CORPORATE ACCOUNTING
Faculty of Commerce
B. Com 3.1
CORPORATE ACCOUNTING
III Semester BCOM
Prepared By,
Assistant Professor
Ms. Surekha Hullair
Faculty of Commerce
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
MODULE: 4 – REDEMPTION OF PREFERENCE SHARES
Redemption of Preference Shares: Meaning & Legal Provisions Treatment regarding Premium on
Redemption - Creation of Capital Redemption Reserve Account - Fresh Issue of Shares for the purpose
of Redemption - Arranging for Cash Balance for the purpose of Redemption - Minimum Number of
Shares to be issued for Redemption - Issue of Bonus Shares - Preparation of Balance sheet after
Redemption as per Schedule III of Companies Act 2013
REDEMPTION OF PREFERENCE SHARES
Redeemable Preference Shares
The Redeemable Preference shares are those, the amount of which can be paid back
to the holders of such shares. The paying back of capital is called the redemption.
Provision For the Redemption of Preference Shares
The following are the important provisions of Sec.80 of the Companies Act, 1956,
relating to redemption of redeemable preference shares:
The shares to be redeemed must be fully paid-up. If the company has partly paid preference
shares, it must see that they are made fully paid up before they are redeemed.
The redeemable preference shares can be redeemed either out of the profits of the company
which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made
for this purpose only.
Any premium payable on redemption must be provided out of profits or out of the company’s
share premium account.
Where redemption is made out of profits, a sum equal to the nominal amount of the shares so
redeemed must be transferred, out of the profits of the company to a reserve called the Capital
Redemption Reserve a/c.
Capital Redemption Reserve a/c can be utilized for the issue of fully paid bonus shares to the
equity shareholders.
Redemption of preference shares shall not be taken as the reduction of the authorized share
capital.
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
REDEMPTION OF PREFERENCE SHARES
CONCEPT 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.
Shareholders will be repaid at a future date, the amount which they invested in the company (along
with frequent payment as return on investment)
The redemption date is the maturity date on which repayment takes place.
The redemption date is printed on the preference share certificate.
A company can adjust its financial structure by eliminating PS & replacing it with other securities if it
is advantageous.
A company cannot issue irredeemable preference shares.
CONCEPT 2 : PURPOSE OF ISSUING REDEEMABLE PREFERENCE SHARES
⮩ Proper way of ⮩ Difficulty in raising share ⮩ PS may be
raising finance in capital as shares are not redeemed when
primary market. traded on stock exchange. there is surplus of
⮩ Investors hesitant in capital.
putting money into shares ⮩ Surplus funds
that cannot be sold, invest cannot be utilised
in the shares redeemable in business for
by the company. profitable use.
In India, issue & redemption of preference shares is governed by Section 55 of the Companies Act,
2013.
CONCEPT 3 : METHODS OF REDEMPTION OF FULLY PAID-UP SHARES
Methods of redemption of Preference shares
By Fresh issue of shares Capitalisation of Combination of both
undistributed profits
[a] Redemption of Preference Shares by Fresh Issue of Shares :
The proceeds from issue of debentures cannot be utilised for the purpose.
When a fresh issue is made for the purpose of redemption of preference shares at a premium, the
question arises whether the proceeds of a fresh issue of shares will include the amount of securities
premium(SP) for the purpose of redemption of preference shares or not.
Section 52 of the Companies Act, 2013 provides that the SPA/c may be applied by the company:
A] To issue B] To write off C] To write off D] To provide E] For purchase
fully Paid up preliminary exp, comm, dis for prem on of own securities
Bonus Shares. expenses. on securities or red of pref or shares (Buy
deb. shares or deb. Back)
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
Notes :
[1] Companies whose financial statements comply with AS prescribed u/s 133 of the Companies Act,
2013, can't apply SP A/c for the purposes (b) and (d) mentioned above.
[2] All questions have been solved on the basis that the companies referred in questions comply with AS
prescribed u/s 133. So, SP A/c has not been utilized for the purpose of pref payable on red of pref share.
Thus, the proceeds of a fresh issue of shares will not include the amount of SP for the purpose of
redemption of preference shares.
Reasons for Issue of New Equity Shares
Permanent need of Capital Insufficient Profit Liquidity Position not good
Advantages of redemption by issue of fresh equity shares
No cash outflow of money New Equity Shares may be Shareholders retain their
– Now or Later valued at premium equity interest.
