Page 116 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 5: Redemption of Preference Shares

To Capital Redemption Reserve Account Notes
(ii) When premium on redemption of preference shares is transferred to either profit and loss
account or any reserve or share premium account.

Share Premium account Dr. with that amount which is being paid on
Profit and Loss account Dr. redemption
To Premium on Redemption of Preference Shares Account
(iii) If the profits that will otherwise be available for dividend, are not sufficient to meet the
redemption of nominal value of redeemable preference shares, for shortage, there will be
new issue of fresh shares. This new issue of fresh shares can be at par, at discount or at
premium. There will be the following journal entries:
(a) When fresh shares are issued at par
Bank Account Dr.

To Share Capital Account
(b) When fresh shares are issued at premium
Bank Account Dr.
To Share Capital Account
To Share Premium Account

(c) When fresh shares are issued at discount
Bank Account Dr.
Discount on Issue of Shares Account Dr.

To Share Capital Account
The amount required from the issue of fresh shares can be computed with the help of following
equation:
Amount of Redeemable Capital Redemption Amount received from
= +
Preference Shares Reserve Account the issue of fresh shares
Step IV: In this step, we have to look for sums available from cash in hand and at bank in the
assets side of balance sheet of the company. If the total sums available from cash in hand and at
bank are not enough to meet the redemption of preference shareholders, shortage of cash will
be raised by one or more of the following methods:
(i) from taking bank loan
(ii) from the sale of investment or current assets.
(iii) from the issue of new shares

For these transactions the journal entries will be as follows:
(a) when bank loan is raised
Bank account Dr.
To Bank Loan Account

(b) When current assets or investments are sold (if there is any profit or loss on the sale
of assets, that will be transferred to Profit and Loss Account)

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