UNIT II

Redemption of Preference Shares

2.1 Redemption of Preference Shares

A Redeemable Preferred Stock is one in which the amount can be repaid to the holder of the share. That is, the capital raised by the issuance of Redeemable Preferred Shares allows the company to repay such shares. The repayment of capital is called Redemption. Redemption of Redeemable Preferred Shares does not reduce the authorized capital of the company. From the creditor's point of view, the Redeemed share capital is simply replaced by the nominal value of the new share issued for the purpose of redemption or the capital redemption reserve account, so the capital remains intact.                            

 Issuance and redemption of preferred shares

1. We may not issue redeemable preferred shares or redeemable preferred shares if the redemption period exceeds 20 years.
2. Article 55 (1) states that a company limited by shares shall not issue preferred shares that are irredeemable.
3. Section 55 (2) further states that a company limited by shares, if approved by the article, may issue preferred shares which, in accordance with the prescribed conditions, may be redeemed within a time span not exceeding 20 years from the date of issue.                                                    

  Exceptions

1. Issuance and redemption of preferred shares by the company in infrastructure projects
2. Companies engaged in setting up and dealing with infrastructure projects can issue preferred shares for a period of more than 20 years, but not more than 30 years,

(However, the choice of preferred shareholder allows the redemption of at least 10% of the annual preferred stock on a proportional basis from twenty-first year onwards)

"Infrastructure project" means the infrastructure project specified in Schedule VI.

About preferred stock

Preferred shares are divided into four categories: Cumulative Preferred Shares, Non-Cumulative Preferred Shares, Participating Preferred Shares and Convertible Preferred Shares.

Cumulative Preferred Shares include provisions requiring shareholders to pay all dividends, including dividends that have been omitted in the past, before common shareholders can receive dividend payments. The payment of these dividends is not guaranteed and the payment of money. Unpaid dividends are assigned a moniker" dividends in arrears", which must legally go to the current owner of the stock at the time of payment. Holders of preferred shares of this type may be awarded additional compensation (interest).

Quarterly dividend= [(dividend) x (face value)] ÷4

Cumulative dividend per share = quarterly dividend X number of missed payments

Non-Cumulative Preferred Shares do not issue abbreviated or unpaid dividends. If the company chooses not to pay dividends in any given year, shareholders of Non-Cumulative Preferred Shares have the right or power to claim such forgone dividends at any time in the future.

Participating preferred shares provide shareholders with the right to pay additional dividends based on prescribed conditions, in addition to the amount equal to the generally specified rate of preferred dividends. This additional dividend is usually designed to be paid only if the dividend received by the common stock is greater than the prescribed amount per share. If the company is liquidated, the participating preferred shareholders may have the right to repay the proportional share of the purchase price of the shares and the remaining income received by the common shareholders.

However, the company may have provisions on such shares that allow the shareholder or the issuer to force the issuance. How valuable convertible common stock is, ultimately, based on how well common stock works.

Significance for investors

Preferred shares are the best option for risk-averse equity investors. Preferred shares are usually less volatile than common shares and provide investors with a steady stream of dividends. Also, preferred shares are usually callable, and the issuer of shares can redeem them at any time, offering investors more options than common shares.

Preferred shareholders experience both pros and cons. On the contrary, they collect dividend payments before the shareholders of common stock receive such income. But as a disadvantage, they do not enjoy the voting rights that common shareholders usually do.                       

Benefits of Preferred Stock

The owner of the preferred stock receives a fixed dividend before the common stock sees the money. In any case, dividends are paid only if the company makes a profit. However, the type of Preferred Stock known as cumulative shares allows for the accumulation of unpaid dividends that have to be paid at a later date,

Advantages of the company

Preferred shares benefit the issuer in several ways. The aforementioned lack of voter rights for preferred shareholders puts the company in a position of strength by letting it hold more control. In addition, the enterprise can issue callable preferred shares, which gives it the right to repurchase shares at its own discretion. This means that if the callable shares are issued with a dividend of 6%, but the interest rate drops to 4%, the company can buy the outstanding shares at market price and reissue those shares with a lower dividend rate. This will eventually reduce the cost of capital. Of course, this same flexibility is disadvantageous to shareholders.

2.2 Provision of the Companies Act for redemption of Preference Shares (Sec 55 of the Companies Act, 2013), Companies (Share and Debentures) Rules.

Issuance and redemption of preferred shares

1.  no stock restrictions shall be issued after the commencement of this law

Any preferred stock that is irredeemable.

2.     the company limited by shares may issue priority if approved by its article

Shares that are obligated to be redeemed within a period of no more than two decades from date issued in accordance with the prescribed conditions:

Provided that the company may issue preferred shares for a period exceeding twenty Year for infrastructure projects, subject to redemption of such a percentage of shares .The option of preferential shareholders can be specified on a yearly basis:

Further to be provided—

(a) Such shares shall not be redeemed except of the company's profits

Otherwise, it will be available for dividends or out of fresh issue earnings

Of shares made for the reason of such redemption;;

(B) Such shares shall not be redeemed unless paid in full;

(C) if such shares are proposed to be redeemed from the profits of such shares;

The Company shall transfer a nominally equal sum out of such profits there

The amount of shares to be redeemed, to the reserve, called capital redemption in accordance with the law on the reduction of share capital, etc.

Except as provided in this paragraph, the Company shall apply as capital redemption the reserve account was the company's paid equity capital.

(D) (I) in the case of a company of such class, is prescribed, and in the case of a class of company of that class of company;

Financial statements comply with the accounting standards established for such classes

The company under Article 133 shall, if there is a premium to be paid at the time of redemption is before the shares are redeemed, the company will be offered for out of profit: You will also be offered, if that premium is paid to any preferred reimbursement. Shares issued before the commencement of this law shall be issued by the company concerned. We will not be liable for any loss, damage, loss, loss, or damage to any of our products or services. Premium accounts before such shares are redeemed.

