Page 134 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 5: Redemption of Preference Shares

5.3 Summary Notes

 The preference shareholders contribute capital to the company. According to section 85 of
the Companies Act, 1956, persons holding preference shares, called preference shareholders.

 They are assured of a preferential dividend at a fixed rate during the life of the company.
 This type share holders carry preferential right over other shareholders to be paid first in
case of liquidation of the company. Companies use this mode of financing as it is cheaper
than raising debt.
 A company may issue redeemable type of shares on the condition that the company will
repay the amount of share capital to the holders of this category of shares after the fixed
period or even earlier at the discretion of the company. Section 80 of the Companies Act,
1956 deals with the redemption of preference shares.

5.4 Keywords

Fully Paid Shares: Shares in which whole amount is paid and no money is required.
Legal Restrictions: Legal limitations on activities.

Redemption: The action of saving or being saved.
Reserve Account: Funds taken out of earnings to provide for anticipated future payments.

5.5 Review Questions

1. What do you mean by preference share? Explain.
2. Distinguish between equity shares and preference shares.
3. Name the shares from where the preference shares can be redeemed.
4. What are the legal restrictions on the redemption of preference shares?

5. Explain in details the requirements for the redemption of preference shares as laid down
in Section 80 of the Companies Act, 1956.
6. What is capital redemption reserve account? How is it created? How is it utilised?

7. Explain the different kinds of preference shares.
8 Explain the following terms:
(i) Profit which would otherwise be available for dividend.
(ii) Proceeds from the issue of fresh shares.
(iii) Capital redemption reserve account.

9. A company has 20,000 redeemable preference shares of 100 each, fully paid. The company
decides the redeem to shares on 31st March, 2006 at a premium of 8%. The company has
sufficient profits but in order to augment liquid funds the following issue was made:

12,500 equity shares of 100 each at 111.
The issue was fully subscribed and all the amounts were received. The redemption was
duly arrived out. Pass journal entries.

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