ABHIJIT SARKAR REDEMPTION OF PREFERENCE SHARES
Question 1: CA Inter May 2018(10 Marks)/ICAI Study Mat. (Similar)
Dheeraj Įimited had 5,000, 10% 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) 40,000 Equity Shares of ₹ 10 each at par
(ii) 2,000 12% Debentures of ₹ 100 each.
The issue was fully subscribed and all accounts 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 Dheeraj Limited Journal Entries
Date Particulars L.F. Dr. (₹) Cr. (₹)
Bank A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being the issue of 40,000 equity shares of ₹ 10 each at
par as per Board’s resolution No……dated…..)
Bank A/c Dr. 2,00,000
To 12% Debentures A/c 2,00,000
(Being the issue of 2,000 Debentures of ₹ 100 each as
per Board’s Resolution No…..dated……)
- 10% Redeemable Preference Share Capital A/c Dr. 5,00,000
Premium on Redemption of Preference shares A/c Dr. 50,000
To Preference Shareholders A/c 5,50,000
(Being amount payable on redemption of preference
shares transferred to Preference Shareholders A/c)
Preference Shareholders A/c Dr. 5,50,000
To Bank A/c 5,50,000
(Being the amount paid on redemption of preference
shares)
Profit & Loss A/c Dr. 50,000
To Premium on Redemption of Pref. shares A/c 50,000
(Being Premium on redemption of preference shares
written off)
Profit & Loss A/c Dr. 1,00,000
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)
Amount to be transferred to CRR:
Nominal Value of preference shares to be redeemed = 5,00,000
Less: Nominal Value of shares issued = (4,00,000)
Amount = 1,00,000
Note: Proceeds of fresh issue of equity shares can be used for the purpose of redemption of
preference shares but not the proceeds of issue of debentures
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ABHIJIT SARKAR REDEMPTION OF PREFERENCE SHARES
Question 2: RTP Nov 2018
The following are the extracts from Balance Sheet of Meera Įtd. as on 31st December,
2021. Share capital: 60,000 Equity shares of ₹10 each fully paid – ₹ 6,00,000; 1,500 10%
Redeemable preference shares of ₹ 100 each fully paid – ₹1,50,000.
Reserve & Surplus: Capital reserve – ₹ 75,000; Securities premium – ₹ 75,000; General
reserve – ₹ 1,12,500; Profit & Įoss A/c – ₹ 62,500.
On 1st January 2022, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilisation of reserve. You are required to prepare necessary Journal
Entries including cash transactions in the books of the company.
Solution
Journal Entries
Date Particulars L.F. Dr. (₹) Cr. (₹)
- 10% Redeemable Preference Share Capital A/c Dr. 1,50,000
Premium on Redemption of Pref. Shares A/c Dr. 15,000
To Preference Shareholders A/c 1,65,000
(Being amount payable on redemption of preference
shares transferred to Preference Shareholders A/c)
Preference Shareholders A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being amount paid on redemption of pref. shares)
General Reserve A/c Dr. 1,12,500
Profit & Loss A/c Dr. 37,500
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)
Profit & Loss A/c Dr. 15,000
To Premium on Redemption of Pref. Shares A/c 15,000
(Being premium on redemption charged to P&L A/c)
Note: Securities premium & capital reserve cannot be utilized for transfer to Capital Redemption
Reserve
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ABHIJIT SARKAR REDEMPTION OF PREFERENCE SHARES
Question 3: ICAI Study Material
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 1.4.2021).
Undistributed reserve and surplus stood as: General Reserve ₹ 80,000; Profit and Įoss
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 utilizing 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 utilized.
Pass Journal Entries to give effect to the above arrangements.
Solution
Journal Entries
S.No. Particulars L.F. Dr. (₹) Cr. (₹)
Bank A/c Dr. 25,000
1 To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares @ 10 per share)
8% Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of Preference shares A/c Dr. 10,000
2 To Preference Shareholders A/c 1,10,000
(Being amount payable on redemption of preference
shares transferred to Preference Shareholders A/c)
Preference Shareholders A/c Dr. 1,10,000
3 To Bank A/c 1,10,000
(Being amount paid on redemption of pref. shares)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of Pref. shares A/c 10,000
4
(Being Premium on redemption of preference shares
written off)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000
5 Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c 75,000
(For transfer to CRR out of divisible profits)
Working Note:
Calculation of Number of Shares:
Face value of shares redeemed 1,00,000
Less: Profit available for distribution as dividend:
General Reserve: (80,000-20,000) 60,000
Profit and Loss (20,000 less 10,000 set aside for
10,000
premium payable on redemption of Pref. shares
Investment Allowance Reserve 5,000 (75,000)
25,000
No. of shares = 25,000/10 = 2,500 shares
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ABHIJIT SARKAR REDEMPTION OF PREFERENCE SHARES
Question 4: ICAI Study Material
The books of B Įtd. showed the following balance on 31st December, 2023:
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, 2022).