(ii) If there is a premium to be paid, if not applicable to section i above, it includes the premium to be paid. Reimbursement shall be provided in our interest or in our interest. Before such shares are redeemed, the company's securities premium account.

(3) The company is not in a position to redeem or pay preferred shares;

When there is a dividend for the shares (hereinafter referred to as the shares) in accordance with the issuance conditions. It can, with the consent of the holder of

With the approval of the court on three-quarters of the value of such preferred shares and the petition made by it in lieu of this will issue a further Redeemable Preferred Stock equal to for outstanding preferred shares, the amount due including dividends, and for the issuance of such further Redeemable Preferred Shares, unrealized preferred shares. The shares shall be deemed to possess been redeemed:

• In this subsection under the approval of the arbitral tribunal、
• Redemption of Preferred Shares, etc. held by persons who do not agree to such redemption shall be made promptly.
• To further issue of Redeemable Preferred Shares.

Description.- For the elimination of doubts, it is declared that here further problems

Redemption of Redeemable Preferred Shares or preferred shares or preferred shares, etc. under this paragraph shall be Share capital not considered to be an increase or in some cases a decrease Company.

(4) Capital redemption reserve account can be, regardless of this one

The section will pay the unissued shares of the company, the company applies

It is issued to members of the company as fully paid bonus shares.

Description.- The term “infrastructure project “for the purposes of Section 2

Schedule VI

2.2.1 Methods of Redemption of fully paid up Preference Shares as per Companies Act, 2013: The proceed of a fresh issue of shares, the capitalisation of undistributed profits and a combination of both, calculation of minimum fresh issue to provide the fund for redemption,

The following points highlight the top three ways of redemption of preferred shares. The methods are:

1. Proceeds from new issuance of shares

2. Capitalization of undistributed profits/reserves

 3. Both applications.

Method 1

Proceeds from new issuance of shares:

The meaning of the fresh issue earnings requires further clarification, because it creates confusion among the authors, as nowhere has previously defined it. According to the meaning of the dictionary, the term "earnings" means receipts under all conditions of issuance, that is. At par ,at a discount, and at a premium.

In the case of shares issued at face value or at a discount, there is practically no problem, but in the case of shares issued at a premium, the question arises whether the issuance premium of shares should be considered" revenue".

Before making any conclusions about it, consider the Sec that deals with shares issued at a premium .Let's look at 78(2). According to Article 78(2)of the Companies Act, funds received in premium accounts shall be transferred to "securities premium accounts."

The securities premium account shall be applied by the company for the following purposes:

a)     To pay any UN-issued shares issued to members of the company as bonus shares paid in full.

b)    To turn off our preliminary costs in writing.;

c)     Write off the costs of any fees or discounts paid on the issuance of company shares or bonds; or (C) write off any fees or discounts allowed on the issuance of company shares or bonds;;

d)    Provide a premium to be paid for redemption of Redeemable Preferred Shares or corporate bonds of the company;

Thus, in Section (d), the premium paid by redemption of the preferred stock may be adjusted to the securities premium account, but the nominal value of the preferred stock may not be redeemed from the securities premium account. Therefore, the premium on the issuance of shares cannot be treated as "earnings" and therefore cannot be used for redemption of the nominal value of preferred shares.                                                                                                                           Shares cannot be treated as "earnings"; therefore, the same cannot be utilized for the nominal value of the redeemed Preferred Stock.

Students are asked to remember the following for the purpose of redemption of preferred shares, which are redeemed from the "earnings" of fresh issues:

In fact, the company issues fresh shares for the purpose of redemption of preferred shares.

(i)                If the fresh issue is made at par : only the nominal values of share issued                            will constitute the proceeds.

(ii)              If the fresh issue is made at a discount : only the net amount received on issue of shares (not the nominal value)

(iii)           If the fresh issue is made at a premium : only the normal value of shares issued (i.e., excluding the amount of securities premium)

(i)                The balance of profits (after creating capital redemption reserves) is not sufficient to declare dividends.

(ii)              The liquidity position of the company is not sound.

(iii)           The company requires permanent capital by issuing shares, not preferred shares with a fixed dividend rate, for fixed asset acquisition or other purposes.

The logic behind fresh stock issues:

The following reasons have been proposed:

(a)  The liquidity position of the company is not sound, i.e. The company may face liquidity issues while paying preferred shareholders in cash.

(b) Due to insufficient profit, it is difficult to create a capital redemption reserve account.

I instead issue fresh Redeemable Preferred Shares that carry a fixed rate of dividends where the company finds it more preferable to issue fresh shares.

When we issue fresh shares for the purpose of redemption of Redeemable Preferred Shares, we may enjoy the following benefits:

(I)                The interests of shareholders and control over the company remain unaffected;

(II)             The acquisition of shares by shareholders is outside of the capital gains tax;

(III)           The problem of repayment does not arise.

Practical Questions:

Problem 1:

Find out the quantity which will be transferred to the capital redemption reserve fund in each of the subsequent cases:

Solution:

New issuance of shares is necessary in the following ways:

1. Rs. 60,000;
2.  Rs 60,000 (reimbursement premiums should not be considered);
3.  Rs. 60,000 (the premium on the issuance of shares must be taken into account)
4. Rs. 64,000 yen 40,000-Rs 4,000 to be deducted from 36,000. 1, 00,000);
5. Rs 60,000 share issue premium and preferred share redemption premium do not affect the capital redemption reserve account.)

Problem 2:

Find out the minimum amount of fresh issuance required to comply with the requirements of Article 80 of the Companies Act, 1956, from the following items: preferred shares to be redeemed:

(i) Rs.1, 00,000 per share

(ii) Rs1, 00,000 at a premium of 10%

(iii) Rs1, 00,000 at a premium of 10%

Profit indicated on the balance sheet:

(i)                Profit Rs.15,000; securities premium Rs.5,000

(ii)              Profit rupees.15,000; securities premium Rs.5,000

(iii)           Profit Rs.15,000 yen, including general reserve fee.10,000;

Dividend Equalization Fund Rs.20, 000; securities premium Rs.4,000.

