Cr. (`), 2,50,000

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REDEMPTION OF PREPERENCE SHARES, Bank A/c, , To 14% Debenture A/c, , 7.21, Dr., , 1,00,000, , Dr., , 50,000, , Dr., , 3,00,000, , Dr., , 30,000, , (Being the issue of 1,000 Debentures of, ` 100 each as per Board’s Resolution, No…..dated……), Profit & Loss A/c, , To Capital Redemption Reserve A/c, , (Being the amount transferred to Capital, Redemption Reserve Account as per the, requirement of the Act), 12% Redeemable Preference Share Capital, A/c, Premium on Redemption of Preference, Shares A/c, To Preference Shareholders A/c, , 1,00,000, , 50,000, , 3,30,000, , (Being the amount payable on redemption, transferred to Preference Shareholders, Account), Preference Shareholders A/c, To Bank A/c, , Dr., , 3,30,000, , Dr., , 30,000, , (Being the amount paid on redemption of, preference shares), Profit & Loss A/c, , To Premium on Redemption, Preference Shares A/c, , of, , 3,30,000, , 30,000, , (Being the adjustment of premium on, redemption against Profits & Loss Account), Working Note:, Amount to be transferred to Capital Redemption Reserve Account, Face value of shares to be redeemed, Less: Proceeds from new issue, Total Balance, © The Institute of Chartered Accountants of India, , 3,00,000, (2,50,000), 50,000

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7.22, , ACCOUNTING, , Illustration 8, The capital structure of a company consists of 20,000 Equity Shares of ` 10 each fully, paid up and 1,000 8% Redeemable Preference Shares of ` 100 each fully paid up, (issued on 1.4.20X1)., Undistributed reserve and surplus stood as: General Reserve ` 80,000; Profit and Loss, Account ` 20,000; Investment Allowance Reserve out of which ` 5,000, (not free for, distribution as dividend) ` 10,000; Securities Premium ` 2,000, Cash at bank, amounted to ` 98,000. Preference shares are to be redeemed at a Premium of 10%, and for the purpose of redemption, the directors are empowered to make fresh issue, of Equity Shares at par after utilising the undistributed reserve and surplus, subject, to the conditions that a sum of ` 20,000 shall be retained in general reserve and, which should not be utilised., Pass Journal Entries to give effect to the above arrangements and also show how the, relevant items will appear in the Balance Sheet of the company after the redemption, carried out., Solution, In the books of ………., Journal Entries, Date Particulars, Bank A/c, , To Equity Share Capital A/c, , Dr. (`), Dr., , 25,000, , Dr., Dr., , 60,000, 10,000, , (Being the issue of 2,500 Equity Shares of, ` 10 each at a premium of Re. 1 per share as per, Board’s Resolution No…..dated…….), General Reserve A/c, Profit & Loss A/c, , Investment Allowance Reserve A/c, To Capital Redemption Reserve A/c, , Dr., , 75,000, , Dr. 1,00,000, , Premium on Redemption of Preference Shares A/c Dr., , © The Institute of Chartered Accountants of India, , 25,000, , 5,000, , (Being the amount transferred to Capital, Redemption Reserve Account as per the, requirement of the Act), 8% Redeemable Preference Share Capital A/c, , Cr. (`), , 10,000

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REDEMPTION OF PREPERENCE SHARES, , 7.23, , To Preference Shareholders A/c, , 1,10,000, , (Being the amount paid on redemption, transferred to Preference Shareholders Account), Preference Shareholders A/c, , Dr. 1,10,000, , To Bank A/c, , (Being the amount paid on redemption of, preference shares), Profit & Loss A/c, , To, Premium, on, Preference Shares A/c, , Redemption, , of, , Dr., , 10,000, , 1,10,000, , 10,000, , (Being the premium payable on redemption is, adjusted against Profit & Loss Account), Balance Sheet as at ………[Extracts], Particulars, , EQUITY AND LIABILITIES, 1. Shareholders’ funds, a, , b, , Notes No., , Share capital, , Reserves and Surplus, , ASSETS, , 2. Current Assets, Cash and cash equivalents, (98,000 + 25,000 – 1,10,000), , 1, 2, , `, , 2,25,000, 1,02,000, , 13,000, , Notes to Accounts, 1. Share Capital, 22,500 Equity shares (20,000 + 2,500) of `10 each, fully paid up, 2. Reserves and Surplus, , 2,25,000, , General Reserve, , 20,000, , Capital Redemption Reserve, , 75,000, , Securities Premium, , Investment Allowance Reserve, , © The Institute of Chartered Accountants of India, , 2,000, 5,000, , 1,02,000

