Premium on Redemption of Preference Shares :
(a) For the companies whose financial statements comply with the accounting standards as prescribed under section 133, the premium payable on redemption shall be provided out of the profits of the company, before the shares are redeemed.
(b) For redemption of any preference shares issued on or before the commencement of 2013 Act, the premium payable on redemption shall be provided out of the profits of the company, or out of the company’s securities premium account, before such shares are redeemed.
For the companies whose financial statements need not comply with the accounting standards as prescribed under section 133, the premium payable on redemption shall be provided out of the profits of the company, or out of the company’s securities premium account, before such shares are redeemed.
Case 1: Redemption out of the profits of the company which would otherwise be available for dividend
If the redeemable preference shares are redeemed out of the profits of the company which would otherwise be available for dividend, the “Capital Redemption Reserve Account” has to be created which will represent the redeemable preference shares in the balance sheet after the redemption. This capital redemption reserve should be equal to the amount of Preference Shares to be redeemed. The profits available for dividend have to be transferred to Capital Redemption Reserve Account.
Case 2: If the redeemable preference shares are redeemed out of the proceeds of a fresh issue of shares made for the purpose of redemption:
If the redeemable preference shares are redeemed out of the proceeds of fresh issue of shares, the new Share Capital Account raised by fresh issue will take the place of the Redeemable Preference Share Capital
Account after the redemption. Thus, in such a case, new Share Capital Account (Equity or Preference) must be equal to the redeemable preference shares redeemed.
First of all, entries for fresh issue of shares will be passed. Then, entries for redemption passed as given in previous case.
Case 3: If the redeemable preference shares are redeemed partly out of the profits of the company which would otherwise be available for dividend and partly out of the proceeds of a fresh issue of shares made for the purpose of redemption:
If the redeemable preference shares are redeemed partly out of the profits of the company which would otherwise be available for dividend and partly out of the proceeds of a fresh issue of shares equity or preference, the Capital Redemption Reserve Account and the new Share Capital Account taken together will replace the Redeemable Preference Share Capital redeemed. Thus in such a case, Redeemable Preference Share Capital redeemed = Capital Redemption Reserve Account + New Share Capital Account (Equity or Preference).
Here, all the entries shown under (1) and (2) have to be passed. But there are certain common entries which can be combined together.
Illustration :
Vanities Ltd. had an issue 1,000, 12% redeemable preference shares of ` 100 each, repayable at a premium of 10%. These shares are to be redeemed now out of the accumulated reserves, which are more than the necessary sum required for redemption. Show the necessary entries in the books of the company, assuming that the premium on redemption of shares has to be written off against the company’s Securities Premium Account.
Solution:
In the books of Vanities Ltd.
Journal Entries
Particulars | Dr.(Rs.) | Cr.(Rs.) |
General Reserve Account Dr. | 1,00,000 | |
To Capital Redemption Reserve A/c | 1,00,000 | |
(Transfer of reserves to Capital Redemption Reserve Account on redemption of redeemable preference shares) | ||
12% Redeemable Preference Share Capital A/c Dr. | 1,00,000 | |
Premium on Redemption of Preference Shares A/c Dr. | 10,000 | |
To 12% Preference Shareholders A/c | 1,10,000 | |
(Amount payable to 12% preference shareholders on redemption of 12% preference shares at a premium of 10%) | ||
Securities Premium A/c Dr. | 10,000 | |
To Premium on Redemption of Preference Share A/c | 10,000 | |
(Application of Securities Premium Account to write off premium on redemption of preference shares) | ||
12% Preference Shareholders A/c Dr. | ||
To Bank | 1,10,000 | |
(Amount due to 12% preference shareholders on redemption paid) | 1,10,000 |
Note: Capital Redemption Reserve Account replaces the 12% Redeemable Preference Shares Capital Account and the capital structure of the company remains unchanged.
Illustration :
Sure and Fast Ltd. has part of its share capital in 12% redeemable preference shares of Rs.100 each, repayable at a premium of 5%. The shares have now become due for redemption. It is decided that the whole amount will be redeemed out of a fresh issue of 20,000 equity shares of Rs.10 each at Rs.11 each. The whole amount is received in cash and the 12% preference shares are redeemed. Show the necessary journal entries in the books of the company.
Solution:
In the books of Sure and Fast Ltd.
