01 Accounting for Share Capital and Debentures

Chapter 1: Accounting for share capital and Debentures

Concept of Share and Share Capital
The total capital of a company is split into small equal parts. Each part therefore
represents a ‘share of the ownership’ of the company. Investors subscribing to the same
becomes the owner of the company and is known as shareholders or members of the
company. Each such part of capital is sold in form of a security or instrument known as
Share and the capital procured in the process is called Share Capital.

Types of Shares

On the basis of the rights enjoyed by the shareholders, shares can be divided into two
categories as follows:
a. Preference Shares: These are shares in case of which the shareholders enjoy certain

preferential right to receive dividend and repayment of capital in the event of liquidation

of the company.

b. Equity Share: These are shares that rea not preference shares. In other words, here,
the shareholders do not enjoy the above two preferential rights.

Types of Share Capital

Based on the type of shares used to raise the capital, share capital can be either Preference

Share Capital or Equity Share Capital.

Again, on the basis of disclosure in the Balance Sheet, Share Capital is categorized as

follows:

a. Authorized Share Capital: It is the amount of share capital that a company is permitted

to issue. It is mentioned in the Capital Clause of the Memorandum of Association of the

company. Authorized Share Capital is also known as Nominal Capital.

b. Issued Share Capital: It represents the portion of the Authorized Capital that has been
offered by a company for subscription.
c. Subscribed Capital: It is that part of the issued capital for which applications are
received from the public.
d. Called up Capital: It is that part of the subscribed capital that has been called up by

the company for payment.

e. Paid up Capital: The part of the called-up capital which is offered and is actually paid

by the members.
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f. Reserved Capital: It is the portion of the uncalled capital of a company that is called-
up for payment only in the event of liquidation of the company.

Various Types of Share Issue

a. Public Issue: Here, the shares are offered directly to the investors for subscription.

Accordingly, any person may become the shareholder of the company.

b. Private Placement: Here, the shares are issued by the company to a small number of
selected investors preferably the financial institutions viz. large banks, mutual funds,
insurance companies, pension funds etc.
c. Rights Issue: Here, the shares are offered to the existing shareholders of the company

at a price below the market price on the basis of their proportionate shareholding.

d. Bonus Issue: Here, the shares are offered to the existing shareholders of the company
without any consideration.
e. Offers for sale: An offer for sale (OFS) is a mechanism that allows promoters to reduce
their holdings in listed companies transparently. These shares sold by the promoters are
offered for sale directly to the public through a bidding process.

Issue Price of Shares

The price at which the shares are offered for issue by a company may be either equal to,

or above, or below the face value. Accordingly, shares can be issued at par, or at a

premium, or at a discount.

a. Issue at Par: When share is issued at a price equal to its face value, it is called issue at
Par.
b. Issue at a Premium: When share is issued at a price higher than its face value, it is

called issue at Premium.

c. Issue at a Discount: When share is issued at a price lower than its face value, it is called

issue at Discount.

Stages of Collection of Issue Price When Shares Are Issued in Instalments

Under Fixed Price Method, normally the proceeds are collected through the following
stages.
a. Application Money: It is the part of the issue price which is to be submitted along with
the application for subscription.
b. Allotment Money: It is the money payable after shares are initially allotted.

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c. Call Money: It is collected in subsequent instalment after collecting the allotment money.
There may be multiple calls.

Journal entries (when shares issued in installments at par)

1. Bank A/c Dr.
To share Application A/c
(being share application money received)

2. Share application A/c Dr.

To share capital A/c

(being share allotted to shareholders)

3. Share allotment A/c Dr.

To share capital A/c

(being share allotment due)

4. Bank A/c Dr.

To share allotment A/c

(being amount received against share allotment)

5. Share 1st call A/c Dr.

To share capital A/c

(being share 1st call due)

6. Bank A/c Dr.

To share 1st call A/c

(being 1st call amount received)

Journal entries (when shares are issued in lump sum at par)

1. Bank A/c Dr.

To share application and allotment A/c
(being amount received for issue of shares)

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2. Share application and Allotment A/c Dr.

To share capital A/c

(being share allotted to shareholders)

Journal entries (when shares issued in installments at premium)

1. Bank A/c Dr. (capital + SPR)
To share Application A/c
(being share application money received)

2. Share application A/c Dr.

To share capital A/c (capital)

To securities premium reserve A/c (SPR)
(being share allotted to shareholders)

3. Share allotment A/c Dr.

To share capital A/c (capital)

To securities premium reserve A/c (SPR)

(being share allotment due)

4. Bank A/c Dr.

To share allotment A/c

(being amount received against share allotment)

5. Share 1st call A/c Dr.

To share capital A/c (capital)

To securities premium reserve A/c (SPR)

(being share 1st call due)

6. Bank A/c Dr.

To share 1st call A/c

(being 1st call amount received)

Note: Shares can never be issued at discount i.e. below its nominal/face/par value

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Nominal Value/Face value/Par value: it means the value of share mentioned in share
certificate.
Nominal Value

Note: Initial Public Offer is only approved when minimum 90% of issued capital is
subscribed other IPO is cancelled.

Note: If question does not specify the installment in which premium is to be received then
assume it to be received with allotment.

Note: if premium is given in % then apply the % on face value of shares to get the premium

amount.

Calls in arrears
Amount called up by the company but not yet paid by the shareholders.

Journal entries for calls in arrears

Share allotment A/c Dr.

To share capital A/c

(being share allotment due)

Bank A/c Dr.

Calls in arrears A/c Dr.

To share allotment A/c

(being amount received against share allotment and one shareholder not able to pay the

amount of allotment due on _____ No. of shares)

Note: Calls in arrears is not possible in case of share application.

Calls in advance
when the shareholder paid the amount of due on shares in advance.

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Journal entries for calls in advance

Share allotment A/c Dr.
To share capital
(being share allotment due)

Bank A/c Dr.

To share allotment A/c
To calls in advance A/c

(being amount received against share allotment and one share holder paid the amount

due on calls along with allotment)

Over subscription
When the shares demanded by potential shareholders is greater than the shares offered
for sale by the company then it is known as over subscription.

Under subscription
When the shares demanded by potential shareholders is less than the shares offered for
sale by company then it is known as under subscription.

In case of oversubscription company have 3 options:

1. Reject the excess application received

2. Pro rata allotment of shares

3. Rejection + pro rata

Note: when the question is silent in case of pro rata allotment adjust the excess money

received on application towards sum due till allotment and refund the surplus funds above

allotment.