Solution:

New issuance of shares is necessary in the following ways:

(i)                Rs.85,000 yen 1,00,000 yen 15,000;the securities premium account is not available for any purpose because it is not available at all for the same dividend and therefore is not available for capital redemption reserve.)

(ii)              Rs.90,000(i.e., the redemption premium is Rs. Adjusted for a security premium of 10,000(1,00,000 X Rs).Profit and loss accounts of 5,000 and Rs.5,000. Therefore, the balance is P&L A / c(Rs.15,000 to 5,000 yen to transfer to the capital redemption reserve account, i.e. 10,000, which is available for dividends. So a fresh issue to be made for Rs.90,000 yen 1,00,000 yen 10,000).

(iii)           Rs.61,000(i.e., the redemption premium is Rs. Securities premium account (full amount) adjusted for Rs 10,000.4,000 rupees and balance.6,000 taken from P & L accounts. Therefore, the profit available for dividends: from P&L A / c Rs.9, 000 per share (tax included, postage included) 15,000 yen-6,000 yen), general reserve charge included.10,000, dividend Equalization Fund Rs.20,000. You can take 39,000 to transfer capital redemption reserves and balances Rs.61, 000 (1, 00,000–39,000) to be taken from the new problem.

Problem 3:

The number of new shares issued is determined from the following items:

Preferred shares to be redeemed:

Rs. 1,00,000 at a premium of £ 10%

Profits displayed on the balance sheet:

Profit Rs.15, 000; securities premium Rs. New launch with more than 2000 million yen purchase!5 at premium%

Solution:

Calculation of shares to be issued and their amount:

Let the fresh issuance of shares X

Premium on Fresh issue at 5% = 5x/100

Rs 1,00,000 + Rs. 10,000 = Rs. 15,000 + Rs. 2,000 + ×(fresh issue) + 5x/100(premium)

Or, Rs 1,10,000 = Rs. 17,000 + x + 5x/100

Or, 93,000 = x+5x/100

Therefore, x = Rs. 88,571.

(If value of share is of Re.1; and it will change accordingly in case of Rs.50 and Rs. 10)

Problem 4:

Calculate from the following items:

(i) The smallest problem;

(ii) The amount issued.

Nominal value of preferred shares to be redeemed Rs.20, 000

Premium benefits@10%

Profit available for dividend Rs.4, 000

Fresh issues made in premium 10%

Solution:

(i) Calculation showing the minimum problem:

Minimum problem Rs.16, 000 (20,000-4,000 yen）)

(II) Issuance amount:

Rs.20, 000 + rupees.2, 000 = rupees. More than 4,000 yen points 10 times / 100

Or, Rs.18, 000 x 10 times / 100

Or x=Rs.16, 364

Premium on redemption of preferred shares:

The premium paid on redemption of preferred shares in accordance with Sec 80(I)(C)of the Companies Act must be adjusted to one:

(I)                securities premium account; or

(II)             in the absence of a securities premium account, or if a securities premium account is not sufficient, from our profits (i.e., profit and loss accounts).

According to Article 80(1)(c)of the Companies Act:

 is in the opinion of some authors that the word "before" refers to the word" Company securities premium account".

Therefore, it concludes that the premium paid at redemption must be provided from a profit or securities premium account (i.e., from an existing securities premium account) before redemption, not the premium received from a new issue of the stock.

However, in the above opinion, the word "before" indicates that a premium provision on redemption should be made before the stock is redeemed. In addition, most of the Indian authors on accounting accept this view. Thus, the premium paid at redemption is calculated from the profit (dividends available), or from an existing securities premium account, or from the premium received at the time of a new issue of the stock.

Accounting Entries:

Redeemed at a premium:

Problem 5:

Co. X has a portion of its share capital in 1,000, a redeemable preferred stock of Rs 8%. Each 100 shares is now ready for redemption. Preferred shares should be redeemed at a premium of 10% of the fresh issuance of shares @Rs. Each of the 10 companies has a Security Premium account balance in the range of Rs. 15,000:

Solution:

In the Books of X.Ltd

Journal

Fresh issuance of Redeemable Preferred Shares for redemption purposes:

Sec .Accounting to 80A, (1)(B), may issue a new Redeemable Preferred Stock for the purpose, with the consent of the Companies Act committee, if the company is unable to redeem the preferred stock on the due date set out due to lack of funds (if there is a dividend delinquent in the principal amount). The company can also take advantage of the fresh issue income for the purpose of paying overdue priority dividends.

The Companies (Amendment) Act 1996, permits a company issue redeemable preference shares which must be redeemed within  a period of 20 years. The Act became operative from 1st March 1997.

Problem 6:

What entries can be made for the next redemption we have made? (No narration required):

(i)                2003 X Ltd. I bought back the Rs. By converting 1,00,000 preferred shares into shares issued at a 25% premium.

(ii)              2004 X N X Co., Ltd. I bought back the Rs. Convert 95,000 preferred shares to shares issued at a 5%discount.

(iii)           2005, X Ltd. Redeemed 10,000 preferred shares of Rs. 10 each at a premium of Rs. 1.25 per share by converting them into shares of Rs. Each issued with 10% discount 10

Solution:

Method 2

Capitalization of undistributed profit/reserve:

The legal procedure that preferred shares can be redeemed from profits available for dividends by creating capital redemption reserves (Sec.In accordance with 80)is already emphasized at the beginning of this study. That is, it is another aspect of redemption other than the issuance of fresh shares, which is also allowed in the Companies Act.

If the preferred stock is redeemed from profit, the sum equal to the face value/nominal value of the Redeemable Preferred Stock is returned to the capital redemption reserve (Sec.80 (1) (d). Such a capital redemption reserve account can only be used for the purpose of issuing fully paid bonus shares. In short, some of the distributable profits cannot be distributed by dividends.

Reasons for creating capital redemption reserves:

There are two reasons for creating capital redemption reserves substantially:

(I)                From a shareholder's perspective, and

(II)             From the perspective of creditors.