Disadvantages of redemption by issue of fresh equity shares
Dilution of future earnings
🟍 Accounting Entries:
Sr. no. Particulars Dr. (`) Cr. (`)
1] When new shares are issued at par
Bank Account Dr.
To Share Capital Account
2] When new shares are issued at a premium
Bank Account Dr.
To Share Capital Account
To Securities Premium Account
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
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
🟍 Calculation of Minimum Fresh Issue of Shares :
⮩ If examination problem does not specify the no. of shares to be issued for the purpose of redemption,
the minimum number of shares should be issued following the four steps as given below :
Step I : Step II : Step III : Step IV :
Calculate Minimum Adjustment to Step
amt of R&S Number of Shares III i.e. no issue can
available for be made of
redemption of PS value of proceeds (Step II) fractional shares.
considering the Preference Shares Price of Thus, rounded off
additional 1share. to next
information given figure/in multiples
in the problem. of 10, 50 (as per
question)
[b] Redemption of Preference Shares by Capitalisation of Undistributed Profits :
Another method 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 (CRR) by debiting the distributable
profit.
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, be transferred to a reserve fund to
be called the CRR A/c sum equal to the nominal amount of the shares redeemed'.
Advantages of redemption by capitalization of profits
No change in percentage Surplus funds can be used
of equity share-holding
Disadvantages of redemption by capitalization of profits
There may be a reduction in liquidity
🟍 Accounting Entries :
Sr. No Particulars Dr. (`) Cr. (`)
1] When shares are redeemed at par
Redeemable Preference Share Capital Account Dr.
To Preference Shareholders Account
2] 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
3] When payment is made to preference shareholders
Preference Shareholders Account Dr.
To Bank Account
4] For adjustment of premium of redemption
Profit and Loss Account Dr.
To Premium on Redemption of Preference Shares Account
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
5] For transferring nominal amount of shares redeemed to CRR Account
General Reserve Account Dr.
Profit and Loss Account Dr.
To Capital Redemption Reserve Account
[c] Redemption of Preference Shares by Combination of (a) & (b) :
Formula :
Sr. No Particulars `
[d]
i] Amount to be Transferred to Capital Redemption Reserve
Face value of shares redeemed xxx
Less: Proceeds from new issue xxx
xxx
ii] Proceeds to be collected from New Issue
Face value of shares redeemed xxx
Less: Profits available for distribution as dividend xxx
xxx
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.
CONCEPT 4 : REDEMPTION OF PARTLY CALLED-UP PREFERENCE SHARES
One of the conditions of redemption is that only fully paid up preference shares can be redeemed.
Notes :
[1] If examination problem states that it is decided to redeem partly called up pref shares, then it is assumed
that final call on these shares is demanded & recd before proceeding with redemption of these shares.
[2] If information of both fully & partly paid pref shares is provided, then, only fully paid shares are
redeemed.
CONCEPT 5 : REDEMPTION OF FULLY CALLED BUT PARTLY PAID-UP PREFERENCE SHARES
🟍 When calls-in-arrears is received by the company :
If the amount of unpaid calls is received 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.
Now, the company can proceed with redemption in the normal course.
🟍 In case of Forfeited Shares :
If the shareholders fail to pay the unpaid calls after getting proper notice, the BOD may decide to
forfeit and cancel these share sinstead of reissuing the forfeited shares.
This is because redemption of these shares is due immediately or in near future.
In this case, entry for forfeiture is passed as usual.
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
CAPITAL REDEMPTION RESERVE
Capital Redemption Reserve is a reserve created out of profit of the company, if the
preference shares are redeemed out of profit. The amount so credited will be equal to the
nominal value of the shares to be redeemed.
PROFITS AVAILABLE FOR CAPITAL REDEMPTION RESERVE
Usually, the revenue profits or the profits available for dividend can be used to
create the capital redemption reserve. They are:
General Reserve
Profits and Loss
Dividend Equalization
Fund Reserve Fund
Revenue portion of profit on sale of
investments Revenue portion of profit on sale
of fixed assets Workmen’s Accident
Compensation Fund Insurance Fund
PROFITS NOT AVAILABLE FOR CAPITAL REDEMPTION RESERVE
The capital profits or profits not available for dividend cannot be used for the
purpose of creating the capital redemption reserve. They are
General Reserve
Capital Redemption
Reserve Development
Rebate Reserve
Depreciation Reserve
Shares forfeited
account Profit prior to
incorporation Profit on
sale of fixed assets
Share premium
account
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
AMOUNT TO BE TRANSFERRED TO CAPITAL REDEMPTION RESERVE
Redeemable pref. shares Fresh issue of share face value = Amount to be
transferred to
Face value -- CRR
(or)
Redeemable pref. shares Actual amount received from fresh issue =Amount to be
transferred
face value -- to CRR
a/c.
