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Redemption of Preference
Shares (Accounting Entries)
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As per the Companies Act, 1956, as amended in 1988, only

preference shares which are redeemable within 10 years can be
issued. The preference shares may be redeemed at par or at
premium. Redemption of preference shares may be carried out
either out of undistributed profits otherwise available for
distribution by way of dividend or from the proceeds of fresh issue
of shares.

It may be noted here that the term ‘proceeds of fresh issue’ does not
include share premium money if fresh issue is being made at a
premium. The premium on redemption of preference shares may be
adjusted against the securities premium account or the profit and
loss account. It is only fully paid preference shares which can be
redeemed. Partly paid preference shares cannot be redeemed unless
they are fully paid.

Accounting Entries on Redemption:

When the preference shares are redeemed out of undistributed

profits, it is necessary, as per provisions of Companies Act, that an
amount equal to the face value of the preference share redeemed is
transferred to capital redemption reserve.

This is necessary in order to immobilise profit from being used for

any other purpose such as declaration of dividend, redemption of
debentures, etc. Capital redemption reserve can be utilised for the
purpose of issuing fully paid-up bonus shares.

The accounting entry for the transfer of amount of profits

to capital redemption reserve a/c is as follows:

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P and L a/c/General reserve a/c Dr.

To capital redemption reserve a/c

Illustration 1:

Bharat Limited invited applications for 1,00,000 shares of Rs. 100

each at a price of Rs. 110, payable Rs. 40 on application (including
premium Rs. 10), Rs. 45 on allotment and balance on first and final
call.

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Applications were received for 1,20,000 shares.

Allotment was made as:

To applicants of 80,000 shares: 100%

To applicants of 40,000 shares: pro-rata to all applicants

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Excess application money was adjusted against further money
payable. Mr. Rahul, to whom 1,000 shares were allotted on a pro-
rata basis, failed to pay the allotment and call money. Mr. Sanjay, to
whom 500 shares were allotted failed to pay the call money.

Prepare the following ledger accounts in the books of

Bharat Ltd.:

(i) Equity share capital account

(ii) Share allotment account

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(iii) Share call account

(iv) Securities premium account

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Illustration 4:

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A company made an issue of 30,000 shares of Rs. 10 each,

payable Rs. 3 on application. Rs. 5 on allotment and Rs. 2
on call. A total of 93,200 shares were applied for and
owing to this heavy oversubscription allotments were
made as follows:

Applicants for 21,500 (in respect of applications for 2,000 or more)

received 10,200 shares.

Applicants for 50,000 (in respect of application for 1,000 or more

but less than 2,000) received 12,600 shares.

Applicants for 21,100 (in respect of applications for less than 1,000)
received 7,200 shares. Cash then received after satisfying amount
due on application was applied towards allotment and call money
and any balance was returned. All moneys due on allotment and call
were realised. Give journal entries including that of cash and write
up the cash account and ledger accounts relating to this issue of
shares in the books of the company.
 Illustration 4: Journal Entries Part 1

Illustration 2:

A company has decided to increase its existing share capital by

making a rights issue to the existing shareholders in the proportion
of one new share for every two old shares held. You are required to
calculate the price of right if the market value of share at the time of
announcement of right issue is Rs. 240. The company has decide to
give one share of Rs. 100 each at a premium of Rs. 20 each.

Illustration 3:

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X Co. Ltd. had issued 2, 00,000 6% redeemable preference shares

of Rs. 100 each. Under the terms of the issue of shares, redemption
was to take place on April 1, 2012. A general reserve of Rs. 1, 25,
00,000 had already been built up out of past profits. For the
purpose of the redemption, 75,000 new 5% preference shares of Rs.
100 each were offered to the public at a premium of Rs. 50, payable
in full on application. The new issue was fully subscribed and paid
for. Thereupon 6% redeemable preference shares were redeemed.
Make journal entries to record the above transactions.
Note:

The above redemption of preference shares is said to be (i) out of

profit otherwise available for dividend to the extent of Rs.
1,25,00,000 and (ii) out of proceeds of fresh issue to the extent of
Rs. 75,00,000.

Illustration 4:

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The balance sheet of Besto Ltd. as on March 31, 2012,

disclosed the following information:

Authorised share capital: (Rs.)

5% redeemable preference shares of Rs. 10 each 1, 50,000

Ordinary shares of Rs. 10 each 5, 00,000

Paid up capital:

5% Redeemable preference shares of Rs. 10 each fully paid 1, 10,000

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Ordinary shares of Rs. 10 each fully paid 3, 00,000

Profit and loss account 2, 00,000

On April 6, 2012 the preference shares were redeemed at a premium

of Rs. 4 per share. The company could not yet trace holders of 1,200
preference shares. On April 8, 2012 a bonus issue of one fully paid
ordinary share for every five shares was made.

Show the journal entries to record these transactions (including

cash) and show these accounts as they would appear in the balance
sheet on April 8, 2012.

Illustration 5:

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The following is an extract from the balance sheet of

Abhinav Ltd. as on December 31, 2011.
On January 1, 2012, the board of directors decides the
following:

(i) The fully paid preference shares are to be redeemed at a

premium of 5% in February 2001 and, for that purpose, 50,000
equity shares of Rs. 10 each are to be issued at par to be paid for in
full on application in January 2012.