Profit from capital redemption reserve to create one of the most important aspects of the capital, it will maintain, i.e., shareholders, to protect the interests of the principle of redemption is to be done and soon, The company is to issue shares of preferred stock that by raising funds to overcome budget level to maintain the operation of the liquidity crisis may be to us known.

Naturally, the public will not be interested in subscribing to shares. This is because when a company redeems preferred shares, it becomes clear that the period of liquidity crisis is over. However, as soon as preferred shares are redeemed, there will be a shortage of capital. Therefore, Section 80 of the Companies Act, 1956, suggests the maintenance of capital taken during the liquidity crisis period by issuing Redeemable Preferred Shares.

Sec.80 objectives / objectives are quite satisfied by the following two methods:

(i)                Fresh out of the problem earnings;

(ii)              Out of profits by creating capital redemption reserves that may only be applied to issue bonus shares paid in full.

(iii)           From the standpoint of creditors:

Logic for creating capital redemption reserves is to protect the interests of creditors. This is not surprising, because if the director decides that way, he can distribute the full amount of profit by dividends; in other words, adversely affect the interests of creditors.

The above points can be proved—how the interests of creditors are protected—if we consider the following examples:

Z Ltd.

Balance Sheet as at 31st March 2008

Preferred shares will be redeemed on 1st April2008 at par.

It shows the effect of creating a capital redemption reserve from the profit and loss account (available to pay dividends), indicating that the interest of creditors is not affected at all.

Solution:    Statement showing the amount available to Creditors

(before redemption and after redemption)

Contd.

Accounting entries

Practical Questions:

Problem 7:

X Corporation (Co.) issued 50,000 shares of Rs.10 each and 3,000 Rs Redeemable Preferred Shares, 100 each and all shares are called in full and paid on 31.3.08. The profit and loss account showed the undistributed profit. The general reserve with 1, 50,000 stood Rs.2, 20,000. In 1.4.2008, the directors have decided to redeem the existing preferred shares in Rs. Take advantage of as much profit as is required for 105 purposes.

Solution:

In the book of X Co. Ltd

Journal

Method 3

Both applications:

(That is, partly from fresh issuance of shares, partly from profit)

Under such circumstances, the company may redeem its preferred shares out of profit by (I) using a new issuance of shares and (II) creating capital redemption reserves.

Practical Questions:

Problem 8:

The company has a redeemable preferred stock of 4,000, 6% of Rs. 100 each paid in full. The company decided to redeem the shares of the company. 31, 2008 at a 5% premium. The company makes the following problems:

a)     1,000 shares of Rs. Each at a 100% premium 10.

b)    Bonds of 1,000, 6% of rupees. 100 each

This issue was fully subscribed and assigned. The redemption was officially made. The company has a credit balance in the profit and loss exchange / C Rs. 5, 00,000 and securities premium A/c Rs. 50,000.

Solution:

In the book of…..

Journal

Sale of investment and fixed assets:

According to Sec  80A, the proceeds from the sale of investments or the sale of fixed assets should not affect the amount necessary for the creation of capital redemption reserves, that is, the above earnings should not be taken into account.

They can be used as a liquid source of funds to redeem preferred shares. However, the profit or loss on sale must be transferred to the profit or loss account, unless it is capital gain. This is because if a fixed asset is sold, then the profit from the sale of that asset must be transferred to the capital reserve as capital gains.

Proceeds from issuance of corporate bonds or long-term loans:

It is the same treatment as "sale of investment/fixed assets" above. But the amount can be used as a liquid source of funds.

Partially paid Pref. Sale of Shares, Investments, sale of plants and machinery and long-term loans:

Problem 9:

As of the 31st march2008, we presented the following balance sheet:

Balance Sheet

As at 31st March, 2008

In the 1st April 2008, the company redeemed its 10% Pref. Shares at a 10% premium. For this purpose, the company:

1. Sell investment for Rs. 80,000.
2. Part of plant and machinery WDV Rs. It sold for 1,50,000 rupees. 1,20,000.
3. Received a loan from ICICI Bank at an interest rate of 12% equivalent to Rs. 1, 00,000.
4.  The minimum reduction made from the general reserve account.
5.  Issued 6,000 shares @Rs. 10 each, fully paid at par.

View the entry and balance sheet immediately after Redemption.

Solution

Workings:

1. Funds required for redemption

(a)  Since partly paid shares be redeemed as per Sec. 80, 8% Partly paid pref. shares cannot be redeemed and as such no fund is required for that purpose.

(b) Funds for fully paid Pref. Shares

                                                     Rs

10% Pref. Shares Capital    2,00,000

Add: Premium @ 10%          20,000

                                                  2,20,000

Premium paid on redemption can be adjusted against the  Securities Premium Account.

                                                                                                          Rs

But regarding Capital sum

6,000 Equity Share @ Rs. 10                                                     60,000

From available balance in Profit & Loss A/c

[Rs 1,00,000 – Rs. 20,000 (Loss on sale of investment)-                             

Rs. 30,000 (Loss on Sales of P & M)                                           50,000

Balance from General Reserve                                                  90,000              

                                                                                                          2,00,000

2.     Proceeds from Sale of Investment of Sales of Plant and Machinery or loan from Bank cannot be considered for creating Capital Redemption Reserve.

In the books of Sourav Ltd.

Journal

W

Balance sheet (after Redemption)

As at 1st April 2008

Untraceable preferred stock:

Sometimes it may happen that some preferred shareholders are untraceable. In this way, they are not paid. The amount of these shares, if any, remains in the preferred shareholder account, which will appear on the debt side of the balance sheet as current liabilities with nominal value plus premium. There is no separate entry for that purpose. Only the amount paid to the preferred shareholder will be deducted from this amount.