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7.24, , ACCOUNTING, , Working Note:, No of Shares to be issued for redemption of Preference Shares:, Face value of shares redeemed, Less:, , ` 1,00,000, , Profit available for distribution as dividend:, General Reserve : `(80,000-20,000), , ` 60,000, , Profit and Loss (20,000 – 10,000 set aside for, adjusting premium payable on redemption of, preference shares), , `10,000, , Investment Allowance Reserve: (` 10,000-5,000) ` 5,000, , (` 75,000), ` 25,000, , Therefore, No. of shares to be issued = ` 25,000/`10 = 2,500 shares., , 4.4 SALE OF INVESTMENTS TO PROVIDE SUFFICIENT FUNDS FOR, REDEMPTION, Companies may have sufficient investments, which can be sold, in the market to, arrange funds for redemption of preference shares., , 5. REDEMPTION OF PARTLY, PREFERENCE SHARES, , CALLED-UP, , One of the conditions of redemption is that only fully paid up preference shares, can be redeemed by a company. Hence:, 1), , If the problem states that it is decided to redeem preference shares which are, partly called up, then it is assumed that the final call on these shares is, demanded and received before proceeding with redemption of these shares., , 2), , If information about both fully paid and partly paid preference shares is, provided, then, it is presumed that only fully paid shares are to be redeemed, and partly paid shares are left intact., , 3), , The company can forfeit the shares, if the call money is not received by the, company in spite of giving opportunity to pay the same via reminders., , © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 7.25, , Illustration 9, The Balance Sheet of XYZ Ltd. as at 31st December, 20X1 inter alia includes the, following information:, , `, 50,000, 8% Preference Shares of `100 each, `70 paid up, 1,00,000 Equity Shares of `100 each fully paid up, , 35,00,000, 1,00,00,000, , Securities Premium, , 5,00,000, , Capital Redemption Reserve, , 20,00,000, , General Reserve, , 50,00,000, , Bank, , 15,00,000, , Under the terms of their issue, the preference shares are redeemable on 31st March,, 20X2 at 5% premium. In order to finance the redemption, the company makes a rights, issue of 50,000 equity shares of ` 100 each at ` 110 per share, ` 20 being payable on, application, ` 35 (including premium) on allotment and the balance on 1st January,, 20X3. The issue was fully subscribed and allotment made on 1st March, 20X2. The, money due on allotment were duly received by 31st March, 20X2. The preference, shares were redeemed after fulfilling the necessary conditions of Section 55 of the, Companies Act, 2013., You are asked to pass the necessary Journal Entries and show the relevant extracts, from the balance sheet as on 31st March, 20X2 with the corresponding figures as on, 31st December, 20X1., Solution, Journal Entries, `, 8% Preference Share Final Call A/c, , To 8% Preference Share Capital A/c, , (For final call made on preference shares @ ` 30, each to make them fully paid up), Bank A/c, , To 8% Preference Share Final Call A/c, , (For receipt of final call money on preference shares), , © The Institute of Chartered Accountants of India, , Dr., , 15,00,000, , Dr., , 15,00,000, , `, 15,00,000, , 15,00,000

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7.26, , ACCOUNTING, , Bank A/c, , To Equity Share Application A/c, , (For receipt of application money on 50,000 equity, shares @ ` 20 per share), Equity Share Application A/c, , To Equity Share Capital A/c, , (For capitalisation of application money received), Equity Share Allotment A/c, , To Equity Share Capital A/c, , Dr., , 10,00,000, , Dr., , 10,00,000, , Dr., , 17,50,000, , To Securities Premium A/c, , (For allotment money due on 50,000 equity shares, @ ` 35 per share including a premium of ` 10 per, share), Bank A/c, , To Equity Share Allotment A/c, , (For receipt of allotment money on equity shares), General Reserve A/c, , To Capital Redemption Reserve A/c, , (For transfer of CRR the amount not covered by the, proceeds of fresh issue of equity shares i.e.,, 50,00,000 - 10,00,000 - 12,50,000), 8% Preference Share Capital A/c, , Premium on Redemption of Preference Shares A/c, To Preference Shareholders A/c, , (For amount payable to preference shareholders on, redemption at 5% premium), Preference Shareholders A/c, To Bank A/c, , (For amount paid to preference shareholders), General Reserve A/c, , To Premium on Redemption A/c, , (For writing off premium on redemption of, preference shares), © The Institute of Chartered Accountants of India, , 10,00,000, , 10,00,000, , 12,50,000, , 5,00,000, , Dr., , 17,50,000, , Dr., , 27,50,000, , Dr., , 50,00,000, , Dr., , 2,50,000, , Dr., , 52,50,000, , Dr., , 2,50,000, , 17,50,000, , 27,50,000, , 52,50,000, , 52,50,000, , 2,50,000

