-> 8-12 marks

·
-

11
RTION
OF PREFERENCE SHARES

redeemed
only fully paid preference shares be
-> can
up
.

->
Preference shares can be redeemed in the
following ways
: -

i) Out or proceeds of fresh issue -

ii) out of
Existing Funds .

EXISTING Furbs
- .

1 .

Only Free Reserves can be used for this purpose .

a Reserves :
-
Reserves which are available for distribution as dividend .

These comprise of

I Revenue Res
a .
General Reserve .

-
b . Balance or POL -

c .
Dividend Equalisation Reserve .

out of
Company's Act in order redeem preference shares
Existing
5 2013 , to

company should
funds .
a : -

Transfer nominal value of shares to be redeemed from it free Reserves

to Capital Redemption Reserve ((RR) ·

Free Reserves - >

Capital Redemption Reserve

NOMINAL VALUE OF SHARES TO

10000 x 100
BE REDEEMED
=10 Lakhs
-

ple 1 : -
Preference shares to be redeemed = 10000 shares
,

Nominal Value = & loolsh -

Redemption E100/sh Value :

.

calculate amount to be transferred to CRR If redemption is out

funds
or existing ·

FR-> LRR

Sion: -
Transfer to CRR : Nominal value of shares to be redeemed .

2 = 10000 X 100
/

x =10 00 000/-
,
,

Example
2 : -
Preference shares to be redeemed = 10000 shares
,
.

Nominal value =
E loolsh .

Redemption value = & 1101sh ·

calculate amount to be transferred to CRR .

If redemption is
out of
existing funds .

I
 Co Act
.
comp
I
-
mboe ene Preference
shares
redeemed

00 M

source
shopkeeper

ase
& -
mobile phone
sings ->

savings
300000
e ↓· 150000
-
- Bank Yebentures
FD snares cast
wal issued
100000 150000 50000 -
-
-
- -

--

· -
↳ 100000 -

- Loan funds x

↑
SOUULe
-
-

-
source 150000
-

- Cash -> PSH

Free Reserves Capital Redem
-
-

->
Res ↓
-
-

150000
Debenture
-

NY of Bank
150000 =

wal Issue
-

redo
-
- ↳

finds
↑
Loan ->

Free Reserves Nominal of red

Capital Redemp Res value .

METHOD 1 : - .
. -

Free Reserves :
-
That can be used for dividend distribution

- >
-
Revenue Profits
① Land Gain :
socrore
⑳ Monthy profit =
tim" gain/capital nature --I
one
I Higher FaMar
in ial
DDX
Education Exp .

=> -Remain
spicRes
I
--
>profits
&DX Gen Res
. ↑
↓ neuDER
P2L Res
-
 CO mp

At
.

owner
-

- I
>Mad
-

MP 150000 cast
=

↓
.

↓
gsx
-

Fe

source
Fresh Issue E cash- PSH
of shares Y
x
Bak Debentives
Loan Issue
-

Loan funds - x

source

Value of Red
Nominal
.

METHOD 28 Proceeds of Fresh Issue =

I
18000 =150000
-- -

AX or IP

w e
.
·
Lower

=10 10
-
10

= 10 12
1-

18
=
(O 9
-

fresh Issue of shares of E100 & E 110 ·

Total Proceeds =

NY
-> 150000 = 150000
....

PIsh => 100

NO -> 1500ES
Cash = 1500 x 110 -
-

=
165000
/ -
METHOD 3: -
Combination of 182

Free Reserves -
Capital Red Reserve
. +
Proceeds of Fresh Issue : NY of redemption

50000 I 100000
->
50000 TP =
150000
=>

- ↑
-
,

P1S =

NO =
 ⑳g
FR-> CRR

11
ation : -
Transfer to CRR = Nominal Value of shares to be redeemed
-

R =10000 X 100
S

x
=1000 000 ,
.

#TE : -

Redemption value of shares is immaterial Amount to be transferred

.

to CRR is based the nominal value of shares

always
on .

AL
ENTRY
-

[ I
1 :
General Reserve al Br .