Problem 12:

The company had a stake in footfalt Rs. It will be split into 2, 00,000 Rs shares. Each 100 11% cumulative red. Share of pref Rs. 100 each for Rs. 1, 00,000 rupees 50,000 and Rs. 40,000, respectively, on the profit and loss account and General Reserve credit as of 31st March1990. It also has Rs. 8,000 on securities premium account credit:

Following an agreement with preferred shareholders, the directors decided to redeem 1.4.190 shares at a 10% premium. It was also decided to sell 31.3.1990 books and certain investments whose market value was Rs. 40,000 and Rs. 50,000 each to activate the redemption.

For the purpose of redemption, the board decided to use the free reserve as much as possible. To finance the redemption, it was decided to issue 500 rights shares at a 20% premium.

After Redemption, the board of Directors decided to issue bonus shares to shareholders in a ratio of 2 to 5.

Holders of 10 preferred shares were not traceable.

Please view the journal entries required to record the above transactions in the footfalt Ltd books. It also displays items will appear on the company's balance sheet.

Solution

In the books of Footfalt Ltd.

Journal

Balance Sheet (Extract)

as at 1st April 1991

Partially paid preferred shares and redemption:

The SEC of corporate law, according to 80, 1956, partially paid preferred shares cannot be redeemed. If the amount due to call-in arrears is realized, it can be redeemed. In other words, it must be converted into fully paid preferred shares before Redemption. The issue of redemption does not arise under the circumstances.

Problem 13:

The balance sheet of XYZ Corporation, as in 31st December1998, includes, among other things, the following:

Under the terms of this issue, preferred shares will be redeemed on March31, 1999 with a premium of 5%. To finance the redemption, the company will issue 50,000 shares of Rs. 100 rupees per share each at Rs 110. 20 are paid to the application, Rs. 35 allotment (including premium) and balance 1, 2000 on the month. This issue was fully subscribed and the assignment was made on March1, 1999. The money by allotment was received by March31, 1999.

Preferred shares were redeemed after meeting the requirements of Section 80, 1956 of the Companies Act. The company decided to make minimal use of the general reserve. You will be asked to pass the required journal entry and display the relevant extract from the balance sheet as of March 31,1999 with the corresponding number as of 31st December1998.

Solution:

Note:

The SEC of corporate law, according to 80, preferred shares cannot be redeemed unless they are paid in full. Therefore, the partially paid preferred shares must be converted to all Final money in Rs, that is, to be paid in full before Redemption 30 per share to call up and pay up.

Call-in arrears, but not confiscated:

According to 80A, preferred shares cannot be redeemed until they are fully refunded or unless they are refunded, i.e., partially paid preferred shares. Therefore, preferred shares that are not fully refunded, i.e. call money, are not paid and remain in arrears, and those shares cannot be redeemed.

Now the question arises: Should the funds be provided only for fully paid preferred shares, or should they include partially paid preferred shares? According to 80, the funds should be provided only for fully paid preferred shares, that is, the minimum amount of fresh matter or fully paid preferred shares.

However, from a practical point of view, to provide funds that include all preferred shares, that is, partially paid preferred shares, it is, of course, against the total amount.

This is due to the fact that once arrears are realized on subsequent due dates, no new issuance can be made for only those minority shares. Therefore, from a practical and realistic point of view, all shares should be funded.

Problem 14:

As of 31st march2008, X Corporation presented the following balance sheet:

Balance Sheet (Extract)

as at 31.3.2008

Other information:

In 1.4.2008, the company redeemed Preferred Shares at a premium of 10%. Displays entries under each of the following conditions:

a)     We have issued 10,000 shares of Rs. 10 each, at par, paid in full.

b)    The company has issued the minimum number of shares of Rs. The minimum bank balance to be maintained at Rs1, 50,000 respectively, at 10% for the purpose of working capital the required amount is borrowed from the bank: on 1.4.2008 reached Rs opening the balance of cash in the bank as on. 80,000.

c)     From a practical point of view.

Solution:

Condition (a)

As per Sec.80 Funds should be provided for:                             Rs

2,000 – 200 = 1,800 Pref. Share @ Rs.100                                  1,80,000

Add: Premium on Redemption @ 10%                                          18,000

                                                                                                               1,98,000

Fresh issue of equity share would be 10,000 x Rs. 10 = Rs. 1,00,000 and the balance to b taken from p & L A/c, Rs. 80,0000, by creating Capital Redemption Reserve, and Premium on Redemption to be adjusted against Securities Premium A/c.

In the book of X Ltd.

Journal

Condition (b)                                                                                                                                             Rs.

  As pre Sec.80 Funds to be required for 20,000 – 200 = 1,800 Pref. Shares @ Rs. 100         1,80,000

Add: Premium on Redemption @ 10%                                                                                             18,000

                                                                                                                                                                  1,98,000

Of which Rs. 1,50,000 to be taken from P & L A/c and balance Rs. 30,000 to be made by fresh issue of equity share of Rs. 10 each .Premium on redemption to be adjusted against Securities Premium A/c.

In the book of X Ltd

Journal

Condition (c)

                                                                                                                         Rs

Fumds requierd dor 2,0000 Pref. Share                                             2,00,0000

Add: Premium on Redemption @ 10%                                                20,000

                                                                                                                      2,20,0000

Of which Rs. 1,50,000 to be taken from P & L A/c by creating Capital Redemption Reserve Scount and balance of Rs. 50,000 to be madfe from fresh issue of equity dhsres of Rs. 10 cash. And Premium on Redemption of PRef. Share amounting to Rs. 20,000 to be adjusted against Securities Premium Account.

Im the books of Y Ltd.

Journal

Note:   The only differemce under this approcah, is that funds to be provided for entire capital sum of Rs. 2,00,000 and not for Rs. 1,98,0000 so that when the calls in appear will be raised no problem will arise for redemption of those preferences shares. But at pesent at the redemption will be made for only paid shares.

Call-in arrears were later confiscated and then reissued:

If the preferred shareholder does not pay the call money within the deadline, even though it issues a reminder notice, the board can then forfeit the shares. Currently, these forfeited shares may or may not be reissued. If these forfeited shares are not reissued on the grounds that they will be redeemed immediately, only the usual forfeited entries should be passed to the account book.