Note: It is assumed in silent cases that excess money is first adjusted towards sum due on

share capital then securities premium reserve.

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Table for pro rata Allotment Questions

Applied Allotted Money received Share capital Excess Adjustment

Group 1
Group 2
G 3/Bal. Fig.
Total

Interest on Calls-in-Arrear
Interest on calls-in-arrear may be collected by the directors from the shareholders, if
the Articles of Association so permit. In the absence of any specification, the company
needs to follow ‘Table F ’ according to which interest @ 10% p.a. from the due date to the
date of actual payment is payable by the shareholders unless the same is waived by the
Board. The accounting entries for the same are as follows:
1. For interest due

Shareholders A/c ………………Dr.

To Interest on Calls-in-Arrear A/c

2. On realization of interest
Bank A/c ……………………Dr.
To Shareholders A/c

3. For transferring interest to Profit and Loss Account

Interest on Calls-in-Arrear A/c ……………. Dr.

To Profit and Loss A/c

Interest on Calls-in-Advance
Interest may be paid by a company on calls-in-advance is the Articles of Association so
provide. In the absence of any specification, the company needs to follow ‘Table F’
according to which interest @ 12% p.a. from the date of receipt to the due date of the
concerned installment is payable. The accounting entries for the same are as follows:
1. For interest due on calls-in-advance

Interest on Calls-in-Arrear A/c ………………Dr.

To Shareholders A/c

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2. On payment of interest

Shareholders A/c ……………………Dr.

To Bank A/c

3. For transferring interest to Profit and Loss Account

Profit and Loss A/c ……………. Dr.

To Interest on Calls-in-Arrear A/c

Forfeiture of shares

when due to nonpayment of any call money due on shares company decided to cancel
the shares on which is amount is overdue it is known as forfeiture of shares.

Reissue of shares
when the forfeited shares are sold it is known as reissue of shares.

Forfeited shares can be issued at discount, but the amount of discount is restricted to
balance available in share forfeited A/c for respective shares.
After reissue of shares if any balance left in share forfeited A/c it will be transferred to
capital reserve because it is capital profit.

Maximum discount on reissue = balance in share forfeited A/c

Note: If question asked minimum amount in which shares can be reissued then calculate

as follows = nominal value of shares – maximum discount on reissue

Journal entries for forfeiture and reissue

1. For forfeiture of shares

Share capital A/c Dr.

Securities premium reserve A/c Dr.
To calls in arrears A/c

To share forfeited A/c

(being ______ No. of shares forfeited because of nonpayment of amount due on shares)

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2. Bank A/c Dr.
Share forfeited A/c Dr.
To share capital A/c

To Securities premium reserve A/c

(being forfeited shares reissued for ____ Rs as _____ paid up)

3. Share forfeited A/c Dr.

To capital reserve A/c
(being amount left of share forfeited t/s to capital reserve A/c)

Note: Language -> paid up

Called up used for amount of share capital at the time
Fully paid up of reissue

Note: If all the forfeited shares are not reissued then find out the proportionate amount
of share forfeited A/c for the portion of share reissued.

= share forfeited x No. of share reissued

No. of shares forfeited

Issue of shares for consideration other than cash

When the shares are issued to the vendor for supply of asset or to acquire any running
business it is known as issue of shares for consideration other than cash.

Journal entries for consideration other than cash

1. Asset A/c Dr.

To vendor A/c
(being asset purchased)

2. Vendor A/c Dr.

To share capital A/c

To SPR A/c

(being shares are issued to vendor for asset purchase)

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If shares are issued to Promoters for their services, the following entry will be passed

Goodwill A/c ………………………… Dr.

To Share Capital A/c

Similarly, if shares are issued to Underwriters for underwriting commission, the

following entry will be passed
Underwriters A/c …………………………. Dr.
To Share Capital A/c

If shares are issued for running business acquisition

1. Asset A/c Dr.

Goodwill A/c Dr. (B/f)
To liabilities A/c

To vendor A/c (purchase consideration)

To capital Reserve A/c (B/f)
(being running business acquired)

Value received = Assets – Liabilities

If purchase consideration > value received, then the difference amount Is termed as

goodwill.

If value received > purchase consideration, then the difference amount is termed as

capital reserve.

2. Vendor A/c Dr.

To share capital
To SPR A/c (if shares are issued at premium)

Purchase consideration = Amount paid to vendor in any form like bank, shares, bills
payable, drafts, etc.

Note: if purchase consideration is missing in the question we have to calculate it.

(Question 22 of sheet)

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Note: if no proper information is given in question regarding purchase consideration,
then purchase consideration = assets – liabilities and in that case, there is no goodwill
and capital reserve. (Question 21 of sheet)

Expense on Issue of Shares

The common expenses associated with share issue are printing charges of prospectus
and application forms, brokerage and commission, underwriting expenses, legal charges
etc. These are written off against the profits of the company in the same year or over
the years depending on the availability of profits and based on the pattern of benefit
derivable from the same.
The accounting entries are:
1. Upon expenditure incurred

Share Issue Expenses A/c …………. Dr.

To Bank A/c
2. When the expenses are written off

Profit and Loss A/c …………………. Dr.

To Share Issue Expenses A/c

Note: Accordingly, in the Statement of Profit and Loss, the same is included under the

head Other Expense.

Follow-on public offer (FPO)

An issuance of stock following a company’s Initial Public Offer is called a Follow-on

Public Offer. A company opts for the FPO route when it wishes to raise additional

capital from the shareholders and new investors. An FPO is essentially a stock issue of

supplementary shares made by a company that is already publicly listed and has gone

through the IPO process.

Difference between Initial Public Offer and Follow on Public Offer

a. IPO is made when company seeks to raise capital via public investment while FPO is
subsequent public contribution.
b. First issue of shares by the company is made through IPO when company first

becoming a publicly traded company on a national exchange while Follow on Public

Offering is the public issue of shares for an already listed company.

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Rights Issue of Shares

“rights issue” means an offer of specified securities by a listed issuer to the shareholders
of the issuer as on the record date fixed for the said purpose.
Accordingly, where at any time, a company having a share capital proposes to increase
its subscribed capital by the issue of further shares, such shares shall be offered to
persons who, at the date of the offer, are holders of equity shares of the company in
proportion, as nearly as circumstances admit, to the paid-up share capital on those
shares by sending a letter of offer.
Such issue of shares shall be done subject to the following conditions:

a. the offer shall be made by notice specifying the number of shares offered;

b. The time limit shall be not less than 15 days and shall be not exceeding thirty days
from the date of the offer within which the offer;
c. unless the articles of the company otherwise provide, the offer aforesaid shall be

deemed to include a right exercisable by the person concerned to renounce the shares

offered to him or any of them in favor of any other person;

d. after the expiry of the time specified in the notice aforesaid, or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the
shares offered, the Board of Directors may dispose of them in such manner which is not
dis-advantageous to the shareholders and the company.

