Page 136 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 5: Redemption of Preference Shares

First, ascertain the amount for which first equity shares were issued. Show journal entries Notes
for all transactions concerning the redemption of preference shares and prepare the balance
sheet as it would appear immediately after redemption.
13. Spotlight Limited has issued share capital of 60,000, 14% Redeemable Preference Shares of
20 each and 4,00,000 Equity Shares of 10 each. The preference shares are redeemable at
premium of 5 per cent on 1st April, 2006.
As at 31 March, 2006 the company's balance sheet showed the following position:

Liabilities ( ) Assets ( )
Issued Share Capital 60,000, 14% Redeemable 12,00,000 Plant and Machinery 25,00,000
Preference shares of 20 each fully paid Furniture 9,00,000
Investments 3,50,000
4,00,000 equity shares of 10 each fully paid 40,00,000 Stock 15,00,000
Profit and Loss Account 7,00,000 Debtors 14,00,000
Sundry Creditors 12,00,000 Balance at Bank 4,50,000
71,00,000 71,00,000

In order to facilitate the redemption of preference shares it was decided:
(a) To sell all the investments for 3,00,000.
(b) To finance part of the redemption from company funds subject to leaving the balance
in Profit and Loss Account at 2,00,000.
(c) To issue sufficient equity shares of 10 each at premium of 2 per share to raise the
balance of funds required.

Answers: Self Assessment

1. True 2. True
3. Fixed 4. Irredeemable
5. (d) 6. Bonus
7. Share Premium 8. Cash
9. False 10. False

11. False 12. fresh issue of shares.
13. (b) 14. (a)
15. (c)

5.6 Further Readings

Books Corporate Accounting - Dr. K.K. Verma

Online links http://moneyterms.co.uk/rights-issue/
http://investmentarticle.com/why-do-companies-conduct-rights-issue.html

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