Undistributed Reserve and Surplus stood as: Profit and Įoss Account ₹ 80,000; General Reserve
₹ 1,20,000; Securities Premium Account ₹ 15,000 and Capital Reserve ₹ 21,000.
Preference shares are redeemed on 1st January, 2024 at a premium of ₹ 2 per share. The
whereabouts of the holders of 100 shares of ₹ 10 each fully paid are not known.
For redemption, 3,000 equity shares of ₹ 10 each are issued at 10% premium. At the same
time, 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. (Ignore date column)
Solution
Journal Entries
S.No. Particulars L.F. Dr. (₹) Cr. (₹)
Bank A/c Dr. 33,000
To Equity Share Capital A/c 30,000
1
To Securities Premium A/c 3,000
(Being the issue of 3,000 Equity Shares @ 11 per share)
12% Preference Share Capital A/c Dr. 1,80,000
Premium on Redemption of Preference shares A/c Dr. 36,000
2 To Preference Shareholders A/c 2,16,000
(Being amount payable on redemption of preference
shares transferred to Preference Shareholders A/c)
Preference Shareholders A/c Dr. 2,14,800
3 To Bank A/c 2,14,800
(Being amount paid on redemption of pref. shares)
Profit & Loss A/c Dr. 36,000
To Premium on Redemption of Pref. shares A/c 36,000
4
(Being Premium on redemption of preference shares
written off)
General Reserve A/c Dr. 1,20,000
Profit & Loss A/c Dr. 30,000
5
To Capital Redemption Reserve A/c 1,50,000
(For transfer to CRR out of divisible profits)
Capital Redemption Reserve A/c Dr. 1,20,000
6 To Bonus to Shareholders A/c 1,20,000
(For CRR utilized for bonus issue)
Bonus to Shareholders A/c Dr. 1,20,000
7 To Equity Share Capital A/c 1,20,000
(For bonus shares allotted)
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ABHIJIT SARKAR REDEMPTION OF PREFERENCE SHARES
Question 5: ICAI Study Material
The Balance Sheet of XYZ Įtd. as at 31st December, 2021 inter alia includes the following:
50,000, 8% Preference Shares of ₹ 100 each, ₹ 70 paid up 35,00,000
1,00,000 Equity Shares of ₹ 100 each fully paid up 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, 2022 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 & the balance on 1st January, 2023. The issue was fully
subscribed & allotment made on 1st March, 2022. The money due on allotment were received by
31st March, 2022.
The preference shares were redeemed after fulfilling the necessary conditions of Section 55 of
the Companies Act, 2013.
You are asked to pass necessary Journal Entries (Ignore date column).
Solution
Journal Entries
S.No. Particulars Amount Amount
8% Preference Share Final Call A/c Dr. 15,00,000
To 8% Preference Share Capital A/c 15,00,000
1
(For final call made on preference shares @ ₹ 30 each to
make them fully paid up)
Bank A/c Dr. 15,00,000
2 To 8% Preference Share Final Call A/c 15,00,000
(For receipt of final call money on preference shares)
Bank A/c Dr. 10,00,000
To Equity Share Application A/c 10,00,000
3
(For receipt of application money on 50,000 equity
shares @ ₹ 20 per share)
Equity Share Application A/c Dr. 10,00,000
4 To Equity Share Capital A/c 10,00,000
(For capitalization of application money received)
Equity Share Allotment A/c Dr. 17,50,000
To Equity Share Capital A/c 12,50,000
5 To Securities Premium A/c 5,00,000
(For allotment money due on 50,000 equity shares @
₹ 35 per share including a premium of ₹ 10 per share)
Bank A/c Dr. 17,50,000
6 To Equity Share Allotment A/c 17,50,000
(For receipt of allotment money on equity shares)
8% Preference Share Capital A/c Dr. 50,00,000
Premium on Redemption of Preference Shares A/c Dr. 2,50,000
7
To Preference Shareholders A/c 52,50,000
(Being amount due to preference shareholders)
General Reserve A/c Dr. 2,50,000
8 To Premium on Redemption A/c 2,50,000
(Writing off premium on redemption of preferenceshares)
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ABHIJIT SARKAR REDEMPTION OF PREFERENCE SHARES
General Reserve A/c Dr. 27,50,000
To Capital Redemption Reserve A/c 27,50,000
9 (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)
Preference Shareholders A/c Dr. 52,50,000
10 To Bank A/c 52,50,000
(For amount paid to preference shareholders)
Question 6: ICAI Study Material
With the help of details in above question and further assuming that the Preference
Shareholders holding 2,000 shares fail to make the payment for the final call made under
Sec 55, you are asked to pass the necessary Journal Entries assuming that the shares in
default are forfeited after giving proper notice. (Ignore date column).