Cum right price = market price per share before right issue

Ex right price/theoretical market price = market price after right issue

= no of shares before right issue x M.P. of share before right issue + no of right

shares x price of right shares

No of shares before right issue + no of right shares

Value of right = M.P. Before right issue – Ex Right price

Journal entries for right issue

1. Bank A/c Dr.

To share application A/c

2. Share application A/c Dr.

To share capital A/c
To SPR A/c (if issued on premium)

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Bonus Issue of Shares

Bonus shares are shares which are issued by a company free of cost to its existing
members on a pro-rata basis. Established companies that have already built-up
reserves sometimes decides to capitalize a part of these reserves by issuing bonus shares
to existing shareholders, without requiring the shareholders to pay any consideration.
Since bonus shares requires capitalization of reserves, it leads to decrease in Reserve &
Surplus and increase in the issued capital but does not bring any change in cash flow
and net worth.

Ways to capitalize profits or reserves

a. by paying up amounts unpaid on existing partly paid shares so as to make them fully

paid-up shares, or

b. by issuing fully paid bonus shares to the existing members.

Companies Act, 2013 on Issue of Bonus Shares

As per Section 63 of the Companies Act, 2013, provisions relating to bonus issue are as
follows:
(1) A company may issue fully paid-up bonus shares to its members, in any manner

whatsoever, out of —

(i) its free reserves;

(ii) the securities premium account; or

(iii) the capital redemption reserve account:

Provided that no issue of bonus shares shall be made by capitalising reserves created by

the revaluation of assets.

Meaning of Free Reserves

As per Sec 2(43) of the Companies Act, 2013, “Free Reserves” mean such reserves

which, as per the latest audited balance sheet of a company, are available for

distribution as dividend.

Thus, the following are excluded from free reserves:

a. Any amount representing unrealized gains, notional gains or revaluation of assets,

where shown as a reserve or otherwise, or

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 01 Accounting for Share Capital and Debentures
b. Any change in carrying amount of an asset or of a liability recognized in equity,
including surplus in Profit and Loss Account on measurement of the Asset or the
Liability at Fair Value.

Conversion of partly paid-up share to fully paid-up shares

A company may utilize its reserves to convert its partly paid shares into fully paid

without asking the shareholders to contribute further against the call money due. This

may be termed as bonus dividend. Unlike issue of fully paid bonus shares, the sources for

bonus dividend shall be, however, free reserves only as Section 52 of Companies Act,

2013 allows utilization of ‘Securities Premium’ for issuing fully paid bonus shares only.
Similarly, Section 55(4) of the Act prohibits the use of ‘Capital Redemption Reserve’ for
purposes other than issue of fully paid-up bonus shares.
Note: Capital Reserve realized in cash can be a source of bonus dividend as well as issue

of fully paid-up bonus shares.

The securities premium account may be applied by the company

(a) towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable

preference shares or of any debentures of the company; or

(e) for the purchase of its own shares or other securities under section 68.

Journal entries for bonus to convert partly paid-up shares to fully paid up

1. Free reserves A/c Dr.

To bonus to shareholders A/c

2. Share call A/c Dr.

To share capital A/c

3. Bonus to shareholders A/c Dr.

To share call A/c

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Journal entries for issue of fully paid up bonus shares

SPR A/c Dr.

CRR A/c Dr.

Free Reserve A/c Dr.

To bonus to shareholders A/c

Bonus to shareholders A/c Dr.

To share capital A/c
To SPR A/c

Note: if dividend is given on percentage, then calculate dividend on nominal value of

issued fully paid-up shares.

Note: if authorized capital is not sufficient to issue bonus shares then increase the
authorized capital as per requirements.

Note: How to calculate equivalent fully paid-up shares from partly paid up shares

Equivalent fully paid-up shares = No of shares x paid up value

Nominal value per share

Example: 100000 equity share of Rs 10 each, 6 paid up

Equivalent fully paid-up shares = 100000 x 6 = 60000 shares fully paid up

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100000 shares, 6 paid up = 60000 shares, 10 paid up

Issue of Sweat Equity Shares

When a company issue shares to its employees or directors for providing knowhow,
intellectual properties etc.,
such an issue of shares is termed as issue of sweat equity shares.

Accounting for sweat equity shares

Case 1: when sweat equity shares is issued for cash against any consideration received
from employees (employees provided services to company)

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Bank A/c Dr. (amount paid by employees)

Intellectual property A/c Dr. (value of service provided by employees)

To equity share capital A/c (nominal value of shares issued)

To SPR A/c (if any)

Case 2: Issue of sweat equity shares without cash for consideration

Intellectual property A/c Dr. (service provided by employees)
Employees/ Directors compensation expenses A/c Dr. (difference)
To equity share capital A/c (nominal)
To SPR A/c

Case 3: issue of sweat equity shares without cash, without consideration

Employees/directors compensation expenses A/c Dr.
To equity share capital A/c (Nominal)
To SPR A/c (if any)

Employees stock option plan

When company offers to its employes an option to buy company’s equity shares at a
predetermined price on a future date after satisfying any particular condition it is
known as employees stock option plans.

Important Terminologies
a. Option: A right (but not the obligation) which is granted to an employee pursuant to
an ESOP to buy company’s shares on the future date at a predetermined price.
b. Grant: It refers to the issuance of option to the employee under an ESOP.

c. Vesting: It refers to the requirement to be satisfied by the employee to apply the

right to exercise the option. Conditions may include certain period of service, meeting

any performance standard etc.

d. Vesting Period: It is the period during which the vesting has been granted to the

employee under the ESOP.

e. Exercise: It is the act of subscribing the shares under ESOP.

f. Exercise Period: The time period within which the option shall be exercised.
g. Exercise Price: It is the price payable to subscribe the shares under ESOP.
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h. Intrinsic Value: It is the excess of market price over the exercise price of shares.

Fair Value per option

Alternatively named as
Market price per option

Accounting for ESOPs

Case 1: when the vesting period is less than or equal to 1 year

1. Bank A/c Dr. (no of options x price per option paid by employees)
Employee stock option expenses A/c Dr. (no of options x intrinsic value)
To equity share capital (No of options x nominal value)
To securities premium reserve A/c

2. P & L A/c Dr.

To employee’s stock option expenses, A/c

Case 2: when vesting period is more than 1 year. In this case we have to spread
employees stock option expenses over the vesting period

1. Recognition of ESOPs expenses at every year end

Employees stock option expenses A/c Dr.

