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

(ii) Dr.                                                                                         Securities Premium A/c                                                                                                         Cr.

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

 

 

(iii) Dr.                                                                                        Profit and Loss A/c                                                                                                                  Cr.

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.