Page 115 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes Procedure for Solving Examination Problems
In order to solve the examination problem relating to the redemption of preference shares, the
following procedure should be adopted:
Step I: First, we should see whether the redeemable preference shares are fully paid or partly
paid up. If these are partly paid up, with the help of following journal entry, make them eligible
for redemption, because only fully paid up shares can be redeemed.
(i) When final call money is due:

Preference Share Final Call Account Dr.
To Preference Share Capital Account
(ii) When amount of final call is received:
Bank Account Dr.
To Preference Shares Final Call Account

Step II: Now we have to determine how much money is required to pay off the preference
shareholders whose shares are to be redeemed. This total amount payable will consist of face
value of preference shares which are to be redeemed and, if any, share premium payable on
redemption. The entry will be:
(i) When preference shares are redeemable at par:

Redeemable Preference Share Capital Account Dr.
To Preference Shareholders Account
(ii) When preference shares are redeemable at premium:
Redeemable Preference Share Capital Account Dr.
Premium on Redemption of Preference Shares Account Dr.

To Preference Shareholder Account
Premium on redemption of preference shares is a loss is therefore being debited.
Step III: In this step, we have to decide the sources from where redemption is to be made. To find
out the source we have to examine the liability side of the balance sheet:

(i) How much profits which will otherwise be available for dividend, are available to need
the redemption of nominal value of redeemable preferences shares.
(ii) How much other profits (capital profits) and balance in share premium account are available
in order to provide for premium, if any, payable on redemption.
It will then be decided whether the new issue of shares is required for the purpose of
redemption or not.
The journal entries will be:
(i) If the redemption is made by using the profits which will otherwise be available for
dividends, that amount of profits which is being utilised for redemption of preference
shares will be transferred to capital reserve account:
Profit and Loss Account Dr.
General Reserve Account Dr. As the case may be

Dividend Equalisation Fund a/c Dr.

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