Solution
Journal Entries
S.No. Particulars Amount Amount
8% Preference Share Final Call A/c Dr. 15,00,000
To 8% Preference Share Capital A/c 15,00,000
1
(For final call made on preference shares @ ₹ 30 each to
make them fully paid up)
Bank A/c Dr. 14,40,000
Calls in Arrears A/c 60,000
2
To 8% Preference Share Final Call A/c 15,00,000
(For receipt of final call money on preference shares)
Bank A/c Dr. 10,00,000
To Equity Share Application A/c 10,00,000
3
(For receipt of application money on 50,000 equity
shares @ ₹ 20 per share)
Equity Share Application A/c Dr. 10,00,000
4 To Equity Share Capital A/c 10,00,000
(For capitalization of application money received)
Equity Share Allotment A/c Dr. 17,50,000
To Equity Share Capital A/c 12,50,000
5 To Securities Premium A/c 5,00,000
(For allotment money due on 50,000 equity shares @
₹ 35 per share including a premium of ₹ 10 per share)
Bank A/c Dr. 17,50,000
6 To Equity Share Allotment A/c 17,50,000
(For receipt of allotment money on equity shares)
8% Preference Share Capital A/c Dr. 48,00,000
Premium on Redemption of Preference Shares A/c Dr. 2,40,000
7 To Preference Shareholders A/c 50,40,000
(For amount payable to preference shareholders on
redemption at 5 % premium)
General Reserve A/c Dr. 2,40,000
8 To Premium on Redemption A/c 2,40,000
(Writing off premium on redemption of preferenceshares)
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ABHIJIT SARKAR REDEMPTION OF PREFERENCE SHARES
General Reserve A/c Dr. 25,50,000
To Capital Redemption Reserve A/c 25,50,000
9 (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)
Preference Shareholders A/c Dr. 50,40,000
10 To Bank A/c 50,40,000
(For amount paid to preference shareholders)
8% Preference Share Capital A/c Dr. 2,00,000
To Calls in Arrears A/c 60,000
11
To Share Forfeited A/c 1,40,000
(For 2,000 shares forfeited)
Share Forfeited A/c Dr. 1,40,000
12 To Capital Reserve A/c 1,40,000
(For forfeited amount transferred to capital reserve)
Question 7: (CA Inter May 2019)
The Summarized Balance Sheet of Clean Įtd. as on 31st March, 2022 is as follows:
Particulars ₹
EQUITY AND ĮIABIĮITIES
1. Shareholders’ funds
Share capital 5,80,000
Reserves and Surplus 96,000
2. Current liabilities
Trade Payables 1,13,000
TOTAĮ 7,89,000
ASSETS
1. Non Current Assets
Property, Plant & Equipment & Intangible Assets
Property, Plant & Equipment 6,90,000
Non Current Investments 37,000
2. Current Assets
Cash and cash equivalents (bank) 62,000
TOTAĮ 7,89,000
The Share Capital of the company consists of ₹ 50 each Equity shares of ₹ 4,50,000 and ₹
100 each 8% Redeemable Preference Shares of ₹ 1,30,000 (issued on 1.4.2019).
Reserves and Surplus comprises statement of profit and loss only. In order to facilitate the
redemption of preference shares at a premium of 10%, the Company decided:
(a) to sell all the investments for ₹ 30,000.
(b) to finance part of redemption from company funds, subject to, leaving a Bank balance of ₹
24,000.
(c) to issue minimum equity share of ₹ 50 each at a premium of ₹ 10 per share to raise
the balance of funds required.
You are required to pass Journal Entries to record the above transactions.
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ABHIJIT SARKAR REDEMPTION OF PREFERENCE SHARES
Solution
Journal Entries
S.No. Particulars L.F. Dr. (₹) Cr. (₹)
Bank A/c Dr. 75,000
1 To Share Application A/c 75,000
(For application money received)
Share Application A/c Dr. 75,000
To Equity Share Capital A/c 62,500
2
To Securities Premium A/c 12,500
(For transfer of application money received)
8% Preference Share Capital A/c Dr. 1,30,000
Premium on Redemption of Pref. shares A/c Dr. 13,000
3
To Preference Shareholders A/c 1,43,000
(Being amount due to Pref. Shareholders A/c)
Bank A/c Dr. 30,000
Profit & Loss A/c Dr. 7,000
4
To Investments A/c 37,000
(Being investments sold at loss)
Preference Shareholders A/c Dr. 1,43,000
5 To Bank A/c 1,43,000
(Being amount paid on redemption of pref. shares)
Profit & Loss A/c Dr. 13,000
6 To Premium on Red. of Pref. shares A/c 13,000
(Being Premium on redemption written off)
Profit & Loss A/c Dr. 67,500
To Capital Redemption Reserve A/c 67,500
(For transfer to CRR out of divisible profits an
7
amount equivalent to excess of nominal value of
preference shares over proceeds i.e., 1,30,000 -
62,500)
Working Note:
Calculation of Number of Shares:
Amount payable on redemption (1,30,000 + 10% Premium) 1,43,000
Less: Sale price of investment (30,000)
1,13,000
Less: Available bank balance (62,000 - 24,000) (38,000)
Funds required from fresh issue 75,000
No. of shares = 75,000/60 = 1,250 shares
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