To employee’s stock option outstanding A/c

P & L A/c Dr.

To employee stock option expenses, A/c

Intrinsic value = market price per share – exercise price per share

Expenses to be booked every year =

(No of options expected to be vested x I. Value) x years expired - expenses already

Total vesting period booked

2. During vesting period if expenses booked > expenses required to be booked, then

pass reverse entry

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Employee stock option outstanding A/c Dr.

To employee stock option expenses, A/c

3. Exercise of stock options

Bank A/c Dr.

Employees stock option outstanding A/C Dr.
To equity share capital
To securities premium reserve A/c

4. Lapse of unexercised option

Employee stock option outstanding A/c Dr.
To general reserve A/c

Presentation under financial statements

1. The amount of Employees Stock Option Expenses will be reflected under the sub-

head Employee Benefit Expenses in the Statement of Profit and Loss.

2. Balance of Employee Stock Option Outstanding A/c should be shown under

Reserve and Surplus in the Balance Sheet.

Note: if due to post vesting conditions the estimated fair market value of share is
different from current market value then we will consider estimated market price
given in the question to calculate intrinsic value.

Employee Stock Purchase Scheme

Employee stock purchase scheme refers to a scheme under which the company offers

shares to employees as part of a public issue or otherwise.

Fair value of ESPS = Employee compensation expenses -> employees benefit expenses

Fair value of ESPS = no of shares to be issued x (fair value per share – issue price)

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Journal entries for ESPS

Bank A/c Dr.

Employee compensation expenses A/c Dr.

To equity share capital A/c
To SPR A/c

P & L A/c Dr.

To employee compensation expense A/c

Buy back of shares

A share buyback is when companies pay shareholders to buy back their own shares,

cancel them and, ultimately, reduce share capital.

A company may buy-back its equity shares at par or at a premium or even at a

discount. However, in most of the cases, buy-backs are found to be made at premium.

As per Section 68 of the companies Act,

1. a company may purchase its own shares or other specified securities hereinafter

referred to as buy-back) out of—

(i) its free reserves;

(ii) the securities premium account; or

(iii) the proceeds of the issue of any shares or other specified securities:

Provided that no buy-back of any kind of shares or other specified securities shall be
made out of the proceeds of an earlier issue of the same kind of shares or same kind of
other specified securities.
2. The buyback must be authorized by its articles.

3. A special resolution must be passed at a general meeting of the company

authorizing the buy-back unless –

(i) the buy-back is, ten per cent. or less of the total paid-up equity capital and

free reserves of the company and

(ii) such buy-back has been authorized by the Board by means of a resolution
passed at its meeting
4. All the shares or other specified securities for buy-back must be fully paid-up.

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5. No offer of buy-back under section 68(2) shall be made within a period of one
year reckoned from the date of the closure of the preceding offer of buy-back, if
any.
6. Every buy-back shall be completed within a period of one year from the date of
passing of the special resolution, or as the case may be, the resolution passed by
the Board.
7. Where a company buys back its own shares or other specified securities, it shall

extinguish and physically destroy the shares or securities so bought back within

seven days of the last date of completion of buy-back.

8. Where a company completes a buy-back of its shares or other specified securities

under section 68, it shall not make a further issue of the same kind of shares or
other securities including allotment of new shares under clause (a) of sub-section
(1) of section 62 or other specified securities within a period of six months except
by way of a bonus issue or in the discharge of subsisting obligations such as

conversion of warrants, stock option schemes, sweat equity or conversion of preference

shares or debentures into equity shares.

9. A company shall, after the completion of the buy-back under this section, file with
the Registrar and the Securities and Exchange Board a return containing such
particulars relating to the buy-back within thirty days of such completion, as may
be prescribed. This is, however, not required for unlisted companies.

As per Section 69 of the Act,

1. Where a company purchases its own shares out of free reserves or securities
premium account, a sum equal to the nominal value of the shares so purchased
shall be transferred to the capital redemption reserve account and details of such

transfer shall be disclosed in the balance sheet.

2. The capital redemption reserve account may be applied by the company, in paying

up unissued shares of the company to be issued to members of the company as

fully paid bonus shares.

The sources for payment of premium on buy-back are –

a. Securities Premium Account; or

b. Other Free Reserves

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Note: ‘Free Reserves’ include Surplus of Statement of Profit and Loss, General Reserve,
Reserve Fund, Dividend Equalization Reserve, Capital reserve (if realized) and free
portion of Workmen Compensation fund etc. Hence, it does not include Securities
Premium, Capital reserve (unrealized), Reevaluation reserve, Capital redemption
Reserve and any other statutory reserve.

Accounting Entries for Buy-back

1. Due entry for buy-back

Share Capital A/c …………………Dr.

Premium on Buy-back A/c ………. Dr. (if at premium)
To Shareholders A/c
To Gain on Buy-back A/c (if at discount)

2. Payment made for buy-back

Shareholders A/c …………………….Dr.
To Bank A/c
3. Provision for premium on buy-back

Securities Premium A/c ……………….Dr.

Free Reserves A/c …………………..Dr.

To Premium on Buy-back A/c
4. Transfer of gain on buy-back (if any)

Gain on Buy-back A/c ……………Dr.

To Capital Reserve A/c

5. Transfer to Capital Redemption Reserve
Securities Premium A/c ……………….Dr.

Free Reserves A/c …………………..Dr.

To Capital Redemption Reserve A/c

6. Expenses on Buy-back

Expenses on Buy-back A/c ………….Dr.

To Bank A/c

7. Transfer of expense on buy-back

Profit and Loss A/c ……………Dr.

To Expenses on Buy-back A/c

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8. On sale of any investments for buy back

Bank A/c Dr.

Loss on sale of investment A/c Dr.
To investment A/c

To Gain on sale of investment A/c

Determination of quantum for buy-back. Sec. 68 of Company Act, 2013

The maximum number of shares to be bought back is determined as the least number of
shares arrived by performing the following tests:
(1) Share outstanding test
(2) Resource test
(3) Debt-Equity Ratio test.
The tests are discussed below:

(1) Share Outstanding test:

(a) Ascertain the number of shares

(b) 25% of the number of shares is eligible for buy back with the approval of shareholders.
(2) Resource test:
(a) Ascertain shareholders’ fund (Aggregate Paid-up Capital + Free Reserves)

(b) No. of shares held for buyback = 25% of Shareholders funds/ Buy-back price
(3) The number of shares to be bought back should be such that the debt-equity ratio
does not exceed 2:1.
The number of shares to be bought-back will be the least of the above three.