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REDEMPTION OF PREPERENCE SHARES, , 7.27, , Balance Sheet (extracts), Particulars, , 1., , 1., , EQUITY AND LIABILITIES, Shareholders’ funds, a), Share capital, b), Reserves and Surplus, ASSETS, Current Assets, a), Cash & Cash Equivalents, , Notes, No., , As at, 31.3.20X2, `, , As at, 31.12.20X1, `, , 1, 2, , 1,22,50,000, 77,50,000, , 1,35,00,000, 75,00,000, , 3, , 5,00,000, , 15,00,000, , Notes to accounts, , 1., , 2., , Share Capital, , Issued, Subscribed and Paid up:, 1,00,000 Equity shares of `100 each fully, paid up, 50,000 Equity shares of `100 each `45, paid up, 50,000, 8% Preference shares of `100, each, `70 called up, , As at, 31.12.20X1, , 1,00,00,000, , 1,00,00,000, , 22,50,000, , -, , -, , 35,00,000, , 1,22,50,000, , 1,35,00,000, , Capital Redemption Reserve, , 47,50,000, , 20,00,000, , General Reserve, , 20,00,000, , 50,00,000, , 5,00,000, , 15,00,000, , Reserves and Surplus, Securities Premium, , 3., , As at, 31.3.20X2, , Cash & Cash Equivalents, Bank balance, , 10,00,000, 77,50,000, , 5,00,000, , 75,00,000, , Note: Amount received (excluding premium) on fresh issue of shares till the date of, redemption should be considered for calculation of proceeds of fresh issue of shares., Thus, proceeds of fresh issue of shares ` 22,50,000 (` 10,00,000 application money plus, ` 12,50,000 received on allotment towards share capital) will be considered., , © The Institute of Chartered Accountants of India

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7.28, , ACCOUNTING, , 6. REDEMPTION OF FULLY CALLED BUT PARTLY, PAID-UP PREFERENCE SHARES, The problem of unpaid calls on fully called up shares may be studied under, following categories:, , 6.1 WHEN THE AMOUNT OF CALLS-IN-ARREARS IS RECEIVED BY THE, COMPANY, If the amount of unpaid calls is received by the Company before redemption, the, entry passed is as under:, Bank A/c, , Dr., , To Calls-in-Arrears A/c, After receipt of calls in arrears, the shares become fully paid up and then, company, can proceed with redemption in the normal course., , 6.2 IN CASE OF FORFEITED SHARES, If in spite of receiving a proper notice from the company, the shareholders fail to, pay the unpaid calls, the Board of Directors may decide to forfeit the shares and, cancel these shares instead of reissuing the forfeited shares because redemption, of these shares is due immediately or in near future. In this case, the journal entry, for forfeiture is passed as usual, which will be as follows:, Preference Share Capital A/c #, , Dr, , (#Called up share capital only relating to the shares to be forfeited), To Calls In Arrears A/c, To Shares Forfeited A/c *, (*Amount actually collected on shares forfeited. This will be equal to the balancing, amount), NOTE: But it should be noted, in this case, that the number of shares to be, redeemed will be reduced by the number of shares so forfeited., Illustration 10, With the help of the details in Illustration 9 above and further assuming that the, Preference Shareholders holding 2,000 shares fail to make the payment for the Final, Call made under Section 55, you are asked to pass the necessary Journal Entries, , © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 7.29, , and show the relevant extracts from the balance sheet as on 31st March, 20X2 with, the corresponding figures as on 31st December, 20X1 assuming that the shares in, default are forfeited after giving proper notices., Solution, Journal Entries, `, 8% Preference Share Final Call A/c, , Dr., , To 8% Preference Share Capital A/c, (For final call made on preference shares @, ` 30 each to make them fully paid up), Bank A/c, (48,000 x `30), Dr., Calls in arrears A/c, (2,000x `30), To 8% Preference Share Final Call A/c, (For receipt of final call money on preference, shares), Preference Share Capital A/c, (2000 X `100), Dr., `, To Calls in Arrears A/c, (2000 X 30), To Shares Forefeited A/c, (2000 X `70), (For Shares Forefeited after shareholders fail to, pay the Final Call), , 15,00,000, , 60,000, , 2,00,000, , Dr., , 10,00,000, , Equity Share Application A/c, , Dr., , 10,00,000, , Equity Share Allotment A/c, , Dr., , 17,50,000, , To Equity Share Capital A/c, (For capitalisation of application money, received), To Equity Share Capital A/c, , To Securities Premium A/c, (For allotment money due on 50,000 equity, shares @ ` 35 per share including a premium, of ` 10 per share), © The Institute of Chartered Accountants of India, , 15,00,000, , 14,40,000, , Bank A/c, , To Equity Share Application A/c, (For receipt of application money on 50,000, equity shares @ ` 20 per share), , `, , 15,00,000, , 60,000, 1,40,000, , 10,00,000, , 10,00,000, , 12,50,000, , 5,00,000

