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Accounting for Companies-I

Notes Only the nominal value of shares should be taken into consideration. The reason for not including
the premium in proceeds is clear that it does not provide any protection to the third party
(creditors). Section 78 of Company Act clearly depicts the four uses of share premium discussed
in the preceding chapter. And if premium is utilised for other than these four uses, it will be
treated as reduction of capital. If the amount of premium is included in the total proceeds for
redemption purpose, the amount of redeemable preference share will be replaced partly by
share capital and partly by share premium. Here, the security available for third party (creditors)
may be reduced at any time by the amount of premium as premium is open for four uses under
Section 78.
To put in a nutshell, the proceeds of fresh issue of shares means:
(i) When shares are issued at par, the nominal value of fresh shares.
(ii) When shares are issued at discount the amount realised from the fresh issue.
(iii) When shares are issued at premium, the nominal value of shares. The amount of premium
is not used for redemption of preference shares.

Profits which would otherwise be available for dividend

One of the sources of redemption of preference shares is the profit that would otherwise be
available for dividend. It means general profits can be utilised for redemption. Profit should not
be of capital nature. The list of such profit from which redemption can be made or can be
transferred to capital redemption reserve is as follows:
(i) General Reserve Fund
(ii) Credit balance of Profit and Loss Account

(iii) Reserve Fund
(iv) Dividend Equalisation Fund
(v) Workmen’s Compensation Fund
(vi) Workmen’s Accident Compensation Fund
(vii) Insurance Fund

(viii) Debenture Redemption Fund/Sinking fund
(ix) Contingency Reserve
(x) Reserve for doubtful debts or taxation.

Profits which will not be available for dividend:

The following profits are of capital nature, therefore cannot be utilised for redemption of
preferences shares or cannot be transferred to capital redemption reserve:
(i) Forfeited Shares Account

(ii) Share Premium Account
(iii) Profit Prior to Incorporation
(iv) Development Rebate Reserve
(v) Investment Allowable Reserve
(vi) Capital Reserve
(vii) Profit from Sale of Fixed Assets.

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