Issue and Redemption of Debentures

Share capital is the primary source of finance for every company. However, companies

are often found to raise debt capital for additional financing requirement. A company

raises the debt capital either through institutional financing i.e., loans from banks and

other financial institutions or may issue structured debt instruments (such as debentures

and bonds). Debentures happens to be the most popular debt instruments issued by a

company to raise borrowed capital.

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Following are the features of debentures as a debt instrument.

a. Debenture is a financial instrument used to raise debt capital.

b. It is written document issued under the seal of the company.
c. It normally carries a rate of interest payable at regular interval. Such rate is termed
as coupon rate.
d. Debenture may be redeemable or irredeemable.

Types of Debentures
a. Redeemable vs. Irredeemable Debentures

Redeemable Debentures are debentures that are repayable by a company at the end of
the pre-specified time period. Irredeemable debentures are not repayable during the life-
time of the company.
b. Secured vs. Unsecured Debentures

Secured Debentures are those debentures which create a charge on the assets of the
company. These are also called Mortgage Debentures. Unsecured debentures are issued
without the support of a collateral security. These are also called Naked Debentures.
c. Convertible vs. Non-convertible Debentures

Debentures which are convertible into other securities viz. equity shares, preference shares

or new debentures after a specified period are referred to as Convertible Debentures.

They may fully convertible or partly convertible. On the other hand, Debentures which

are not convertible into any other security are referred to as Non-convertible Debentures.

Note: In all the above cases, the debentures may be issued at par or at premium or at
discount to the issue price.

Accounting for Issue of Debentures – General Cases

Debentures can be issued at par or at premium or at discount. Moreover, the money can

be collected in lump sum or in instalments. The accounting entries for issue of debentures

are as follows:

a. Debentures issued in lump sum

(i) On receipt of application money
Bank A/c …………………………………Dr.

To Debenture Application A/c

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 01 Accounting for Share Capital and Debentures
(ii) For excess debenture application money refunded
Debenture Application A/c ……………………. Dr.
To Bank A/c
(iii) On allotment of debentures

Debenture Application A/c ………………………Dr.

Discount on Issue of Debentures A/c ………….... Dr. (if issued at discount)

To Debentures A/c
To Securities Premium A/c (if issued at premium)
b. Debentures issued in instalments

(i) On receipt of application money

Bank A/c …………………………………Dr.
To Debenture Application A/c
(ii) For excess debenture application money refunded

Debenture Application A/c ……………………. Dr.

To Bank A/c
(iii) For debenture application money transferred to share capital
Debenture Application A/c ………………………Dr.
To Debentures A/c
(iv) For debenture allotment money due

Debenture Allotment A/c …………………………Dr.

Discount on Issue of Debentures A/c ………….... Dr. (if issued at discount)

To Debenture A/c

To Securities Premium A/c (if issued at premium)

(v) For debenture allotment money received

Bank A/c …………………………………Dr.

To Debenture Allotment A/c

(vi) For debenture call money due

Debenture Call A/c …………………………. Dr.
To Debentures A/c
(vii)For debenture call money received

Bank A/c …………………………………Dr.

To Debenture Call A/c

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Note: In case of issue of debentures at discount, the Discount will always be accounted in
allotment. However, premium will be accounted with the instalment in which it is
included. If nothing is mentioned specifically, it is accounted with allotment money.

Issue of Debenture for Consideration other than Cash

Debentures may also be issued for consideration other than cash. Examples include

allotment of debentures for purchase of asset or for technical services received.

The accounting entries in such a case will be as follows:

(i) On purchase of assets
Sundry Assets A/c …………………Dr.

To Vendor A/c

(ii) On issue of debentures

Vendor A/c …………………………Dr.
Discount on Issue of Debentures A/c ………….... Dr. (if issued at discount)

To Debenture Capital A/c

To Securities Premium A/c (if issued at premium)
Debentures Issued as Collateral Security

The term ‘collateral’ means additional or secondary. When debentures are issued as

additional security against a loan (for which there exists a primary security) it is called

issue of debentures as collateral security. This type of issue is generally made when the

lender feels that the primary security is inadequate. The borrower company, however, is

not required to pay any interest on the debenture which are issued as collateral security.

On full repayment of the loan, the debentures issued as collateral security are returned
by the lender. However, if the company fails to repay the loan, the lender exercises its
right on the debentures issued as collateral security.

Debentures issued as a collateral security can be dealt with in two ways in the books:

a. First Method

No entry is made in the books. On the liability side of the balance sheet below the item

of loan a note that it has been secured by the issue of debentures is to be given.

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b. Second method
Sometimes issue of debentures as collateral security is recorded by making a journal entry

as follows:

Debenture Suspense A/c ……………. Dr.

To Debenture A/c
Note: Debenture Suspense A/c is shown as a deduction from Debenture A/c in the balance

sheet. When the loan is paid the above entry is cancelled by means of a reverse entry.

Interest on Debentures
The periodical interest paid on debentures is included in the Finance Cost in the
Statement of Profit and Loss as it is a charge against profit. The accounting entries are:
1. Interest on debentures A/c …………………Dr.
To Debenture holder’s A/c
To TDS Payable A/c (if given in question)
2. Debenture holder’s A/c Dr.

TDS Payable A/c Dr.

To bank A/c
3. Profit and Loss A/c ………………………. Dr.

To Interest on debentures A/c

Note: When the due dates for payment of debenture interest does not match with the

accounting period, the following two concepts emerge:

(1) Debenture interest accrued and due: The portion of the total amount of debenture

interest for which due date(s) has/have fallen within the accounting period is referred to

as ‘Debenture interest accrued and due; and

(2) Debenture interest accrued but not due: The portion of the total amount of debenture

interest that has arisen but for which due date(s) has/have not fallen within the

accounting period is referred to as ‘Debenture interest accrued but not due’.

In the Balance Sheet, both ‘Debenture interest accrued and due’ as well as ‘Debenture

interest accrued but not due’ are shown under ‘Other current liabilities’.

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When terms of redemption are known and debentures are redeemable at premium

In this case the premium payable on redemption may be provided at the time of issue
itself, by passing the following additional entry –
Loss on Issue of debentures A/c……………….... Dr.
To Premium on Redemption of Debentures A/c

Issue at par, redemption at premium

Debenture Application A/c …………Dr.