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7.30, , ACCOUNTING, , Bank A/c, To Equity Share Allotment A/c, , Dr., , 17,50,000, , General Reserve A/c, , Dr., , 25,50,000, , 8% Preference Share Capital A/c, , Dr., , 48,00,000, , (For receipt of allotment money on equity, shares), To Capital Redemption Reserve A/c, (For transfer of CRR the amount not covered, by the proceeds of fresh issue of equity, shares i.e., 48,00,000 – 10,00,000 – 12,50,000), Premium on Redemption of Preference, Shares A/c, , To Preference Shareholders A/c, (For, amount, payable, to, preference, shareholders on redemption at 5% premium), , Dr., , 25,50,000, , 2,40,000, 50,40,000, , Preference Shareholders A/c, To Bank A/c, , Dr., , 50,40,000, , General Reserve A/c, To Premium on Redemption A/c, (For writing off premium on redemption of, preference shares), , Dr., , 2,40,000, , (For amount paid to preference shareholders), , 17,50,000, , 50,40,000, , 2,40,000, , Balance Sheet (extracts), Particulars, , 1., , 1., , Notes, No., , As at, 31.3.20X2, `, , As at, 31.12.20X1, `, , 1, , 1,23,90,000, , 1,35,00,000, , 3, , 6,50,000, , 15,00,000, , EQUITY AND LIABILITIES, Shareholders’ funds, a), b), , Share capital, Reserves and Surplus, , ASSETS, , Current Assets, a), Cash & Cash Equivalents, , © The Institute of Chartered Accountants of India, , 2, , 77,60,000, , 75,00,000

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REDEMPTION OF PREPERENCE SHARES, , 7.31, , Notes to accounts, As at, 31.3.20X2, 1., , As at, 31.12.20X1, , Share Capital, Issued, Subscribed and Paid up:, 1,00,000 Equity shares of `100 each fully, paid up, , 1,00,00,000, , 1,00,00,000, , 50,000 Equity shares of `100 each `45, paid up, , 22,50,000, , -, , -, , 35,00,000, , 1,40,000, , -, , 1,23,90,000, , 1,35,00,000, , Capital Redemption Reserve, , 45,50,000, , 20,00,000, , Securities Premium, , 10,00,000, , 5,00,000, , General Reserve, , 22,10,000, , 50,00,000, , 77,60,000, , 75,00,000, , 6,50,000, , 15,00,000, , 50,000, 8% Preference shares of, ` 100 each, ` 70 called up, Shares Forfeited, , 2., , 3., , Reserves and Surplus, , Cash & Cash Equivalents, Bank, , Note: Amount received (excluding premium) on fresh issue of shares till the date, of redemption should be considered for calculation of proceeds of fresh issue of, shares. Thus, proceeds of fresh issue of shares ` 22,50,000 (`10,00,000 application, money plus ` 12,50,000 received on allotment towards share capital) will be, considered., , © The Institute of Chartered Accountants of India