Journal Entries
Particulars | Dr.(Rs.) | Cr.(Rs.) |
Bank Dr. | 2,20,000 | |
To Equity Share Application and Allotment A/c | 2,20,000 | |
(Application money on 20,000 equity shares @ Rs.11 per share including a premium of Re. 1 per share) | ||
Equity Share Application and Allotment A/c Dr. | 2,20,000 | |
To Equity Share Capital A/c | 2,00,000 | |
To Securities Premium A/c | 20,000 | |
(Allotment of 20,000 equity shares Rs.10 each issued at a premium of Rs.1 per share as per Board’s Resolution dated….) | ||
12% Redeemable Preference Share Capital A/c Dr. | 2,00,000 | |
Premium on Redemption of Preference Share A/c Dr. | 10,000 | |
To 12% Preference Shareholders A/c | 2,10,000 | |
(Amount due to 12% preference shareholders on redemption of 8% preference shares at a premium of 5%) | ||
Securities Premium A/c Dr. | 10,000 | |
To Premium on Redemption of Preference Shares A/c | 10,000 | |
(Application of Securities Premium Account to write off Premium on Redemption of Preference Shares) | ||
12% Preference Shareholders A/c Dr. | 210,000 | |
To Bank | 2,10,000 | |
(Payment of amount due to 12% preference shareholders on redemption) |
Note: Equity Share Capital Account replaces the 12% Redeemable Preference Share Capital Account and the capital structure of the company remains unchanged.
Illustration :
The following is the balance sheet of Oscar India Ltd. as on 31st March 2011:
Particulars | Note No. | Amount (Rs.) |
I Equity and Liabilities | ||
Shareholders’ Funds | ||
Share Capital | 1 | 548,000 |
Reserves and Surplus | 2 | 1,65,000 |
Current Liabilities | ||
Trade Payable | 3 | 1,27,000 |
Total | 8,40,000 | |
II Assets | ||
Non-Current Assets | ||
Fixed Assets | 6,00,000 | |
Current Assets | ||
Investment | 50,000 | |
Inventories | 1,10,000 | |
Cash and Cash Equivalents | 4 | 80,000 |
Total | 8 4,000 | |
Notes: | ||
1. Share Capital ` ` | ||
Authorised | ||
Issued, subscribed and paid-up: ………. | ||
30,000 Equity Shares of ` 10 each fully paid-up | 3,00,000 | |
2,500 Preference share of ` 100 each fully called-up | 2,50,000 | |
Less: Final Call on 100 preference shares @ ` 20 per share unpaid | 2,000 | 2,48,000 |
5,48,000 | ||
2. Reserves and Surplus | ||
Securities Premium | 15,000 | |
Surplus | 1,50,000 | |
1,65,000 | ||
3. Trade Payable | ||
Trade Creditors | 1,10,000 | |
Outstanding Expenses | 17,000 | |
1,27,000 | ||
4. Cash and Cash Equivalent | ||
Balance with Bank | 80,000 |
On 30th June, 2012, the Board of Directors decided to redeem the preference shares at a premium of 10% and to sell the investments at its market price of Rs.40,000. They also decided to issue sufficient number of equity shares of Rs.10 each at a premium of Re. 1 per share, required after utilizing the profit and loss account leaving a balance of Rs.50,000. Premium on redemption is required to be set off against securities premium account.
Repayments on redemption were made in full except to one shareholder holding 50 shares only due to his leaving India for good.
You are required to show the journal entries and the balance sheet of the company after redemption. Assumption made should be shown in the working.
Solution:
In the books of Oscar Ltd.
Journal Entries
Particulars | Dr.(Rs.) | Cr.(Rs.) |
Bank Dr. | 40,000 | |
Profit and Loss A/c Dr. | 10,000 | |
To Investments | 50,000 | |
(Being the sale of investments at a loss of Rs.10,000) | ||
Bank Dr. | 1,65,000 | |
To Share Capital A/c | 1,50,000 | |
To Securities Premium A/c | 15,000 | |
(Being the issue of required number of equity shares at a premium of 10%) | ||
Preference Share Capital A/c Dr. | 2,40,000 | |
Premium on Redemption A/c Dr. | 24,000 | |
To Preference Shareholders A/c | 2,64,000 | |
(Being the transfer of the amount due to preference shareholders on redemption) |
||
Securities Premium A/c Dr. | 24,000 | |
To Premium on Redemption A/c | 24,000 | |
(Being the transfer of securities premium account to write off premium on redemption of preference shares account) | ||
Profit and Loss A/c Dr. | 90,000 | |
To Capital Redemption Reserve A/c | 90,000 | |
