Page 118 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 5: Redemption of Preference Shares

(iii) 10% Redeemable Preference Shares of 2,00,000 are to be redeemed at a premium of Notes
10%. General Reserve, Share Premium and Dividend Equalisation Funds are of
20,000, 4,000 and 40,000 respectively in the balance sheet.
(b) (i) A company has to redeem its Redeemable Preference Shares of 1,00,000 at 10%
premium. In its balance sheet shows profits available for dividend are 15,000,
Share premium of 2,000 and new shares are to be issued at 5% premium.
(ii) The Redeemable Preference Shares of a company are of 5,00,000 which are to be
redeemed at 10% premium. In its balance sheet there is credit balance of Profit and
Loss account of 1,12,500, balance in Share Premium Account is 10,000. The company
has to issue the new shares at 5% discount.
Solution:
The following amount from fresh issue of shares is required for redemption:
(a) (i) 80,000, because profit available of 20,000 can be utilised for redemption of
preference shares and will be transferred to Capital Redemption Reserve Account.
As per Section 80 the amount of premium cannot be utilised for redemption of
preference shares.
(ii) 1,10,500, because after writing off the premium on redemption of preference shares,
the profit available will only 39,500 which will be utilised for redemption of
preference shares and will be transferred to Capital Redemption Reserve Account.
(iii) 1,56,000, because after writing off the premium on redemption of preference shares
from share premium account and other profit, the profit available will only be
44,000 which will be utilised for redemption of preference shares and will be
transferred to Capital Redemption Reserve Account.
(b) (i) ( )
Profits available for dividend 15,000

—Premium on redemption to be paid out of profit (10,000 – 2,000) 8,000
Profits available for redemption 7,000
Amount of preference shares to be redeemed 1,00,000
Proceeds of fresh issue should be equal to 1,00,000 – 7,000 = 93,000

As the new shares are issued at 5% premium, nominal value of fresh
share capital will be:

100
93,000× = 8 8,571.4
105
(ii) ( )
Credit balance of P/L A/c 1,12,500
Premium on redemption to be paid out of profit (50,000 – 10,000) 40,000
Profit available for redemption 72,500
Amount of preference shares to be redeemed is 5,00,000

Proceeds of fresh issue should be equal to 5,00,000 – 72,500 = 4,27,500

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