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7.32, , ACCOUNTING, , SUMMARY, , , Redemption is the process of repaying an obligation, at prearranged, amount and timing., , , , In India, the issue and redemption of preference shares is governed by, Section 55 of the Companies Act, 2013., , , , A company limited by shares if so authorised by its Articles, may issue, preference shares which at the option of the company, are liable to be, redeemed. It should be noted that:, (a), , no shares can be redeemed except out of profit of the company which, , would otherwise be available for dividend or out of proceeds of fresh, issue of shares made for the purpose of redemption;, , (b), , , no such shares can be redeemed unless they are fully paid;, , Methods of redemption of fully paid-up preference shares: (i) by Fresh issue, , of shares; (ii) by Capitalisation of undistributed profits; (iii) Combination of, (i) and (ii),, , TEST YOUR KNOWLEDGE, MCQ, 1., , 2., , Securities premium cannot be used to _______., (a), , Issue bonus shares, , (b), , Redeem preference shares, , (c), , Write-off preliminary expenses, , S Ltd. issued 2,000, 10% Preference shares of ` 100 each at par on 1.4.20X1,, which are redeemable at a premium of 10%. For the purpose of redemption,, the company issued 1,500 Equity Shares of ` 100 each at a premium of 20%, per share. At the time of redemption of Preference Shares, the amount to be, transferred by the company to the Capital Redemption Reserve Account = ?, (a), , ` 50,000, , © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 3., , 4, , 5., , 6., , 7., , 8., , (b), , ` 40,000, , (c), , ` 2,00,000, , 7.33, , Which of the following cannot be used for the purpose of creation of capital, redemption reserve account?, (a), , Profit and loss account (credit balance), , (b), , General reserve account, , (c), , Unclaimed dividend account, , According to Section 52 of the Companies Act, 2013, the amount in the, Securities Premium A/c cannot be used for the purpose of, (a), , Issue of fully paid bonus shares, , (b), , Writing off losses of the company, , (c), , For purchase of own securities, , Which of the following can be utilized for redemption of preference shares?, (a), , The proceeds of fresh issue of equity shares, , (b), , The proceeds of issue of debentures, , (c), , The proceeds of issue of fixed deposit, , Which of the following statements is True?, (a), , Capital redemption reserve cannot be used for writing off miscellaneous, expenses and losses, , (b), , Capital profit realized in cash cannot be used for payment of dividend, , (c), , Reserves created by revaluation of fixed assets are not permitted to be, capitalized, , Which of the following accounts can be used for transfer to capital, redemption reserve account?, (a), , General reserve account, , (b), , Forfeited shares account, , (c), , Profit prior to incorporation, , Preference shares amounting to ` 2,00,000 (already issued on 1.4.20X1) are, redeemed at a premium of 5%, by issue of shares amounting to ` 1,00,000 at, , © The Institute of Chartered Accountants of India

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7.34, , ACCOUNTING, , a premium of 10%. The amount to be transferred to capital redemption, reserve = ?, , 9., , 10., , (a), , ` 1,05,000, , (b), , ` 1,00,000, , (c), , ` 2,00,000, , A company who prepares financial statements in compliance with Accounting, Standards under Section 133 of the Companies Act, 2013, it cannot utilize, securities premium for the purpose of, (a), , Purchase of its own shares or other securities, , (b), , To write off discount allowed on any of securities or debentures of the, company, , (c), , To provide for premium on the redemption of Redeemable Preference, shares of the Company., , When shares are redeemed by utilising distributable profit, an amount equal, to the face value of shares redeemed is transferred to _______________________, account by debiting the distributable profit., (a), , Capital replacement Reserve., , (b), , Capital Redemption Reserve., , (c), , Capital Reserve., , Theoretical Questions, 1., , What is the purpose of issuing redeemable preference shares?, , 2., , What are the provisions of the Companies Act, 2013 related with redemption, of preference shares? Explain in brief., , Practical Questions, Question 1, The books of B Ltd. showed the following balance on 31st December, 20X3:, 30,000 Equity Shares of `10 each fully paid; 18,000 12% Redeemable Preference, Shares of `10 each fully paid; 4,000 10% Redeemable Preference Shares of ` 10, each, ` 8 paid up (all shares issued on 1st April, 20X2)., Undistributed Reserve and Surplus stood as: Profit and Loss Account ` 80,000;, © The Institute of Chartered Accountants of India

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REDEMPTION OF PREPERENCE SHARES, , 7.35, , General Reserve ` 1,20,000; Securities Premium Account ` 15,000 and Capital, Reserve ` 21,000., For redemption, 3,000 equity shares of `10 each are issued at 10% premium. At the, same time, Preference shares are redeemed on 1st January, 20X4 at a premium of, `2 per share. The whereabouts of the holders of 100 shares of `10 each fully paid, are not known., A bonus issue of equity share was made at par, two shares being issued for every, five held on that date out of the Capital Redemption Reserve Account. However,, equity shares, issued for redemption are not eligible for bonus., Show the necessary Journal Entries to record the transactions., Question 2, Bumbum Limited gives you the following information as at 31st March, 20X1:, `, Authorized capital:, , 50,000 Equity shares of ` 10 each, 10,000 Preference shares of ` 100 each (8% redeemable), , Issued, subscribed and paid up capital:, , 30,000 Equity shares of ` 10 each, 5,000, 8% Redeemable Preference shares of ` 100 each, , Reserves & Surplus:, Securities Premium, General Reserve, Profit & Loss A/c, , 2,500, 9% Debentures of ` 100 each, Trade payables, , 5,00,000, 10,00,000, 15,00,000, , 3,00,000, 5,00,000, 8,00,000, 6,00,000, , 6,50,000, 40,000, , 12,90,000, , 2,50,000, 1,70,000, , Property, Plant and Equipment (net), , 7,80,000, , Deferred Tax Assets, , 3,40,000, , Investments (market value ` 5,80,000), Trade receivables, , Cash & Bank balance, © The Institute of Chartered Accountants of India, , 4,90,000, 6,20,000, 2,80,000

