Page 119 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

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

100
4,27,500× = 4,50,000
95

Example 2: Redemption of Preference Shares out of Profits
The balance sheet of Sonex Limited as on 31 March 2006 was as under:

Liabilities ( ) Assets ( )
Share Capital: Sundry Assets 21,25,000
5,000, 8% Preference Bank Balance 3,75,000
Shares of 100 each fully paid 5,00,000
1,00,000 Equity shares of 10 each 10,00,000
15,00,000
Profit & Loss Account 3,00,000
General Reserves 2,50,000
Creditors 4,50,000
25,00,000 25,00,000

The preference shares are redeemable on April 1, 2006 at a premium of 10%. The redemption was
duly carried out on the due date, assuming that the company raised the necessary loan from
bank. Show the necessary journal entries in the books of Sonex Limited.

Solution:
Sonex Limited Journal
Date Particulars L.F. ( ) ( )
April 1 8% Redeemable Preference Share Capital Account Dr. 5,00,000
Premium on Redemption of Preference Share A/c Dr. 50,000
To 8% Preference Shareholders Account 5,50,000
(Being amount on redemption due to shareholders with premium)
Profit & Loss account Dr. 3,00,000
General Reserve Account Dr. 200,000
To Capital Redemption Reserve Account 5,00,000
(Being utilisation of profit and general reserve for redemption)
General Reserve Account Dr. 50,000
To Premium on Redemption of Preferences Shares account 50,000
(Being utilisation of general reserve for writing off the premium on
redemption of preference shares)
Bank Account Dr. 1,75,000
To Bank Loan Account 1,75,000
(Being raised of bank loan to pay off preference share holders)
8% Preference Shareholders Account Dr. 5,50,000
To Bank Account 5,50,000
(Being payment made to preference shareholders on redemption)

Note: 8% Preference Share Capital will be replaced by capital redemption reserve account in the liability
side of balance sheet.

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