Pfl alc Dr . Nominal Value of shares redeemed

Dividend Equalisation Reserve al Du .

To , Capital Redemption Reserve

2 .
% Preference share Capital alc Dr . [Nominal Value] (E100)
Premium on redemption al Dr .
(Premium ir any] (E10)
To, Preference Shareholders al [Redemption Value] (E110)

3 .
Preference Shareholders all Dr .
[Redemption Value]
To Bank
,
alc

ICA)
4 :
securities Premium al
To Premium on redemption al
Dr .
* =X
-
-
GR
↑& L
- Sec 133
-
:

·
ROCEEDS OF FRESH ISSUE

Fresh cannot of of shares to redeemed

1. Issue the same
type be .

2 . Fresh Issue of debentures is not considered here .

.
3 How much of Fresh issue is required : -

Proceeds of Fresh Issue =

Nominal value of shares to be redeemed .

12
4 :

feeds : · Calculated in the

following a
ways
-
10
IP
- NY OR
- -

Fresh Issue is at Fresh issue is at

LONEs
PAR/PREMIUM DISCOUNT -

↓ ↓
PROCEED_= PAR VALUE PROCEEDS= ISSUE PRICE

S .
No amount is to be transferred to caR in this method .
 ⑳

Elimina
Preference redeemed
ple: -
1 .
shares to be = 10 000 sh
,
-

2 . Nominal Value Ish :

Eloosh ·

.
3 Redemption Value = E100/sh .

I
4 .

Equity shares are issued at E10/sh .

/Nominal Value = =101sh .

)
calculate no . or
equity shares to be issued for the purpose of
IP 10 L
redemption NY =
10 =

sation: - Proceeds or Fresh Issue :

Nominal Value of shares to be redeemed .

x = 10000 X 100
S

e -1000000 .

Proceeds 10L
S
S

Total
=

1 .

Equity shares Proceede the-

proceeds
T
Number of =
a

. No
3 . Of Sh - =
12
-
-

-000
10

-100000 sh :

1 .
Preference shares to be redeemed 10 000sh
=
.

.
2 Nominal Value =

E looksh ·

.
3 Redemption Value : E 110/sh ·

4 .

Equity shares are issued ot E12/sh (Nominal Value E101sh )

.
=
:

calculate number of
equity shares to be issued for the
purpose of
redemption .

k =10000 X 100
/

x = 10 00 000
, ,

1 . Total proceeds = 10 L
Equity procede
-
Number or Shares =

a .

Proceeds/sh .
=

10

-
-
1000000 .
3 No . Of st =
IP
pink = 12X 12
=
100000 sh
,
=IXL
-

:
-
Cash flow =
1,00 000 x
,
12 = 12 00
,
,
000/-
restricted to Nominal Value
However proceeds are
always only
.

Hence , proceeds =
100000 x 10 = 10 00 0001-
-S , ,
 ⑳

11
ple
: -
1 .
Preference shares to be redeemed =10000
S

.
2 Nominal value = =100

.
3 Redemption value = 110

Reserves
FR= 450000
4 .
Balance of : I General Reserve = 200000 2
-
,

# P& L - 50000
F
/

#Capital Reserve = 200000

,

# securities Prem .
= 100000
-

# Dividend Res 200000

Equal . -
:

issue fresh (Ny 10)

scompanyif wishes equity shares & Elshave
-

to =

only required
.

transferred to and of
Calculate amount to be cRR number
equity.shares
to be issued .

FR-> CRR
station ~- Transfer to CRR+Proceeds of Fresh issue : Nominal value of shares redeemed
-

GR - .

//P2L// DER - 10000 X100

/

450000 t R =
1000000
-
,

x =
550 000/-
,

Total proceeds 550000

Equity ↑proceed
Number or shares e 1 .
=

in
=

2 .
Proceeds/SH=
- SS0000
No I 55008
.
3 .

T
-
-

=55 000 shares .