But on the other hand, if these forfeited shares are reissued to another person, the usual forfeiture and reissue entries should be passed to the account book. Funds provided for the total number of preferred shares. The profit from the reissue of the forfeited preferred shares must be transferred to the capital reserve account, such as forfeiture and reissue of shares.

Problem 15:

Below is the balance of company P. 31 (UPI) 2008:

Preferred shares were redeemed at a premium of 1.7.109%. To get a reminder about call-in arrears payments, shareholders holding 50 shares paid dues by 31.5.2009. Shareholders who held the remaining 10 shares became insolvent and were unable to pay the balance. As a result, the directors confiscated these shares and reissued them as fully paid on 10.6.2009 when they received Rs. 500.

The repayment was completed by 30.9.2009, except for shareholders holding 100 shares that were out of India.

A further 15,000 shares, each was issued at 10 per cent for the above redemption purposes

View entries and prepare a balance sheet that assumes that the minimum reduction will be made from the general reserve.

Solution:

In the books of P. Co. Ltd.

Journal

Balance Sheet (Extracts)

As at 30th September 2009

Redemption of Pref. Shares made at Premium but new issue of Equity Shares made at a discount

Confirmation of the minimum fresh issuance of shares is calculated as follows:

Method 1:

(a)  First, calculate the amount paid to the preferred shareholder (without insurance), that is, the total capital/principal amount.

(b)  Deduct the amount taken from the general reserve/profit / loss account in the capital redemption reserve account.

(c)  The remaining balance must be the funds required to be met from fresh issuance at face value.

Method 2:

If the minimum balance is maintained by fresh issuance of shares, then what happens to the deficit/shortage on the debit side of the bank, which is treated as fresh issuance of shares? Now, if the fresh issuance of shares is made at a premium, then the deficit required in that case should be divided by the face value per share plus the premium to obtain the number of shares.

The necessary amount, which is then allocated between the amount of the share capital and the amount of the securities premium in the ratio of the face value of the share capital and the premium per share. Look at the Problem below.

Problem16:

Ltd spotlight has issued 60,000 share capital, 8% redeemable cumulative preferred share of Rs. Share of each of 20Rs and equity of 4, 00,000. Each 10 preferred shares will be redeemed at a 5% premium of 1january2006:

We had a balance sheet that day.

Top 3 ways of redemption of preferred shares in order to facilitate redemption of preferred shares, it was decided:

(A) Sell the investment for Rs. 3, 00,000.

(B)  to finance part of the redemption from company funds provided that the balance of the profit and loss account of Rs remains outstanding. 2,00,000.

(C) issue sufficient shares of Rs; 10 each at a premium of Rs. 2 per share in order to take up  the necessary funds balance.

Preferred shares were redeemed on the due date and the shares were fully subscribed. You need to prepare:

(i) Journal entries to record the above transactions;

(ii) Memorandum balance sheet upon completion of redemption.

Workings:

1. Calculation of Frsh issue of Equity Shares:

Total funds required for redemption (Rs.12,00,000 + Rs. 60,000)                12,60,000

2.     Less: Available balance from P & L A/c by creating

Capital Redemption Reserve:                   

P & L (balance) A/c                                                                                7,00,000

Less: Loss on Sale of Investment                                                           50,000

                                                                                                                     6,50,000

Less: Minimum balance to be retained in P & L A/c                        2,00,000

                                                                                                                                                           4,50,000

Therefore, total amount to be required                                                                                      8,10,000

Less: Premium payable on redemption                                                                                       60,000

                                                                                                                                                             7,50,000

No. of Shares to be issued = Rs. 7,50,000 / Rs. 10 = 75,000 Shares

Dr.                                                                             Bank Account.                                                                Cr.

Solution:

In the books of Spotlight Ltd.

Journal

Memorandum Balance Sheet

As at 1st Jan.1 2006

(after Redemption)

Workings:

1. Calculation of fresh issue of Equity Shares:

                                                                                                                                              Rs

Total Funds required for redemption (Rs. 12,00,000 + Rs. 60,000)               12,60,000

2.     Less: Available balance from P & L A/c by cresting

Capital Redemption Resrve:

P & L (balance) A/c                                                                                                       7,00,000

Less: Loss on Sale of Investment                                                                                   50,000

                                                                                                                                           6,50,000

Less: Minimum balance to be retained in P & L A/c                                                 2,00,000

                                                                                                                                                             4,50,000

Total amount to be required                                                                                                          8,10,000

Total fund to be raised by the issue of equity shares                                                               60,000

                                                                                                                                                             7,50,000

No. of Share to be issued = Rs. 7,50,000 / Rs. 10 = 75,000 Shares

Dr.                                                                             Bank Account.                                                                Cr.

Problem 17:

Standing as under the balance sheet 31.12.2008 of the Corporation M:

Balance Sheet

as at 31st December, 2008

Preferred shares will be redeemed at 1.1.2009 at a premium of 7‰%.

To facilitate reimbursement, the company decided:

(i)                Sell the investment for Rs. 2, 60,000.

(ii)              To finance part of the redemption from our fund.

(iii)           To issue sufficient equity at the premium of Re. 1 per share to in order to take up the  balance of funds needed,

(iv)            The minimum bank balance held in Rs. 10,500. The investment was sold, the shares were fully subscribed, and the shares were officially redeemed.

View the entries and prepare the balance sheet.

Note: A minimum reduction should be made for the general reserve.

Solution:

Workshop:

In order to issue a sufficient number of shares, you need to prepare the following bank accounts:

Bank Account

*Total funds required by fredh issue of equity shares = Rs. 3,81,750

No. of Shares will be Rs. 3,81,750 / 6(5+1) = 63,625

(i.e, Equity Share Capital  = 63,625 x Rs. 5 = Rs. 3,18,125

Securities Premium = 63,625 x Re. 1 = Rs. 63,625)

                                                                                                                                                                           Rs

Now, funds required for the purpose of redemption of Preference Shares with premium       6,98,750

(Rs. 6,50,000 + Rs. 48,750)

Less: Amount to be raised by the issue of equity shares                                                                   3,18,125

                                                                                                                                                                         3,80,625

Less: Premium payable on redemption                                                                                                   48,750

                                                                                                                                                                           3,31.875

Less: Amount vaialable from P & L A/c

(2,60,000 – 15,000 for loss on sale of Investment)                                                                                  2,45,000

Amount taken from General                                                                                                                         86,875

In the book of M. Ltd.