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7.36, , ACCOUNTING, , In Annual General Meeting held on 20th June, 20X1 the company passed the, following resolutions:, (i), , To split equity share of ` 10 each into 5 equity shares of ` 2 each from 1st July., , (ii), , To redeem 8% preference shares at a premium of 5%., , (iii), , To redeem 9% Debentures by making offer to debenture holders to convert, their holdings into equity shares at ` 10 per share or accept cash on, redemption., , (iv), , To issue fully paid bonus shares in the ratio of one equity share for every 3, shares held on record date., , On 10th July, 20X1 investments were sold for ` 5,55,000 and preference shares were, redeemed., 40% of Debenture holders exercised their option to accept cash and their claims, were settled on 1st August, 20X1., The company fixed 5th September, 20X1 as record date and bonus issue was, concluded by 12th September, 20X1, You are requested to journalize the above transactions including cash transactions, and prepare Balance Sheet as at 30th September, 20X1. All working notes should, form part of your answer., Question 3, Trinity Ltd. gives you the following information as at 31.3.20X1:, `, Property, Plant and Equipment:, Gross Block, Less: Depreciation, , 3,00,000, 1,00,000, , Investments, , 1,00,000, , Inventory, , Trade receivables, , Cash and Bank Balances, Share Capital:, Authorised:, , 10,000 10% Redeemable Preference Shares of ` 10 each, © The Institute of Chartered Accountants of India, , 2,00,000, 45,000, 25,000, 50,000, , 1,00,000

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REDEMPTION OF PREPERENCE SHARES, , 7.37, , 90,000 Equity Shares of `10 each, , 9,00,000, , Issued, Subscribed and Paid-up Capital:, 10,000 10% Redeemable Preference Shares of ` 10 each, , 1,00,000, , 10,000 Equity Shares of ` 10 each, , 1,00,000, , Reserves and Surplus:, General Reserve, , 1,20,000, , Securities Premium, Profit and Loss A/c, , 70,000, 18,500, , Current Liabilities and Provisions, , 11,500, , For the year ended 31.3.20X2, the company made a net profit of `35,000 after, providing `20,000 depreciation., The following additional information is available with regard to company’s, operation:, 1., , The preference dividend for the year ended 31.3.20X2 was paid., , 2., , Except cash and bank balances other current assets and current liabilities as, on 31.3.20X2, was the same as on 31.3.20X1., , 3., , The company redeemed the preference shares at a premium of 10%., , 4., , The company issued bonus shares in the ratio of one share for every equity, share held as on 31.3.20X2., , 5., , To meet the cash requirements of redemption, the company sold, investments., , 6., , Investments were sold at 90% of cost on 31.3.20X2., , You are required to prepare necessary journal entries to record redemption and, issue of bonus shares., , ANSWERS/ HINTS, MCQ, 1., 7., 1, 2, , (b), (a), , 2., 8., , (a) 1, (b) 2, , 3., 9., , (c), (c), , 2,00,000 – 1,50,000, 2,00,000 – 1,00,000, , © The Institute of Chartered Accountants of India, , 4., 10., , (b), (b), , 5., , (a), , 6., , (a)

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7.38, , ACCOUNTING, , Theoretical Questions, 1., , A company may issue redeemable preference shares to raise finance in a dull, primary market. Preference shares may be redeemed when there is a surplus, of capital and the surplus funds cannot be utilised in the business for, profitable use. For details, refer para 2 of the chapter., , 2., , Section 55 of the Companies Act, 2013, deals with provisions relating to, redemption of preference shares. It ensures that there is no reduction in, shareholders’ funds due to redemption and, thus, the interest of outsiders is, not affected. For details, refer para 3 of the chapter., , Practical Questions, Answer 1, In the books of B Limited, Journal Entries, Date, , Particulars, , 12% Redeemable Preference Share Capital, A/c, Jan 1 Premium on Redemption of Preference, Shares A/c, 20X1, , To Preference Shareholders A/c, (Being the amount payable on redemption, of 18,000 12% Redeemable Preference, Shares transferred to Shareholders Account), , Dr. (`), , Dr., , 1,80,000, , Dr., , 36,000, 2,16,000, , Preference Shareholders A/c, , Dr., , 2,14,800, , Bank A/c, To Equity Shares Capital A/c, , Dr., , 33,000, , General Reserve A/c, , Dr., , To Bank A/c, (Being the amount paid on redemption of, 17,900 preference shares), , To Securities Premium A/c, (Being the issue of 3,000 Equity Shares of, ` 10 each at a premium of 10% as per, Board’s Resolution No……. Dated……), , © The Institute of Chartered Accountants of India, , Cr. (`), , 2,14,800, , 30,000, , 3,000, , 1,20,000