(ii) The 1,000 equity shares owned by A, an existing shareholder,

who has failed to pay the allotment money of Rs. 250 per share and
the first call money of Rs. 2.50 per share, are to be forfeited in the
month of March 2012.

(iii) The final call of Rs. 2.50 per share is to be made in April 2018.

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All the above decisions were duly complied with according to the
time schedule laid down.

The amount due on the issue of fresh equity shares and on final call
were duly received except from B, who has failed to pay the first call
money on his 1,000 shares, has failed to pay the final call money
also. These shares of B were forfeited in the month of May 2012.
Of the total shares forfeited, 1,500 were issued to X in June 2012,
credited as fully paid at Rs. 9 per share, the whole of A’s shares
being included.

Pass journal entries in the books of the company to record these

transactions and show the relevant items on the liabilities side of
the balance sheet (necessarily extract) according to the form
prescribed by the Companies Act, 1956. Assume that the resources
required for payment are available.
Illustration 6:

The following is the balance sheet at Abhiprya Ltd. as on

December 31, 2011.
The preference shares are to be redeemed on January 1, 2012 at 10
per cent premium.

On January 1, 2012, a fresh issue of equity shares was made to the

extent it is required under the Companies Act for the purpose of the
redemption of preference shares.

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The shortfall in cash resources for the purpose of redemption after

utilising the proceeds of fresh issue was met by raising a bank loan,
the cash balance of Rs. 50,000 being the minimum the company
requires for its trading operations.

Draft journal entries in the books of the company to record these

share capital transactions and prepare the balance sheet, in the
form prescribed by the Companies Act 1956, immediately after
redemption.

Illustration 7:
X Co. Ltd. issued 10,000 11% redeemable preference shares of Rs.
100 each at Rs. 105 on December 31, 2012. The terms of issue
provide for (a), the conversion of Rs. 3, 00,000 preference shares
into equity shares of Rs. 100 each on December 31, 2014 and (b) the
redemption of remaining preference shares at Rs. 103 on December
31, 2019. The company accordingly converts and redeems the
preference shares.

Just before redemption, the company reserve and surplus

comprises: Capital redemption reserve, Rs. 3, 00,000, securities
premium a/c 50,000, general reserve, Rs. 1, 00,000 and P and L
appropriation a/c Rs. 21,000.

Journalize since December 31, 2014. Assume that (i) the company
raises minimum proceeds from fresh issue of shares for the
purposes of redemptions and (ii) one per cent of the redeemed
preference share remains unpaid.
Illustration 8:

Determine the amount of fresh issue of shares from the

following information relating to Shagoon Leather Works
Ltd.

(i) Redeemable preference shares Rs. 2, 00,000

(ii) Premium on redemption 10%

(iii) Divisible profits available Rs. 60,000

(iv) Balance on general reserve Rs. 40,000

(v) Securities premium a/c Rs. 15,000

(vi) Fresh issue to be made at a discount of 10%

Solution:
Face value of preference shares to be redeemed = Rs. 2, 00,000

Premium on redemption of preference shares (10%) = 20,000

Premium on redemption of preference shares amounting to Rs.

20,000 will be met out of securities premium money—Rs. 15,000
and out of profits—Rs. 5,000.

Profits available for redemption of preference shares

= Rs. 60,000 – Rs. 5,000 + 40,000 = Rs. 95,000.

Therefore, proceeds amounting to Rs. 1, 05,000 have to be raised by

making a fresh issue of shares. Nominal value of shares to be issued
at a discount of 10%

= 1, 05,000 x 100/90

= Rs. 1, 16,670

Illustration 9:

The balance sheet of B Co. Ltd. as on March 31, 2012

disclosed the following information:

7% redeemable preference shares of Rs. 100 each, Rs. 70 paid up 2,

10,000

Ordinary shares of Rs. 10 each, fully paid up 3, 00,000

Profit and Loss a/c 2, 10,000

It was decided to redeem preference share at a premium of Rs. 5 per
share. The company made a first issue of 10,000 ordinary shares of
Rs. 10 each at a premium of 10 per cent on April 7, 2012.

The issue was fully subscribed and paid for on April 15, 2012, the
company redeemed all the preference shares. Pass necessary journal
entries to record the transactions.

Illustration 10:
X Co. Ltd. decided to redeem their preference shares as on
March 31, 2012 on which date their position was as under:

The redemption of all preference shares is to be carried out at

premium of 5 per cent. In order to carry out redemption of
preference shares it was decided to issue sufficient number of equity
shares of Rs. 100 each at a discount of 10 per cent. The new issue
was fully subscribed and paid for. The redemption was duly carried
out. Pass journal entries to record the above transaction and
prepare the balance sheet after redemption.
First securities premium on redemption of preference shares has to
be provided out of share premium money and dividend equalisation
fund. Thus, profits available for redemption of preference shares (in
the form of balance in dividend equalisation fund) are Rs. 1,
00,000. So, Rs. 3, 00,000 has to be raised by making a fresh issue
of equity shares.

Required number of equity share to be issued

= Rs. 3, 00,000/Rs. 90

= 3,333 – 1/3 or 3,334 shares

Cash and bank account is prepared to find out cash and bank
balance after redemption.

Related Articles:
1. Redemption of both Classes of Preference Shares
2. Redemption of Irredeemable Preference Shares of a Company
(Accounting Entries)
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