Journal

Balance Sheet

(after redemption)

as at jan. 1, 2009

In the book of XYZ. Ltd.

Journal

Balance Sheet

as  at 31st March 1999

2.2.2 Security premium account not to be utilised for premium payable on redemption of preference shares.

Premium on redemption of preferred shares

(a)  For a company whose financial statements are in compliance with the accounting standards set forth in Article 133, the premium paid by Redemption shall be deducted from the company's profits before the share is redeemed.

(b) for preferred share redemptions issued prior to the commencement of the 2013 Act, the premium paid by the redemption shall not exceed the company's profit or the company's interest before such share is redeemed.

(c)  for a company whose financial statements are not required to comply with the accounting standards set forth in Article 133, the premiums paid at the time of redemption shall be paid to the company's profit before such shares are redeemed.

Case 1: redemption of preferred shares out of company profits that would otherwise be available

For dividends

If the Redeemable Preferred Shares are redeemed from the company's profits that are available for dividends, a "capital redemption reserve account" should be created that represents the Redeemable Preferred Shares in the balance sheet after Redemption. This capital redemption reserve must be equal to the amount of preferred shares to be redeemed. The profit available for dividends must be transferred to the capital redemption reserve account.

Journal entry

1. Transfer dividends to a capital redemption reserve account:

You may have earned a general allowance account

Profit and loss appropriation a / c Dr

Dividend equalization a/c Dr

                               To capital redemption reserve A/c

 Having the nominal value of the shares to be redeemed

2. If liquid assets are realized to provide cash for redemption of preferred shares:

Bank A/c Dr

To each asset account with the realized value of the asset

3. Transfer of Redeemable Preferred Stock capital to be redeemed to preferred shareholders

Account:

Redeemable Preferred Stock capital A / c Dr (Has a nominal value of the shares to be)

                               To Preferred shareholder A/c (to be redeemed)

4. When preferred shares are redeemed at a premium:

Redeemable preference share capital A / C Dr

Premium on redemption of Preferred Stock a / C Dr     With the amount of premium paid

                              To Preferred shareholder A / c

5. Offer of premium on redemption of Preferred Stock:

Securities premium A/c  Dr (with the amount of premium paid on redemption of preferred shares)

Or the appropriation of profit and loss a/c Dr

               To Account to premium on preferred stock redemption A/c

6. Redemption of Preferred Stock:

Preferred shareholders A/c Dr (in the amount paid)

                                    To the bank

Case 2: if the preferred shares to be redeemed from the proceeds of the new issuance of shares made for the purpose of redemption are redeemed:

If the Redeemable Preferred Stock capital is redeemed from the proceeds of the new issue, the new share capital account raised by the new issue shall replace the Redeemable Preferred Stock capital account after Redemption.

First, the entry for the new issuance of shares is passed. They make reimbursement funds as they were passed before.

Case 3: if a redeemable preferred stock is partially redeemed from the company's profits that would otherwise be available for dividends, a new portion of the stock made for redemption purposes will be redeemed:

If the Redeemable Preferred Stock is redeemed from a portion of the company's profits that can be dividends and redeemed from a portion of the proceeds of the new issue of the stock or preferred stock, then the capital redemption reserve account (capital or preferred), therefore, in such cases, the Redeemable Preferred Stock capital redemption=capital redemption reserve account+new share capital account (capital or preferred).

Here you need to pass all the entries shown under (i) and (ii). However, certain common applications are possible.

Problem 1

(If preferred shares are redeemed from our profits)

Ltd. Vanity's issued 1, 000, 12% Redeemable Preferred Shares"100 each, could be repaid at a premium of 10%. These shares shall be redeemed from reserve funds that exceed the amount required for redemption. It is assumed that the premium on redemption of shares must be written off against the company's securities compensation reserves, indicating the necessary entries in the company's books.

General reservation account doctor

On capital redemption reserve A/c

(Transfer of reserve funds to a capital redemption reserve account in connection with redemption of redemption preferred shares）)________m1, 00,000               

1, 00,000

12%redeemable preferred equity capital A / C Dr

Premium on redemption of Preferred Stock A/C Dr

To 12% favourite shareholder A/c

(Amount paid to 12% preferred shareholders at a premium of 12% upon redemption of 10% preferred shares %)

1, 00,000

10,000

1, 10,000

Securities premium reserve

Redemption of preference share a / C Premium

(Application of securities premium account to write off the premium in redemption of preferred shares)______

10,000 

10,000

12% preferred shareholder A / c Dr

To the bank (Amount by 12% of preferred shareholders at redemption)1, 10,000

 1, 10,000

Note: capital redemption reserve account replaces 12% Redeemable Preferred Stock capital account

 Structure of the company's capital does not change.

Problem 2

(When Redeemable Preferred Shares are redeemed from the proceeds of fresh issuance made for that purpose).

Co., Ltd. three and fast consists of a portion of its share capital,12% Redeemable Preferred Shares of100 each, repayable at a 5% premium. The shares are now ready for redemption. It is determined that the full amount will be redeemed from the fresh issuance of 20,000 shares1011 each to each. The full amount will be received in cash and 12% preferred shares will be redeemed.

View the required journal entries for your company's books.