Loss on Issue of debentures A/c……….... Dr.
To Debentures A/c
To Premium on Redemption of Debentures A/c

Issue at premium, redemption at premium

Debenture Application A/c …………Dr.

Loss on Issue of debentures A/c……….... Dr.
To Debentures A/c
To Securities Premium A/c
To Premium on Redemption of Debentures A/c
Issue at discount, redemption at premium

Debenture Application A/c ………………………Dr.

Discount on Issue of Debentures A/c ………….... Dr.

Loss on Issue of Debentures A/c ………….... Dr.

To Debentures A/c

To Premium on Redemption of Debentures A/c

Accounting for Redemption of Debentures

Redemption of debentures refers to the repayment of borrowed capital raised by a

company through debentures.

The condition of redemption is clearly specified in the prospectus inviting application for
the issuance of debentures.

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Redemption of debentures can be made out of profits or out of capital

Redemption out of profits: A company may utilize a portion of its profit which otherwise
were available for distribution of dividend to redeem the debentures. This may be done
by transferring a portion of profits to Debenture Redemption Reserve. The profits so
transferred may be retained within the company or may be invested outside in readily
marketable securities.

Redemption out of capital: Here the company does not set aside any profits for

redemption purpose. Thus, eventually, the amount is paid out of capital.

In India, redemption of debenture is guided by Section 71 of the Companies Act, 2013

and Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 which require
mandatory creation of Debenture Redemption Reserve. Hence, the redemption happens
to be partly out of profits and partly out of capital.

Provision related to debentures redemption

a. DRR is required to be created only in case of ‘Non-convertible Debentures’ and ‘Non-

convertible portion of Partly Convertible Debentures’.
b. The DRR shall be created out of the profits of the company that are available for

payment of dividend i.e., out of the divisible profits of the company.

c. A company shall create DRR before starting the redemption of debentures.

d. A company shall create DRR of an amount equal to at least 25% of the nominal (face)
value of the debentures issued.
e. Companies (other than AIFIs and Banking companies) including manufacturing and

infrastructure companies are required to create DRR to the extent of 25% of the nominal/

face value of the debentures issued for publicly and privately placed debentures.

f. NBFCs and other financial institutions covered u/s 2(72) of Companies Act, 2013 are

required to create DRR to the extent of 25% of the nominal/ face value of the debentures

issued for publicly placed debentures.

g. Every company which is required to create DRR shall on or before April 30 each year,
must invest or deposit a specified sum of not less than 15% of the amount of debentures
maturing during the year ending on the March 31, in any of the specified modes.
h. After the redemption of debentures, such DRR a/c is closed by transfer to General

Reserve A/c.

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Note: It is to be noted that a company only requires to create DRR to the extent of 25%
of the nominal value of the debentures. Then, effectively 75% of the nominal value of
debentures is redeemed out of capital.

Note: if question asked to do redemption out of profits only or provides any hint to do so

then create 100% of nominal value of debentures as DRR. (Question 45 of sheet)

Methods of Redemption of Debentures

1. Lump sum
2. Draw of lots
3. Conversion
4. Buying own debentures from Open market

Journal entries for mump sum and draw of lots method

31.3.20XX Surplus i.e. balances in statement of p&l Dr. (25% of face value)
To debenture redemption reserve A/c

1.4.20XX – 30.4.20XX Debenture redemption investment A/c Dr.

To Bank A/c (15% of face value)

Bank A/c Dr.

TDS Receivable A/c Dr. (if any)

To Debenture redemption investment
To income on investment A/c (if any)

Debentures A/c Dr.

Premium on redemption A/c Dr.

To debenture holder’s A/c

Debenture holder A/c Dr.

To bank A/c

DRR A/c Dr.

To general reserve A/c

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Note: DRR/DRI is not required in case of banking companies.

Journal entries for sinking fund method

1. Surplus A/c ....Dr (Annual contribution)

To Sinking Fund A/c

2. Sinking Fund Investment A/c ....Dr. (Investment of the amount)

To Bank A/c

3. Bank A/c ....Dr. (Receipt of Interest on Investment)

To Interest on Sinking Fund Investment A/c

4. Interest on Sinking Fund Investment A/c .......Dr.

To Sinking Fund A/c (Transferring of interest to Sinking Fund)

5. Surplus A/c ....Dr. (Providing Annual contribution of 2nd year)

To Sinking Fund A/c

6. Sinking Fund Investment A/c .... Dr.

To Bank A/c (Investment of the amount of 2nd year)
Amount invested in Sinking Fund Investment = Annual Contribution + Interest on Sinking
Fund Investment.

7. Bank A/c ....Dr. (Receipt of Interest In the year of redemption)

To Interest on Sinking Fund Investment A/c

8. Surplus A/c ....Dr. (Annual contribution in the year of redemption)

To Sinking Fund A/c

9. Bank A/c ....Dr. (Disposal of Sinking Fund Investment at profit)

To Sinking Fund Investment A/c

To sinking fund A/c

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10. Bank A/c …………………….Dr. (Disposal of Sinking Fund Investment at loss)
Sinking Fund A/c ……………..Dr.

To Sinking Fund Investment A/c

11. Debenture A/c…………………..Dr.

Premium on Red. of Debentures A/c…..Dr.
To Debenture-holders A/c (Due entry for redemption)

12. Debenture-holders A/c …………Dr.

To Bank A/c (Payment entry)

13. Sinking Fund A/c …………..Dr. (Transfer of Sinking Fund balance)

To General Reserve A/c
To capital reserve

Redemption of Debentures by Conversion

Under this method debentures are converted into new debentures or equity shares or
preference shares. However, in most of the cases, they are convertible into equity shares.
Debentures may be fully convertible or partly convertible. New securities may be issued
at par, at premium or at discount.
Since, DRR is required only for non-convertible debentures or non-convertible part of

partly convertible debentures, under this method the provisions for DRR and DRI are not

applicable.

The accounting entries are as follows:

1. Debentures A/c . ............ Dr.

Prem. on redemption of Debentures A/c ....Dr.