,
 7.8 ACCOUNTING

To Securities Premium Account

(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……)
3. When preference shares are redeemed at par
Redeemable Preference Share Capital Account Dr.
To Preference Shareholders Account
4. When preference shares are redeemed at a premium
Redeemable Preference Share Capital Account Dr.
Premium on Redemption of Preference Shares Account Dr.
To Preference Shareholders Account
5. When payment is made to preference shareholders
Preference Shareholders Account Dr.
To Bank Account
6. For adjustment of premium on redemption
Profit and Loss Account Dr.
To Premium on Redemption of Preference Shares Account
Illustration 1
..

Hinduja Company Ltd. had 5,000, 8% Redeemable Preference Shares of ` 100 each,
fully paid up. The company decided to redeem these preference shares at par by the
issue of sufficient number of equity shares of ` 10 each fully paid up at par. You are
required to pass necessary Journal Entries including cash transactions in the books of
the company. Proceeds of Fresh Issue-- NV Of red . 1 TP
: =
500000
-

10
Solution 5000x100 2 Ps =
X -

0
.
-

M2 In the books of Hinduja Company Ltd.

3
. No =: 50000
/

Journal Entries

Date Particulars Dr. (` ) Cr. (` )

Bank
- A/c Dr. 5,00,000
=

To
- Equity Share Capital A/c 5,00,000
=

© The Institute of Chartered Accountants of India

 REDEMPTION OF PREPERENCE SHARES 7.9

(Being the issue of 50,000 Equity Shares of

`10 each at par for the purpose of
redemption of preference shares, as per
Board Resolution No. ……..dated……..)
8%
- Redeemable Preference Share Capital Dr. 5,00,000
A/c
To Preference Shareholders A/c
~ 5,00,000
(Being the amount payable on redemption
of preference shares transferred to
Preference Shareholders Account)
Preference Shareholders A/c
- Dr. 5,00,000
To Bank
~ A/c 5,00,000
(Being the amount paid on redemption of
preference shares)
Illustration 2
C Ltd. had 10,000, 10% Redeemable Preference Shares of ` 100 each, fully paid
up. The company decided to redeem these preference shares at par, by issue of
sufficient number of equity shares of ` 10 each at a premium of `- 2 per share as
fully paid up. You are required to pass necessary Journal Entries including cash
transactions in the books of the company. loceeds of Ei Ny of Redo =

Solution
O 10000x100
=

x
# TP 1000 000
In the books of C Ltd.
=

,
S

RIS = 10
Journal Entries No = 100000 ES
-

Date Particulars Dr. (` ) Cr. (` )

3
Bank A/c
- Dr. 12,00,000
-
- -

To Equity Share Capital A/c 10,00,000

-
↑ -
--

To Securities
er Premium A/c 2,00,000
* * e
-

(Being the issue of 1,00,000 Equity

Shares of `10 each at a premium of `2
per share as per Board’s Resolution
No….. dated……….)
~
10% Redeemable Preference Share Dr. 10,00,000
-
Capital A/c

© The Institute of Chartered Accountants of India

 7.10 ACCOUNTING

-
To Preference Shareholders A/c 10,00,000
-
(Being the amount payable on
redemption of preference shares
transferred to Preference Shareholders
A/c)
Preference Shareholders A/c Dr. 10,00,000
Y To Bank A/c
-

10,00,000
-

(Being the amount paid on redemption

of preference shares)

Note: Amount required for redemption is ` 10,00,000. Therefore, face value of

equity shares to be issued for this purpose must be equal to ` 10,00,000. Premium
received on new issue cannot be used to finance the redemption.
Illustration 3
G India Ltd. had 9,000 10% redeemable Preference Shares of ` 10 each, fully paid
up. The company decided to redeem these preference shares at par by the issue of
sufficient number of equity shares of ` 9 each fully paid up. ES of E10 each at Eq fully
-of paid up
-
-

You are required to pass necessary Journal Entries including cash transactions in
the books of the company. Proceeds t NI of used=

⑫
IP 9 x 90000 =>
=

Solution Fx q =
/

In the books of G India Limited IP 90000 =

P13 9
Journal
=

NO =
10000
I

Date Particulars Dr. (` ) Cr. (` )