(Being the transfer of profit used for redemption of preference shares to capital redemption reserve account) | ||
Preference Shareholders A/c Dr. | 2,58,500 | |
To Bank | 2,58,500 | |
(Being the payment to preference shareholders except to a holder of 50 shares) |
Balance Sheet of Oscar India Ltd. as on 1st July, 2011
(After redemption)
Particulars |
Note No. |
Amount (Rs.) |
I Equity and Liabilities | ||
Shareholders’ Funds | ||
Share Capital | 1 | 4,58,000 |
Reserves and Surplus | 2 | 1,46,000 |
Current Liabilities | ||
Trade Payable | 3 | 1,27,000 |
Preference shareholders | ___5,500 | |
Total | 1,40,000 | |
II Assets | ||
Non-Current Assets | ||
Fixed Assets | 6,00,000 | |
Current Assets | ||
Inventories | 1,10,000 | |
Cash and Cash Equivalents | 4 | ___26,500 |
Total | 8 4,000 |
Notes: | ||
1. Share Capital | Rs, | |
Authorised | ||
Issued, subscribed and paid-up: | ………. | |
45,000 Equity Shares of Rs.10 each fully paid-up | 4,50,000 | |
In preference share of Rs.100 each fully called-up | 10,000 | |
Less: Final Call @ Rs.20 per share unpaid | 2,000 | ____8,000 |
4,58,000 | ||
2. Reserves and Surplus | ||
Capital Redemption Reserve | 90,000 | |
Securities Premium | 6,000 | |
Surplus | 50,000 | |
1,46,000 | ||
3. Trade Payable | ||
Trade Creditors | 1,10,000 | |
Outstanding Expenses | __17,000 | |
1,27,000 | ||
4. Cash and Cash Equivalent | ||
Balance with Bank | 26,500 |
Calculation of required number of fresh issue of equity shares: | ||
Rs. | ||
Balance of Profit and Loss A/c | 1,50,000 | |
Less: Loss on Sale of Investment | 10,000 | |
Balance required | 50,000 | 60,000 |
Profit available for redemption | 90,000 | |
Amount required for redemption | 2,40,000 | |
Amount available from Profit and Loss A/c | 90,000 | |
New issue required 15,000 shares | 1,50,000 | |
Dr. Bank Account Cr.
Particulars | Rs. | Particulars | Rs. |
To Balance b/d | 90,000 | By Preference Share- holders A/c | 2,58,500 |
To Investment | 40,000 | By Balance b/d | 36,500 |
To Share Capital A/c | 1,50,000 | ||
To Securities Premium A/c | 15,000 | _______ | |
2,95,000 | 2,95,000 |
Illustration 22:
The Balance Sheet of Producers Ltd. as at 31st March, 2013 is as follows:
Particulars | Note No. | Amount (Rs.) |
I Equity and Liabilities | ||
Shareholders’ Funds | ||
Share Capital | 1 | 3,50,000 |
Reserves and Surplus | 2 | 64,000 |
Current Liabilities | ||
Trade Payable | 3 | 72,000 |
Short-term premium | 4 | 39,500 |
Total | 5,26,000 | |
II Assets | ||
Non-Current Assets | ||
Fixed Assets | 5 | 2,80,000 |
Current Assets | ||
Short-term Investment | 60,000 | |
Inventories | 1,30,500 | |
Trade Receivables | 50,550 | |
Cash and Cash Equivalents | 6 | 4,950 |
Total | 5 26,000 |
Notes: | ||
1. Share Capital | Rs. | |
Authorised | ||
Issued, subscribed and paid-up: | ………. | |
40,000 Equity Shares of ` 10 each fully paid-up | 4,00,000 | |
10,000 10% Preference share of ` 100 each | 1,00,000 | |
5,00,000 | ||
Issued, subscribed and paid-up: | ………. | |
25,000 Equity Shares of ` 10 each, fully paid-up | 2,50,000 | |
10,000 10% Preference share of ` 100 each, fully paid-up | 1,00,000 | |
3,50,000 | ||
2. Reserves and Surplus | ||
Securities Premium | 10,000 | |
Surplus | 54,000 | |
64,000 | ||
3. Trade Payable | ||
Supplies of Goods | 66,000 | |
Outstanding Expenses | 6,500 | |
72,500 | ||
4. Short-term Premium | ||
Provision for Income Tax | 18,000 | |
Staff Provision Fund | 21,500 | |
39,500 | ||
5. Tangible Assets | ||
Plant and Machinery | 2,40,000 | |
Staff Provision Fund | __40,000 | |
2,80,000 | ||
6. Cash and Cash Equivalent | ||
Balance with Bank | 4,900 | |
Cash on hand | ___50 | |
4,950 |
In order to redeem its preference shares, the company issued 5,000 equity shares of Rs.10 each at a premium of 10% and sold all of its investment for Rs. 70,800. Preference shares were redeemed at a premium of 10%. Show the necessary journal entries in the books of the company and prepare the balance sheet of the company immediately after redemption of preference shares.
Solution:
In the books of Producers Ltd.