To Debenture-holders A/c

2. Debenture-holders A/c ...Dr. (Issue at par)

To Eq. Shares/ Pref. Shares/ Debentures A/c

3. Debenture-holders A/c ....Dr. (Issue at premium)

To Eq. Shares/ Pref. Shares/ Debentures A/c
To Securities Premium A/c

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4. Debenture-holders A/c ....Dr. (Issue at discount)

Discount on issue of Debentures A/c ....Dr.
To (New) Debentures A/c

Redemption of Debentures by Purchase in the Open Market

A company may redeem the debentures by buying them form the open market (i.e., from
the existing debentureholders). The debentures so purchased may be immediately
cancelled or may be held as investment and cancelled later. In the former, the debentures
are immediately redeemed while in case of the latter they are redeemed after some time.
Till the redemption, the debentures are considered as Investment.
Ex-interest and Cum-interest purchase price
If price quotation in the open market is available in form of ex-interest or cum-interest

and debentures are purchased by the company on dates other than the interest date,

consideration paid on purchase shall be segregated into price and interest and shall be

recorded accordingly. The accounting entries will be as follows.

a. When own debentures are purchased and immediately cancelled

(i) Own debentures purchased and cancelled
Debentures A/c ……………………….............Dr.
Loss on Cancellation of Debentures A/c ……..Dr. (if there is a loss)
To Bank A/c

To Profit on Cancellation of Debentures A/c (if there is a profit )

(ii) Transfer of profit or loss on cancellation

Profit on Cancellation of Debentures A/c ……………..Dr.

To Capital Reserve A/c
Or
Profit and Loss A/c …………………….Dr.

To Loss on Cancellation of Debentures A/c

Note: Profit or loss on cancellation is the difference between the face value of debentures

cancelled and the purchase price of the debentures.

b. When own debentures are purchased and held as investment

(i) Purchase of own debentures
Investment in Own Debentures A/c ………………..Dr.

To Bank A/c

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(ii) Interest payment on debentures including own debentures

Debenture Interest A/c ………………..Dr.

To Bank A/c
To Interest on Own Debentures A/c
(iii) Resale of own debentures held as investment
Bank A/c ………………………………………….Dr.

Loss on Sale of Own Debentures A/c …………….Dr.

To Investment in Own Debentures A/c

To Profit on Sale of Own Debentures A/c

(iv) Cancellation of own debentures

Debentures A/c ………………………………….Dr.
Loss on Cancellation of Debentures A/c ……..Dr.
To Investment in Own Debentures A/c

To Profit on Cancellation of Own Debentures A/c

(v) Transfer of profit or loss on cancellation

Profit on Cancellation of Debentures A/c ……………..Dr.
To Capital Reserve A/c
Or
Profit and Loss A/c …………………….Dr.

To Loss on Cancellation of Debentures A/c

Note: When the company maintains a Sinking fund for redemption of debentures
A company which maintains a sinking fund and investment the proceeds to a Sinking

Fund Investment may consider its own debentures as an investment avenue. The own

debentures purchased may again be either retained as investment or cancelled

immediately.

Writing off discount or loss on issue of debentures

Case 1: when redemption is in lump sum at the end of specified period

Discount = Nominal value x discount %

Discount to be charged to P&L (SLM Basis) every year = Discount
No. of years

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Case 2: when redemption is in installment

Step 1: find out outstanding debentures at the every year end till the debentures is
completely redeemed.
Step 2: find out the ratio of outstanding debentures balance at the year end as calculated
in step 1.
Step 3: find out total of ratio calculated in step 2
Step 4: divide the discount amount with the total of ratio calculated in step 3

Step 5: find out discount to be written off every year by multiplying the amount

calculated in step 4 with respective ratio of each year.

Note: If debentures are issued between the year then consider the time factor on o/s
debentures at the end of the year. (Question 76)

Note: Loss on issue of debentures = Discount on issue + loss on issue

Journal entries to write off discount/loss on issue of debentures

Securities premium reserve A/c Dr.
Surplus i.e. balances in statement on P&L Dr.

To loss on issue of debentures A/c

Underwriting of shares

Underwriting of securities is an agreement, entered into by a company (issuing the

security) with a financial agency to ensure that the entire issue of securities (shares,
debentures etc.) gets fully subscribed. The concerned financial agency is known as

‘underwriter’. The underwriters provide their services against certain fees known as

‘underwriting commission’.

Marked vs. Unmarked Applications

‘Marked’ applications are those applications which bear the stamp of an underwriter. If
the issue is not fully subscribed, ‘marked’ applications shall be applied in reduction of
underwriter’s liability.
The ‘unmarked’ applications are those applications which bear no stamp of an

underwriter. These applications are received by the company directly from the public.

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Underwriter’s Liability
Gross Liability refers to the total commitment of the underwriter as per the
underwriting agreement.
Net Liability refers to the liability of taking up the unsubscribed securities after taking

into consideration the gross liability as per the agreement of underwriting and

applications received (both, marked applications and unmarked applications).

Thus, Net Liability = Gross Liability - (Marked applications + Proportion of Unmarked

applications for which the underwriter has been given credit).

Underwriting Commission
Underwriting Commission = [Gross Liability (in no.) x Issue Price per security] x Rate of
Commission.
The rate of commission paid or agreed to be paid shall not exceed, in case of shares, five
percent of the price at which the shares are issued or a rate authorized by the articles,
whichever is less, and in case of debentures, shall not exceed two and a half per cent of
the price at which the debentures are issued, or as specified in the company’s articles,
whichever is less;

Determination of Underwriter’s Liability

Case 1: When the Issue is Fully Underwritten by a Single Underwriter

Underwriter’s liability = No. of Shares Issued (-) No. of shares subscribed by the public.

Case 2: When the Issue is Fully Underwritten by Multiple Underwriters

Individual underwriters are given credits for respective marked applications.

The unmarked applications are shared between all the underwriters. The sharing is
normally done in proportion of their ‘Gross Liability’.
However, if the underwriting arrangement so provides, the same can be shared based on
‘Gross Liability (-) Marked Application’ also.

Treatment of Firm Underwriting

The treatment of Firm Underwriting becomes significant as the underwriter must take

up the number of securities underwritten ‘firm’ irrespective of its liability under the

regular underwriting agreement.

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For determining the liability of the underwriters, the shares underwritten firm may be

treated in either of the following two ways:

(a) Firm underwriting treated as Marked applications: Here, the benefit of firm
underwriting is given to each individual underwriter i.e., number of shares underwritten
firm is deducted from each underwriter’s respective liability; or
(b) Firm underwriting is treated as Unmarked applications: Here, the benefit is given to
all underwriters in the ratio of Gross Liability.
Note: Students should note that unless otherwise stated, firm underwriting should
preferably be treated as either ‘Marked applications’ or ‘Unmarked applications’ by
stating the assumption clearly.
Thus, Underwriter’s Liability is finally calculated as –
Underwriter’s liability = Gross Liability (-) No. of Marked applications (-) Shares of
Unmarked applications (+) Firm Underwriting.