Bank A/c 10000 X 9 Dr. 90,000
To Equity Share Capital A/c 9
10000 x 90,000
(Being the issue of 10,000 Equity Shares of `9
each at par, as per Board’s Resolution
No…….Dated…..)
10% Redeemable Preference Shares Capital Dr. 90,000
A/c
To Preference Shareholders A/c 90,000
(Being the amount payable on redemption of
preference shares transferred to Preference
Shareholders A/c)

-
I
--
© The Institute of Chartered Accountants of India
 7.12 ACCOUNTING

(4) Minimum number of shares calculated as per (3) above, needs to be adjusted
due to various reasons. Firstly, shares fractions cannot be issued. Thus, if
minimum number of shares as per (3) above includes a fraction, it must be
approximated to the next higher figure to ensure that provisions of Section
55 are not violated. Secondly, if the examination problem states that the
proceeds/number of shares should be a multiple of say, 10 or 50 or 100, then
again the next higher multiple should be considered.
Illustration 4
The Board of Directors of a Company decided to issue minimum number of equity
shares of ` 9 to redeem ` 5,00,000 preference shares. The maximum amount of
divisible profits available for redemption is ` 3,00,000. Calculate the number of shares
to be issued by the company to ensure that the provisions of Section 55 are not
violated. Also determine the number of shares if the company decides to issue shares
in multiples of ` 50 only. FR -> CRR + Roceeds of Fl Mom Value of 12
=
.

bl - 3L x =

500000
Solution .

1. TP = 200000
Nominal value of preference shares ` 5,00,000
-

2 .
P1S = 9
Maximum possible redemption out of profits ` 3,00,000 3 -
No . =

22 .
222/22223
Minimum proceeds of fresh issue ` 5,00,000 – 3,00,000 = ` 2,00,000
Proceed of one share =`9
2,00,000
Minimum number of shares = = 22,222.22 shares
9
As fractional shares are not permitted, the minimum number of shares to be issued
is 22,223 shares.
If shares are to be issued in multiples of 50, then the next higher figure which is a
multiple of 50 is 22,250. Hence, minimum number of shares to be issued in such a
case is 22,250 shares.
4.1.6 Fresh Issue at a Premium and Minimum Fresh Issue
The calculation of minimum number of shares, when fresh issue is at a premium
should be handled very carefully Minimum fresh issue cannot be calculated unless
one knows the profits available for replacement of preference shares and profit
available for replacement cannot be determined unless one knows the portion of
profit available for redemption which is required for paying premium on
redemption. To tackle this, assume that profits available for redemption is not
required for paying premium on redemption of preference shares. In other words,

© The Institute of Chartered Accountants of India

 REDEMPTION OF PREPERENCE SHARES 7.13

it means that securities premium including premium on fresh issue is comparatively

more than premium on redemption.
If the above assumption holds good, minimum number of shares can be calculated
in a simple manner without use of equation. But, if above condition does not hold
good, then an equation is used to determine the minimum number of shares.
4.1.7 Minimum Fresh Issue to Provide Funds for Redemption
Besides, ensuring compliance with Section 55, the fresh issue of shares is made to
provide funds for making payment to preference shareholders. To calculate
minimum number of fresh shares to be issued to provide funds, amount payable to
preference shareholders is compared with funds available for redemption and the
balance of funds to be raised by fresh issue of shares are calculated. The amount
to be raised is divided by the issue price of a share (amount payable by shareholder
including premium, if any, on fresh issue) to compute the minimum number of
shares to be issued.
Illustration 5
X Ltd. gives you the following information as at 31st March, 20X3:

Particulars `
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 2,90,000
b Reserves and Surplus -> P2L - FR 48,000
>

2. Current liabilities
Trade Payables 56,500
ASSETS
1. Property, Plant and Equipment 3,45,000
2. Non-current investments 18,500
3. Current Assets
Cash and cash equivalents (bank) ⑧
31,000