Solution:

Journal entry

Bank A/c Dr

Application for equity and allocation A/C

(Including application money 20,000 shares@11 per share

1 premium per share)____     2,20,000 

2, 20,000

Share Application and allotment A/C Dr

Share capital A / c 2, 00,000

To securities premium reserve

(Allocation of 20,000 shares10 per share in accordance with the resolution of the board of directors issued at a premium of 1 per share per each share....)________

2, 20,000 

2, 00,000

20,000

12%redeemable preferred equity capital A / C Dr

Redemption of preference share a / C Dr. Premium

To 12% favourite shareholder A/c

(Amount due to redemption of 12% preferred shares, 8% Preferred Shares, 5% premium %)

2, 00,000’

10,000

2, 10,000

 Securities premium reserve

 To a premium on redemption of Preferred Shares A/c

(Application of securities premium account to write off the premium in redemption of preferred shares)____     10,000               

10,000

12% preferred shareholder A / C Dr

To the bank

(Amount by 12% of preferred shareholders at redemption)

2, 10,000 

2, 10,000

Note: share capital account replaces 12% redeemable preferred share capital account、

 I. Capital and liabilities Rs.

1. Shareholder funds  

(A) 15, 48,000 per in capital

(b) Reserves and retained earnings   2 1, 65,000

2. Current liabilities

 Purchase price                                               27,000

Total                                                                                           7, 40,000

II.Assets  

1. Non-current assets

(A) Fixed assets

(b) Non-current investments

2. Current assets

Cash and cash equivalent

Total

6, 00,000

50,000

6, 50,000

90,000

7, 40,000

 Notes

1. Share capital  

Authorized share capital............. 

Issue, subscription call-up and paid share capital

2500 preferred shares ' 100 each paid up in full 2, 50,000 

Less: calls in arrears 2000                                            

                                                                                        2, 48,000

30,000 shares of ' 10 each paid up in full 3, 00,000

2. Reserve and surplus  

Securities premium 15,000 

Surplus accounts 1, 50,000 1, 65,000

Problem 3

On 30 June, 2014, the board of directors redeemed Preferred Shares at a 10% premium and "decided to sell the investment at a market price of 40,000." They also decided to issue a sufficient number of shares at a premium of 10 per share per 1 share, which they needed after taking advantage of the surplus account to leave a balance of 50,000. The redemption premium must be offset against the securities premium reserve.

The repayments against the reimbursement were made in full except for shareholders holding 50 shares only because he left India.

It is necessary to present the journal table and balance sheet of the company after Redemption. The assumptions made should be stated in working.

Solution:

Journal entry for Oscar Books, Inc

Details are available at Dr. ('Rs.）Cr. ('Rs.)

Bank A/c Dr 40,000

Surplus a / c Dr 10,000

To investment

(That is, the sale of investments at a loss of 10,000)____________________50,000

BankA/c Dr     1, 65,000

To share capital A/        1, 50,000

To securities premium reserve

(To be the issuance of the required number of shares of premium 10%) 15,000

Preference share capital A / C Dr 2, 40,000

Reimbursement a / c Dr. Premium   24,000

Preferred shareholder A / c

(To be a transfer of the amount by the preferred shareholder of redemption) 2, 64,000

 Securities premium reserve        24,000

On reimbursement a/c premium (To be the transfer of securities premium account to write off the premium to the redemption account)_______________             24,000

Surplus a / c Dr   90,000

On capital redemption reserve A/c

(Is the transfer of profit used for redemption of preferred shares transferred to the capital redemption reserve account)____90,000

Preferred shareholder A / c Dr      2, 58,500

To the bank (Payment to preferred shareholders excluding 50 shares) 2,58,500

Oscar India Inc.

Balance sheet (after Redemption)

As of 1st July2014

I. Capital and liabilities Rs.

1. Shareholder benefits 1 4, 58,000

(a)Equity Capital 2 1, 46,000

(b) Reserves and surplus  

2. Current liabilities  

Purchase price 27,500 yen

Other current liability 3 5,000

Total 6, 36,500

II. Assets  

1. Non-current assets  

(A) Fixed assets 6, 00,000

2. Current assets  

Cash and cash equivalents 36,500

Total 6, 36,500

Notes

1. Share capital

Authorized share capital  

Issue, subscription call-up and paid share capital  

Issued, subscribed, and paid-in share capital 10,000 

Less: calls in arrears 2000 8,000

45,000 shares'10 each paid up in full 4, 50,000

4, 58,000

2. Reserve and surplus

Capital redemption reserve 90,000 

6,000 securities premium reserves 

Surplus accounts 50,000 1, 46,000

3. Other current responsibilities

Amount due to preferred shareholders: 5,000

 Bank account A/c Dr

Preferred shareholder to balance b/D90,000 by a / C 2,58,500

By investment 40,000 Balance B/d36,500

To share capital a/c1, 50,000  

To 15,000 securities compensation reserves _______

2, 95,000  2, 95,000

3. The premium on redemption of preferred shares is met from the securities premium account.

Problem 4

Redeemable Preferred Shares are redeemed from a portion of the company's profits and from a portion of the proceeds of fresh issuance of shares made for that purpose.

Producer Co., Ltd.

Balance sheet as of 31st March, 2014:

Producers Ltd
BALANCE SHEET
AS AT 31st March, 2014

Notes

1. Share capital

Authorized share capital

40,000 shares'10 each paid up in full 4, 00,000

1000, 8% Preferred Shares " 100 each 1, 00,000

5, 00,000

Issue, subscription call-up and paid share capital

1000 8% Preferred Shares'100 each paid in full-up 1, 00,000

25,000 shares'10 each paid up in full 2, 50,000

3, 50,000

2. Reserve and surplus

9,000 securities premium reserves

Surplus accounts 55,000                                                                                                                                                                                          64,000

3. Short-term provisions

 19,500 levy provision

4. Property, plant and equipment

Plant and machine 1, 90,000

Furniture and fixtures 20,000                                                                                                                                                                                                   2, 10,000

5. Other current assets

Prepaid cost 1000

To redeem preferred shares, the company issued 5,000 shares of 10 shares each at a 10% premium and sold 70,800 shares of the investment. Preferred shares were redeemed at a 10% premium.

Display the necessary journal entries in the company's books and prepare the company's balance sheet immediately after redemption of preferred shares.

Solution:

Journal Entries