Table showing liabilities of underwriters

Particulars X Y Z

Gross Liability

Less: Marked Applications

Less: Unmarked Applications

Surplus of any underwriter apportioned between

remaining underwriters in the ratio of Gross Liability

Net Liability under contract

Add: Firm Underwriting

Net Liability

Case 3: When the Issue is Partially Underwritten by a Single Underwriter

In this situation, the concerned underwriter shall be responsible only for the agreed
portion of the total issue.
For the balance portion of the issue, the company itself shall be responsible.

The liability of the underwriter will be determined in the following manner:

Step 1: Gross Liability = Total Issue Size x % of underwriting

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Step 2: No. of shares unsubscribed = Total no. of shares offered (–) No. of shares subscribed

(including marked applications)

Step 3: Deficit of the underwriter = Gross Liability (-) Marked Applications

Note: the deficit can never be negative
Step 4: Net Liability = Step 2 or Step 3 – whichever is lower.
Treatment of Firm Underwriting: In case the underwriter has underwritten ‘firm’, the
liability of the underwriter should be determined by adding the number of shares
underwritten ‘firm’ to the ‘Net Liability under the underwriting contract’ mentioned
above.
In this context, there can be two possibilities as follows:

(i) No abatement is allowed for the shares taken up ‘firm’: This means that the shares
underwritten ‘firm’ will not be adjusted against ‘Net Liability under the underwriting
contract’ and the underwriter will have to subscribe them additionally. Therefore, here,
number of shares to be taken up by the underwriter = ‘Net Liability under the
underwriting contract’ + Firm Underwriting.

(ii) Abatement is allowed for the shares taken up ‘firm’: This means that the shares

underwritten ‘firm’ will be adjusted against ‘Net Liability under the underwriting

contract’. Hence, in this case, number of shares to be taken up by the underwriter = ‘Net

Liability under the underwriting contract’ or Firm Underwriting – whichever is higher.

Case 4: When the Issue is Partially Underwritten by Multiple Underwriters

Here, the underwriters together take the responsibility of a part of the total issue and

the for the remining portion, the company itself is held responsible. The credit for marked

applications is given to the individual underwriters.

However, the credit for unmarked applications does not go to the underwriters.

Accounting for Underwriting

1. Underwriters A/c ……..Dr.

To Share Capital A/c
To Securities Premium A/c

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2. Underwriting Commission A/c …..Dr.

To Underwriters A/c

3. Bank A/c ………………………..Dr.

To Underwriters A/c
Or
Underwriters A/c…………………Dr.
To Bank A/c

Redemption of Preference Shares

Redeemable preference shares have a fixed term and hence are redeem at the end of such
period. On redemption the shareholders are repaid the capital that they had invested in
those shares.
The redemption may occur either ‘at par’ or ‘at premium’.

Section 55 of the Act states that –

(1) No company limited by shares shall, after the commencement of this Act, issue any

preference shares which are irredeemable.

(2) A company limited by shares may, if so authorized by its articles, issue preference
shares which are liable to be redeemed within a period not exceeding twenty years from
the date of their issue subject to such conditions as may be prescribed.
Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014 further states

that company engaged in the setting up and dealing with of infrastructural projects may

issue preference shares for a period exceeding twenty years but not exceeding thirty

years, subject to the redemption of a minimum ten percent of such preference shares per

year from the twenty first year onwards or earlier, on proportionate basis, at the option

of the preference shareholders.

Conditions for Redemption of Preference Shares

1. No such shares shall be redeemed unless they are fully paid;
2. A sum equal to the nominal amount of the shares to be redeemed, to a
reserve, to be called the Capital Redemption Reserve Account.

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Deemed Redemption u/s 55(3) - Where a company is not in a position to redeem any
preference shares or to pay dividend, if any, on such shares in accordance with the terms
of issue (such shares hereinafter referred to as unredeemed preference shares), it may,
with the consent of the holders of three-fourths in value of such preference shares and
with the approval of the Tribunal on a petition made by it in this behalf, issue further

redeemable preference shares equal to the amount due, including the dividend thereon,
in respect of the unredeemed preference shares, and on the issue of such further
redeemable preference shares, the unredeemed preference shares shall be deemed to have
been redeemed

(In easy words preference shares ko redeem nahi kar pare hai aur na dividend de pare
hai toh purane wale preference shareholders ko new shares issue kar dene se old
preference shares ka deemed redemption man liya jaiga)

The premium on redemption, if any, shall be provided as follows:

(i) In case of the prescribed class of companies and whose financial statements comply
with the accounting standards prescribed u/s 133 of the Companies Act, 2013 –
- If the preference shares were issued on or before 01.04.2014 (date of commencement
of the Companies Act, 2013), premium can be provided out of Securities Premium as
well as out of Profits of the Company.
- If the preference shares were issued after 01.04.2014, premium can be provided only

out of Profits of the Company.

(ii) For other companies, there can be two sources of premium i.e., Securities Premium

and Profits of the Company.

A sum equal to the nominal amount of the shares to be redeemed out of profits should

be transferred to Capital Redemption Reserve (CRR). The balance of CRR so created shall

only be utilized for issue of fully paid-up bonus shares.

Accounting for Redemption of Preference Shares

(i) On issue of new shares for the purpose of redemption
Bank A/c …………………… Dr.

To Equity Share Application A/c

(Being application money received on ... shares @ ` ... each)

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CA Hardik Mishra
 01 Accounting for Share Capital and Debentures

Equity Share Application A/c ……Dr.

To Share Capital A/c

To Securities Premium A/c (if new shares are issued at premium)
(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 ...)

(ii) Redemption due entry

Redeemable Preference Share Capital A/c …...…… Dr.
Premium on Redemption of Preference Shares A/c …Dr. (if redeemable at premium)
To Preference Shareholders A/c

(iii) When payment is made to preference shareholders

Redeemable Preference Shareholders A/c ………. Dr.

To Bank A/c

(iv) Adjustment of premium on redemption

Profit and Loss A/c …………… Dr.

To Premium on Redemption of Preference Shares A/c

(Being the premium on redemption adjusted against profit and loss balance)

Note: In addition, the company may need to undertake transactions such as ‘sale of

investment’ ‘sale of idle assets’ etc. at profit or at loss. The effect of such transaction shall

also be taken into consideration while determining the required amount of fresh issue or

profits to be transferred to CRR.

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CA Hardik Mishra