The share capital of the company consists of ` 50 each equity shares of ` 2,25,000
and ` 100 each Preference shares of `65,000(issued on 1.4.20X1). Reserves and
Surplus comprises Profit and Loss Account only.
In order to facilitate the redemption of preference shares at a premium of 10%, the
=
-

© The Institute of Chartered Accountants of India

 REDEMPTION OF PREPERENCE SHARES 7.15

To Investment A/c 18,500

=>

(For sale of investments at a loss of ` 3,500)

Profit
- and Loss A/c Dr. 33,750
To Capital Redemption Reserve A/c
- 33,750
(For transfer to CRR out of divisible profits an
amount equivalent to excess of nominal value
of preference shares over proceeds (face
value of equity shares) i.e., ` 65,000 - ` 31,250)
Preference Shareholders A/c Dr. 71,500 -
-

To Bank A/c 71,500-

-

(For payment of preference shareholders)

Profit and Loss A/c Dr. 6,500
To Premium on Redemption of Preference -6,500
Shares A/c
(For writing off premium on redemption out
of profits)

Balance Sheet (after redemption)

Particulars Notes No. `

EQUITY AND LIABILITIES
1. Shareholders’ funds
a) Share capital 1 2,62,500
b) Reserves and Surplus 2 38,000
2. Current liabilities
Trade Payables 56,500
Total 3,57,000
ASSETS
1. Property, Plant and Equipment 3,45,000
2. Current Assets
Cash and cash equivalents (bank) 3 12,000
Total 3,57,000

© The Institute of Chartered Accountants of India

 7.18 ACCOUNTING

3. When shares are redeemed at a premium

Redeemable Preference Share Capital Account Dr.

Premium on Redemptions of Preference Shares Account Dr.
To Preference Shareholders Account

(Being the amount payable on redemption transferred to

Preference Shareholders Account)
4. When payment is made to preference shareholders

Preference Shareholders Account Dr.

To Bank Account

(Being the payment to preference shareholders as per terms)

5. For adjustment of premium of redemption
Divisible Profit Account Dr.
To Premium on Redemption of Preference Shares Account

(Being the premium on redemption adjusted against Profit

and Loss Account)

Illustration 6
The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st
December, 20X1.
Share capital: 40,000 Equity shares of ` 10 each fully paid – ` 4,00,000; 1,000 10%
Redeemable preference shares of ` 100 each fully paid – ` 1,00,000.
-
-

Reserve & Surplus: Capital reserve – ` 50,000; Securities premium – ` 50,000; General
-

reserve –` 75,000; Profit and Loss Account – ` 35,000

- -

On 1st January 20X2, the Board of Directors decided to redeem the preference shares
at par by utilisation of reserve.

You are required to pass necessary Journal Entries including cash transactions in the
books of the company.
FR-> CRR =
NY of red :

GR7800 ->75000 =100000

·

P2L 35000 -> 25000

-

100000
© The Institute of Chartered Accountants of India -
-
-
 7.22 ACCOUNTING

Illustration 8
The capital structure of a company consists of 20,000 Equity Shares of ` 10 each fully
paid up and 1,000 8% Redeemable Preference Shares of ` 100 each fully paid up
(issued on 1.4.20X1).
Undistributed reserve and surplus stood as: General Reserve ` 80,000; Profit and Loss
Account ` 20,000; Investment Allowance Reserve Cout of which ` 5,000, (not free for
distribution as dividend) ` 10,000; Securities Premium ` 2,000, Cash at bank
amounted to ` 98,000. Preference shares are to be redeemed at a Premium of 10%
and for the purpose of redemption, the directors are empowered to make fresh issue
of Equity Shares at par after utilising the undistributed reserve and surplus, subject
to the conditions that a sum of ` 20,000 shall be retained in general reserve and
which should not be utilised.
Pass Journal Entries to give effect to the above arrangements and also show how the
relevant items will appear in the Balance Sheet of the company after the redemption
carried out.
Solution
In the books of ……….
Journal Entries

Date Particulars Dr. (` ) Cr. (`)

Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of
` 10 each at a premium of Re. 1 per share as per
Board’s Resolution No…..dated…….)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000
Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c
75,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)
8% Redeemable Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of Preference Shares A/c Dr. 10,000

© The Institute of Chartered Accountants of India

 FR - >
CRR+ Proceeds of Fresh Issue =
NV of redemption
GY 0000 =
100000
.