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REDEMPTION OF PREPERENCE SHARES, , 7.39, , Profit & Loss A/c, , Dr., , 30,000, , Capital Redemption Reserve A/c, To Bonus to Shareholders A/c, , Dr., , 1,20,000, , Bonus to Shareholders A/c, To Equity Share Capital A/c, (Being the utilisation of bonus dividend for, issue of 12,000 equity shares of ` 10 each, fully paid), , Dr., , 1,20,000, , Dr., , 36,000, , To Capital Redemption Reserve A/c, (Being the amount transferred to Capital, Redemption Reserve A/c as per the, requirement of the Act.), , (Being the amount appropriated for issue of, bonus share in the ratio of 5:2 as per, shareholders Resolution No.….. dated…), , Profit & Loss A/c, To Premium on Redemption, Preference Shares A/c, , of, , 1,50,000, , 1,20,000, , 1,20,000, , 36,000, , (Being premium on redemption of, preference shares adjusted against to Profit, & Loss Account), Working Note:, (1), , Partly paid-up preference shares cannot be redeemed., , (2), , Amount to be Transferred to Capital Redemption Reserve Account, Face value of share to be redeemed, , `1,80,000, , Less: Proceeds from fresh issue (excluding premium), , (` 30,000), `1,50,000, , (3), , No bonus shares on 3,000 equity shares issued for redemption., , © The Institute of Chartered Accountants of India

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7.40, , ACCOUNTING, , Answer 2, Bumbum Limited, Journal Entries, 20X1, July 1, , Dr. (`), Equity Share Capital A/c (` 10 each), , To Equity share capital A/c (` 2 each), , Dr. 3,00,000, , (Being equity share of `10 each splitted into 5, equity shares of ` 2 each) {1,50,000 X 2}, July 10, , Cash & Bank balance A/c, To Investment A/c, , Dr. 5,55,000, , To Profit & Loss A/c, , Premium on redemption of pref. share A/c, , Dr., , 25,000, , (Being amount payable to preference share, holders on redemption) (refer W.N.1), Preference shareholders A/c, To Cash & bank A/c, , Dr. 5,25,000, , (Being amount paid to preference shareholders), July 10, , General reserve A/c, , To Capital redemption reserve A/c, , Dr. 5,00,000, , (Being amount equal to nominal value of, preference shares transferred to Capital, Redemption Reserve A/c on its redemption as per, the law), Aug 1, , 4,90,000, , 8% Redeemable preference share capital A/c Dr. 5,00,000, To Preference shareholders A/c, , July 10, , 3,00,000, , 65,000, , (Being investment sold out and profit on sale, credited to Profit & Loss A/c), July 10, , Cr. (`), , 9% Debentures A/c, , Interest on debentures A/c, (2,50,000 x 9% x 4/12), , © The Institute of Chartered Accountants of India, , Dr. 2,50,000, , Dr., , 7,500, , 5,25,000, , 5,25,000, , 5,00,000

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REDEMPTION OF PREPERENCE SHARES, , 7.41, , To Debenture holders A/c, , 2,57,500, , (Being amount payable to debenture holders, along with interest payable), Aug. 1, , Debenture holders A/c, , Dr. 2,57,500, , To Cash & bank A/c (1,00,000 + 7,500), , 1,07,500, , To Equity share capital A/c (15,000 X 2), , 30,000, , To Securities premium A/c (15,000 x 8), , 1,20,000, , (Being claims of debenture holders satisfied), (refer W.N.2), Sept. 5, , Capital Redemption Reserve A/c, , Dr. 1,10,000, , To Bonus to shareholders A/c, , 1,10,000, , (Being balance in capital redemption reserve, capitalized to issue bonus shares) (refer W.N.3), Sept. 12 Bonus to shareholders A/c, , Dr. 1,10,000, , To Equity share capital A/c, , 1,10,000, , (Being 55,000 fully paid equity shares of ` 2 each, issued as bonus in ratio of 1 share for every 3, shares held), Sept. 30 General Reserve A/c, , Dr., , 25,000, , To Premium on redemption of preference, shares A/c, , 25,000, , (Being premium on preference shares adjusted, from general reserve), Sept. 30 Profit & Loss A/c, , Dr., , To Interest on debentures A/c, (Being interest on debentures transferred to, Profit and Loss Account), , © The Institute of Chartered Accountants of India, , 7,500, 7,500