MINIMUM FRESH ISSUE OF SHARES
Fresh issue=RPS face value +premium on redemption –divisible profit in the B/S – share premium in
the B/S – premium on fresh issue
JOURNAL ENTRIES FOR REDEMPTION OF PREFERENCE SHARES
Date Particulars LF Debit Credit
Rs. Rs.
WHEN THE RPS ARE NOT FULLY PAID
a) Redeemable pref. shares final call a/c Dr. xxx
To Redeemable pref. shares capital, xxx
a/c (Being the final call due)
b) Bank a/c Dr. xxx
To Redeemable pref. share final call, a/c xxx
(Being final call received)
WHEN THE RPS ARE FULLY PAID
i)For sale of investment etc.
a) If sold at profit:
Bank a/c Dr. xxx XX xxx
To Investment a/c To p & l a/c
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
b) If sold at loss:
Bank a/c Dr. xxx
P&L a/c Dr. xxx
To investment a/c
(Being the investment sold at loss)
ii)For issue of debentures:
Bank a/c Dr.
To debenture a/c xxx
To debenture premium a/c
(Being the debentures issued for augmenting the cash) Xxx xxx
For fresh issue of shares
Bank a/c Dr. xxx
To share capital a/c Xxx xxx
To share premium a/c
(Being the debentures premium)
Share premium a/c Dr. Xxx Xxx
P&L a/c Dr. xxx
General reserve a/c Dr.
To premium on redemption a/c (Being the premium on
redemption appropriated) xxx
General reserve a/c Dr. Xxx xxx
Profit & loss a/c Dr.
To capital redemption reserve a/c (Being the amount xxx
transferred to CRR)
Redeemable pref. share capital a/c Dr. Premium on Xxx xxx
redemption a/c Dr.
To redeem pref. shareholders a/c xxx
(Being the capital & premium transferred)
Redeem pref. shareholder a/c Dr. xxx
To bank a/c xxx
(Being the final payment made.)
Capital redemption reserve a/c Dr. xxx
General reserve a/c Dr.
Profit & loss a/c Dr.
To bonus to shareholders a/c (Being the bonus payable.)
Bonus to shareholders a/c Dr. xxx
To equity share capital a/c (Being the bonus shares xxx
issued)
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
CALCULATION OF FRESH ISSUE
1. From the following information find out how much minimum fresh issue is
necessary, if Redeemable preference share of Rs.2,00,000 is redeemed at 10%
premium.
Profit shown in the balance sheet.
Profit Rs.30,000; General reserve Rs.20,000, share premium Rs.8,000.
Dividend equalization fund Rs.50,000.
SOLUTION:
Fresh issue = 20,000+2,00,000*10/100-(30,000+20,000+50,000)-8,000
= 2,00,000+20,000-1,00,000-8,000
= 2,20,000-1,08000 = Rs.112000
1. The following are the details taken from the records of B ltd. On June 30, 2009:
Share capital
Equity shares (fully paid up) Rs. 6,00,000
Preference shares (fully paid up) 3,00,000
General reserve 2,00,000
P&l a/c (credit balance) 1,25,000
Share premium 50,000
The company decided to redeem the preference shares at a premium of 10% out
of its general reserve and p&l a/c .
Give journal entries relating to redemption of preference shares.
CORPORATE ACCOUNTING ADMIN
CORPORATE ACCOUNTING
SOLUTION:
Journal entries
Date Particulars LF Debit Credit
Rs. Rs.
General reserve a/c Dr. 2,00,000
P & l a/c Dr. 1,00,000
To capital redemption reserve a/c 3,00,000
(Being the amount transferred to CRR)
Share premium a/c Dr. 30,000
To premium on redemption a/c 30,000
(Being the premium on redemption a/c appropriated)
Preference shares capital a/c Dr. 3,00,000
Premium on redemption a/c Dr. 30,000
To redeem pref. share capital a/c 3,30,000
(Being share capital & premium transferred to RPS
holder a/c)
Redeemable pref. share holder a/c Dr. 3,30,000
To bank a/c
(Being the final payment made.)
3,30,000
CORPORATE ACCOUNTING ADMIN