Ret- 20000
-

wo -> 60000
L
·

pa 20000
=

25000
/
I

.
POR -
10000

0 -
- 10 000
,

1A 10000/

-
SWOO
-

5000 - 5000
- -
-

75008
-

-
-

3 .

10 2 .

1 .
Total Proceeds =
25000
/

Proceeds/sh
=sh
2 .

.
3 No . Of Sh :

10 GR BU .
60002
F S

P& i DV 10000
/

TAR Du 5000
↑

To CRR 7500
, I

2 .
Baule 190 .
25000
-
/

To ESC
,
25000
/

PS Dr 100000
B
.

I POR Dr -
10000
S

To ,
pst 10000
-

PSH Dr . 10000
-

To Bank
,
110000
--

PCL Br -
10000
S

To , POR 10000
S

-
 REDEMPTION OF PREPERENCE SHARES 7.25

Illustration 9
The Balance Sheet of XYZ Ltd. as at 31st December, 20X1 inter alia includes the
following information:
`
50,000, 8% Preference Shares of `100 each, `70 paid up 35,00,000
1,00,000 Equity Shares of `100 each fully paid up 1,00,00,000
Securities Premium 5,00,000
Capital Redemption Reserve 20,00,000
General Reserve
-
-
50,00,000
-
-

Bank 15,00,000
Under the terms of their issue, the preference shares are redeemable on 31st March,
20X2 at 5% premium. In order to finance the redemption, the company makes a rights
-

issue of 50,000 equity shares of ` 100 each at ` 110 per share, ` 20 being payable on
-

application, ` 35 (including premium) on allotment and the balance on 1st January,

-

- -
- -

20X3. The issue was fully subscribed and allotment made on 1st March, 20X2. The
-

--
--

money due on allotment were duly received by 31st March, 20X2. The preference
-
-

- -

shares were redeemed after fulfilling the necessary conditions of Section 55 of the
-

Companies Act, 2013.

You are asked to pass the necessary Journal Entries and show the relevant extracts
from the balance sheet as on 31st March, 20X2 with the corresponding figures as on
31st December, 20X1.
Solution
Journal Entries

` `
8% Preference Share Final Call A/c Dr. 15,00,000
To 8% Preference Share Capital A/c 15,00,000
(For final call made on preference shares @ ` 30
each to make them fully paid up)
Bank A/c Dr. 15,00,000
To 8% Preference Share Final Call A/c 15,00,000
(For receipt of final call money on preference shares)

© The Institute of Chartered Accountants of India

 A
**
--
Free Res
-

Cap . Red Res

.
+ Proceeds of fresh Issue :
Nominal Value of red .

GR5000000 50000x45 = 2250000 =

50000 x 100

pool i
-

IP= 110
-

FX =
100 = 5000000
-
-> 2750000
- · - 31 3 22
. .

--- 7
- -
-

ment ale P 250000

=
,

ECO -55

3113 31/3 1123

↓
PW Pe
Roceeds
>
20
-

35
--
F 20
=
= x rx25 =
10
↓
PL
F ↓
PX

xis)
! rotsn =

B Dr 20 ESAlof 35
To ESApp 20 To ESL 25
, ,

To SP 10
② ,

⑳
 188
CRRS 50
51 312
·

ER-CRR+ Proceeds of Fresh Issue = NV of redemption

-
↓ ↓ ↓ =

5000 000I
.

Allot call
GR5000000 ->2150000
- --
App
-

31 3 12
:
- 31 3 12
- :
1 1013
-

20 35/premS 55
-
I ↓
↓ 3

Proceeds Proceeds Proceeds

20 25 X

-
45
- X SOWOD

I -
-
R ~

GR BW 2750 000
I
.