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7.42, , ACCOUNTING, , Balance Sheet as at 30th September, 20X1, Particulars, , 1, , 2, , 1, , 2, , Notes, , Equity and Liabilities, a, , Shareholders' funds, Share capital, , 1, , b Reserves and Surplus, a, , b, , 13,32,500, , Trade Payables, Assets, , a, , 4,40,000, , 2, , Current liabilities, , `, , 1,70,000, Total, , 19,42,500, , Non-current assets, , Property, Plant and Equipment, , 7,80,000, , Deferred tax asset, , 3,40,000, , Current assets, , Trade receivables, , 6,20,000, , Cash and bank balances (W.N.4), , 2,02,500, Total, , 19,42,500, , Notes to accounts, `, 1, , `, , Share Capital, , Authorized share capital, , 2,50,000 Equity shares of ` 2 each, , 10,000 Preference shares of `100 each, , 5,00,000, , 10,00,000, , Issued, subscribed and paid up, , 2,20,000 Equity shares of ` 2 each, [(30,000 x 5) + 15,000 + 55,000], , 4,40,000, , 2 Reserves and Surplus, , Securities Premium A/c, , Balance as per balance sheet, , © The Institute of Chartered Accountants of India, , 15,00,000, , 6,00,000

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REDEMPTION OF PREPERENCE SHARES, Add: Premium on equity shares issued on, conversion of debentures (15,000 x 8), , 7.43, , 1,20,000, , Balance, , 7,20,000, , Capital Redemption Reserve (5,00,000-1,10,000), General Reserve (6,50,000 – 5,00,000- 25,000), , 3,90,000, , Profit & Loss A/c, , 40,000, , Less: Interest on debentures, , (7,500), , Add: Profit on sale of investment, , 65,000, , Total, , 1,25,000, , 97,500, 13,32,500, , Working Notes:, `, 1., , Redemption of preference share:, , 5,000 Preference shares of ` 100 each, , 5,00,000, , Amount Payable, , 5,25,000, , 2,500 Debentures of `100 each, , 2,50,000, , Premium on redemption @ 5%, 2., , Redemption of Debentures, , Less: Cash option exercised by 40% holders, , Conversion option exercised by remaining 60%, Equity shares issued on conversion =, 3., , shares, , (1,00,000), 1,50,000, , 1,50,000, = 15,000, 10, , Issue of Bonus Shares, , Existing equity shares after split (30,000 x 5), , 1,50,000 shares, , Equity shares entitled for bonus, , 1,65,000 shares, , Equity shares issued on conversion, , 4., , 25,000, , Bonus shares (1 share for every 3 shares held) to be, issued, Cash and Bank Balance, , Balance as per balance sheet, Add:, , Realization on sale of investment, , © The Institute of Chartered Accountants of India, , 15,000 shares, 55,000 shares, , 2,80,000, 5,55,000

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7.44, , ACCOUNTING, 8,35,000, , Less: Paid to preference share holders, , (5,25,000), , Paid to Debenture holders (7,500 + 1,00,000), 5., , (1,07,500), , Balance, , 2,02,500, , Interest of `7,500 paid to debenture holders have been, debited to Profit & Loss Account., , Answer 3, Journal Entries in the Books of Trinity Ltd., , General Reserve A/c, , Dr., , Dr., , Cr., , `, , `, , 10,000, , To Premium on Redemption of Preference, shares, (Being amount of premium, redemption of preference shares), , payable, , 10,000, , on, , 10% Redeemable Preference Capital, , Dr., , 1,00,000, , Premium on redemption of Preference Shares, , Dr., , 10,000, , To Preference Shareholders, (Being the amount payable, shareholders on redemption), , 1,10,000, to, , preference, , General Reserve A/c, , Dr., , 1,00,000, , To Capital Redemption Reserve, , 1,00,000, , (Being transfer to the latter account on redemption of, shares), Bank A/c, , Dr., , 90,000, , Profit and Loss A/c, , Dr., , 10,000, , To Investments, (Being amount realised on sale of Investments, and loss thereon adjusted), , © The Institute of Chartered Accountants of India, , 1,00,000

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REDEMPTION OF PREPERENCE SHARES, Preference shareholders A/c, , 7.45, Dr., , 1,10,000, , To Bank, (Being, payment, shareholders), , 1,10,000, made, , to, , preference, , Capital Redemption Reserve A/c, , Dr., , 1,00,000, , To Bonus to Shareholders, , 1,00,000, , (Amount adjusted for issuing bonus share in the, ratio of 1: 1), Bonus to Shareholders A/c, To Equity Share Capital, (Balance on former account transferred to latter), , © The Institute of Chartered Accountants of India, , Dr., , 1,00,000, 1,00,000