Journal Entries
Particulars | Dr. (Rs.) | Cr.(Rs.) |
Bank Dr. | 55,000 | |
To Equity Share Application and Allotment Account | 55,000 | |
(Application money received on 5,000 equity shares of Rs.10 issued at a premium of 10%) | ||
Equity Share Application and Allotment A/c Dr. | 55,000 | |
To Equity Share Capital A/c | 50,000 | |
To Securities Premium A/c | 5,000 | |
(Allotment of 5000 equity shares of Rs.10 each issued at a premium of 10% as per Board’s resolution dated….) | ||
Profit and Loss A/c Dr. | 50,000 | |
To Capital Redemption Reserve A/c | 50,000 | |
(Transfer of the balance of the nominal value of preference shares to be redeemed not covered by fresh issue, i.e.,Rs. 1,00,000 – Rs. 50,000 on redemption to Capital Redemption Reserve A/c) | ||
Bank Dr. | 70,800 | |
To Investments A/c | 60,000 | |
To Profit and Loss A/c | 10,800 | |
(Sale of Investments at a profit and transfer of profit on sale to Profit and Loss A/c) | ||
10% Redeemable Preference Share Capital A/c Dr. | 1,00,000 | |
Premium on Redemption of Preference Shares A/c Dr. | 10,000 | |
To 10% Preference Shareholders A/c | 1,10,000 | |
(Amount due to 10% preference shareholders on redemption) | ||
Securities Premium A/c Dr. | 10,000 | |
To Premium on Redemption of Preference Shares A/c | 10,000 | |
(Application of securities premium to write off premium on redemption of preference shares) | ||
10% Preference Shareholders A/c Dr. | 1,10,000 | |
To Bank | 1,10,000 | |
(Amount due to 10% Preference Shareholders on redemption of their shares paid) |
Balance Sheet of Producers Ltd. as at 31st March, 2013
(After redemption preference shares)
Particulars | Note No. | Amount(Rs.) |
I Equity and Liabilities | ||
Shareholders’ Funds | ||
Share Capital | 1 | 3,00,000 |
Reserves and Surplus | 2 | 69,800 |
Current Liabilities | ||
Trade Payable | 3 | 72,000 |
Short-term premium | 4 | 39,500 |
Total | 4,81,800 | |
II Assets | ||
Non-Current Assets | ||
Fixed Assets | ||
Tangible assets | 5 | 2,80,000 |
Current Assets | ||
Inventories | 1,30,500 | |
Trade Receivables | 50,550 | |
Cash and Cash Equivalents | 6 | 20,750 |
Total | 4,81,800 |
Notes: | ||
1. Share Capital | Rs. | Rs. |
Authorised | ||
Issued, subscribed and paid-up: | ………. | |
40,000 Equity Shares of Rs. 10 each | 4,00,000 | |
10,000 10% Preference share of Rs.10 each | 1,00,000 | |
5,00,000 | ||
Issued, subscribed and paid-up: | ………. | |
30,000 Equity Shares of Rs.10 each, fully paid-up | 3,00,000 | |
2. Reserves and Surplus | ||
Capital Redemption Reserve | 50,000 | |
Securities Premium | 5,000 | |
Surplus | 14,800 | |
69,800 | ||
3. Trade Payable | ||
Supplies of Goods | 66,000 | |
Outstanding Expenses | __6,500 | |
72,500 | ||
4. Short-term Premium | ||
Provision for Income Tax | 18,000 | |
Staff Provision Fund | 21,500 | |
39,500 | ||
5. Tangible Assets | ||
Plant and Machinery | 2,40,000 | |
Staff Provision Fund | ___40,000 | |
2,80,000 | ||
6. Cash and Cash Equivalent | ||
Balance with Bank | 20,700 | |
Cash on hand | _____50__ | |
20,750 |
Working Notes:
(i) Dr. Bank Account Cr.
Particulars | Rs. | Particulars | Rs. |
To Balance b/fd | 4,900 | By 8% PreferenceShareholders A/c | 1,10,000 |
To Equity Share Application and Allotment A/c | 55,000 | By Balance c/d 20,700 | |
To Investment A/c | 60,000 | ||
To Profit and Loss A/c | 10,800 | _______ | |
1,30,700 | 1,30,700 |
Particulars | Rs. | Particulars | Rs. |
To Premium on Redemption of Preference Shares Account | 10,000 | By Balance b/fd | 10,000 |
To Balance c/d | 5,000 | By Equity Share Application and Allotment A/c | 5,000 |
15,000 | 15,000 |
Particulars | Rs. | Particulars | Rs. |
To Capital Redemption Reserve A/c | 50,000 | By Balance b/fd | 54,000 |
To Balance c/d | 14,800 | By Bank (Profit on sale of investments) | 10,800 |
64,800 | 64,800 |
Note: Equity Share Capital issued of Rs.50,000 and Capital Redemption Reserve Account Rs.50,000 jointly replace 8% Redeemable Preference Share Capital of Rs.1,00,000. Hence, the capital structure of the company remains unchanged.