To CRR
, 27,50 000 ,

2 :
Bank Dr .
50000 x 20
I I

To ES APP 50000 x 20
,
/

ESA Dr . 50000 X 20

To ESL 50000X 20

Es Allof D8 .
50000x35
I

To ,
ES 50000x
25

To S
50 000 x 10
, ,

Bank 135 - 50000 x 35

To
,
ES Allot ,
50 000 x 35

PS call Dr 50000X 30

To PSC 50000X 30
,
 s
Bank D8 :
58000 x 30

T,
Ps call 50000 x 30
/

- 12: 00
PSC Dr . 50000 X 100
/

POR Dr . 50000X 5
7
2 :

30pns
-
-

T, PS .
50000 X 105
&

Branch
7: 00-9 : 30am
PSH Dr - 50000X 105-
/

To, Bank 50000x 105

/

GR Dr .
50000 x 5

To, Po 50000x5
 7.28 ACCOUNTING

6. REDEMPTION OF FULLY CALLED BUT PARTLY

PAID-UP PREFERENCE SHARES
The problem of unpaid calls on fully called up shares may be studied under
following categories:
6.1 WHEN THE AMOUNT OF CALLS-IN-ARREARS IS RECEIVED BY THE
COMPANY
If the amount of unpaid calls is received by the Company before redemption, the
entry passed is as under:
Bank A/c Dr.
To Calls-in-Arrears A/c
After receipt of calls in arrears, the shares become fully paid up and then, company
can proceed with redemption in the normal course.
6.2 IN CASE OF FORFEITED SHARES
If in spite of receiving a proper notice from the company, the shareholders fail to
pay the unpaid calls, the Board of Directors may decide to forfeit the shares and
cancel these shares instead of reissuing the forfeited shares because redemption
of these shares is due immediately or in near future. In this case, the journal entry
for forfeiture is passed as usual, which will be as follows:
Preference Share Capital A/c # Dr
(#Called up share capital only relating to the shares to be forfeited)
To Calls In Arrears A/c
To Shares Forfeited A/c *
(*Amount actually collected on shares forfeited. This will be equal to the balancing
amount)
NOTE: But it should be noted, in this case, that the number of shares to be
redeemed will be reduced by the number of shares so forfeited.
Illustration 10
With the help of the details in Illustration 9 above and further assuming that the
Preference Shareholders holding 2,000 shares fail to make the payment for the Final
Call made under Section 55, you are asked to pass the necessary Journal Entries

© The Institute of Chartered Accountants of India

 REDEMPTION OF PREPERENCE SHARES 7.29

and show the relevant extracts from the balance sheet as on 31st March, 20X2 with
the corresponding figures as on 31st December, 20X1 assuming that the shares in
default are forfeited after giving proper notices.
Solution
Journal Entries
` `
8% Preference Share Final Call A/c 50000 X 30 Dr. 15,00,000
To 8% Preference Share Capital A/c 15,00,000
(For final call made on preference shares @
` 30 each to make them fully paid up)
Bank A/c (48,000 x `30)
- -
Dr. 14,40,000
-

Calls in arrears A/c

-
=> (2,000x ` 30)
-
60,000
-
- -

To 8% Preference Share Final Call A/c 50000 X 30

m
15,00,000
-

(For receipt of final call money on preference

shares) ~
Preference Share Capital A/c (2000 X 100)
` Dr. 2,00,000

3
-
-

To Calls in Arrears A/c (2000 X 30) 60,000

-

`
- ->

To Shares Forefeited A/c (2000 X `70) 1,40,000

-

-
--

(For Shares Forefeited after shareholders fail to

-

pay the Final Call)

Bank A/c Dr. 10,00,000
To Equity Share Application A/c 10,00,000
(For receipt of application money on 50,000
equity shares @ ` 20 per share)
Equity Share Application A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(For capitalisation of application money
received)
Equity Share Allotment A/c Dr. 17,50,000
To Equity Share Capital A/c 12,50,000
To Securities Premium A/c 5,00,000
(For allotment money due on 50,000 equity
shares @ ` 35 per share including a premium
of ` 10 per share)

© The Institute of Chartered Accountants of India