Redemption of preference share

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Redemption of preference share

  1. 1. PREFERENCE SHARE Preference shares represent partial ownership in a company. Preference Shares will carry preferential (cumulative) right to dividend, at coupon rate, when declared. The dividend will be calculated pro rata i.e. from the date of allotment of such Preference Shares. Preference shareholders always receive their dividends first. Preference shareholders do not enjoy any of the voting rights. Preference shareholders have a greater claim on the companys assets than common stockholders. The Preference Shares will have the maximum redemption period of 20 years. A Presentation By Himanshu Arya, Daksh2/12/2012 1 Professional Education Meerut
  2. 2. REDEMPTION OF PREFERENCE SHARE Only fully paid up Preference Shares will be redeemed. The redemption of Preference Shares will not be taken as reducing the Authorised Share Capital of the Company. The Preference Shares will be redeemed at par/ at a premium. If the Preference Shares are redeemed at a premium, premium will be provided either out of Securities Premium Account or Profit and Loss Account. Where any Preference Shares are redeemed out of profits for dividend, which a sum equivalent to the nominal value of the Preference Shares redeemed will be transferred to the “Capital Redemption Reserve A/C”. Where any Preference Shares are redeemed by issuing of new shares, it must be redeemed within 1 month from the date of issue of new shares & it will not be considered as increase of Authorised Share Capital. A Presentation By Himanshu Arya, Daksh2/12/2012 2 Professional Education Meerut
  3. 3. REDEMPTION OF PREFERENCE SHARE Capital Redemption Reserve (CRR) A/C  Creates when a company redeem or buy-back its own shares which reduces share capital.  It creates with the same with nominal value of the shares are redeemed out of profits.  Due to its creation the share capital is not reduced after redemption, - CRR A/C is converted to Share Capital.  Capital before Redemption = Capital after Redemption + CRR A/C.  Is not distributed among the shareholders.  Used only for Issue of Fully Paid Up Shares.  Used in paying up unissued shares to be issued to the members as Fully Paid Bonus Shares.  Redemption out of available Profit.  Redemption partly out of available Profit & partly by issuing new Shares. A Presentation By Himanshu Arya, Daksh2/12/2012 3 Professional Education Meerut
  4. 4. REDEMPTION OF PREFERENCE SHARE Capital Redemption Reserve (CRR) A/C  Amount to be transferred to CRR A/C:-  In case of Redemption out of Profits: Face Value of Preference Shares to be redeemed  In case of Redemption out of Profits & partly by issuing New Shares: Face Value of Preference Shares to be redeemed LESS Face Value of New Shares LESS Discount Allowed on Issue of New Shares A Presentation By Himanshu Arya, Daksh2/12/2012 4 Professional Education Meerut
  5. 5. REDEMPTION OF PREFERENCE SHARE Methods Are:  Alternative-1 Redemption out of available Profit for Dividend  Alternative-2 Redemption by issuing new Equity or Preference Shares  Alternative-3 Redemption partly out of available Profit & partly by issuing new Shares  Important Note A Company has no right to sales its Assets or issues debentures to redeem its Preference Shares. A Presentation By Himanshu Arya, Daksh2/12/2012 5 Professional Education Meerut
  6. 6. REDEMPTION OF PREFERENCE SHARE  Profits available for Dividend U/S 205  Profit & Loss A/C  General Reserve  Reserve Fund  Contingency Reserve  Insurance Fund  Dividend Equalisation Fund  Debenture Redemption Fund  Voluntary Debenture Sinking Fund  Workmen’s Accident Fund  Workmen’s Compensation Fund A Presentation By Himanshu Arya, Daksh2/12/2012 6 Professional Education Meerut
  7. 7. REDEMPTION OF PREFERENCE SHAREAT PARIssuing 20,000 8% RPS @ RS. 100 at PARFor This Obligation Co. has: CR Balance of P&L A/C : 5,00,000 General Reserve : 3,00,000 Workmen’s Accident Fund : Sufficient Fund Capital Reserve : 8,00,000 Security Premium A/C : 1,00,000For This Obligation Co. Issues: 1,00,000 Equity Shares @ RS. 10 at 10% Premium A Presentation By Himanshu Arya, Daksh2/12/2012 7 Professional Education Meerut
  8. 8. REDEMPTION OF PREFERENCE SHARECo. has: CR Balance of P&L A/C : 5,00,000 General Reserve : 3,00,000 Workmen’s Accident Fund : 2,00,000 {20 Lack – ( 5 Lack – 3 Lack – 10 Lack)} Capital Reserve : 8,00,000 Security Premium A/C : 1,00,000Funds are out of profits for Dividend will be transferred to CRR A/CP&L Appropriation A/C Dr. 5,00,000General Reserve Dr. 3,00,000Workmen’s Accident Fund Dr. 2,00,000 To Capital Redemption Reserve A/C 10,00,000 A Presentation By Himanshu Arya, Daksh2/12/2012 8 Professional Education Meerut
  9. 9. REDEMPTION OF PREFERENCE SHARECo. issues: 1,00,000 Equity Shares @ RS. 10 at 10% PremiumBank A/C Dr. 11,00,000 To Equity Share Capital A/C 10,00,000 To Securities Premium A/C 1,00,000 Securities Premium A/C cannot be transferred to CRR A/C. Securities Premium A/C can be written off from the amount of paying premium on redemption of Preference Shares. A Presentation By Himanshu Arya, Daksh2/12/2012 9 Professional Education Meerut
  10. 10. REDEMPTION OF PREFERENCE SHARECo. issues: Issuing 20,000 8% RPS @ RS. 100 at PARDue Amount to 8% RPS Shareholders8% Redeemable Preference Share Capital A/C Dr. 20,00,000 To Preference Shareholders A/C 20,00,000Payment to 8% RPS ShareholdersPreference Shareholders A/C Dr. 20,00,000 To Bank A/C 20,00,000 A Presentation By Himanshu Arya, Daksh2/12/2012 10 Professional Education Meerut
  11. 11. REDEMPTION OF PREFERENCE SHAREAT PREMIUMIssuing 20,000 8% RPS @ RS. 100 at 10% PremiumFor This Obligation Co. has: CR Balance of P&L A/C : 4,00,000 General Reserve : 2,00,000 Capital Reserve : 5,00,000 Share Forfeiture A/C : 1,00,000For This Obligation Co. Issues:1,00,000 Equity Shares @ RS. 10 at 10% Premium4,000 9% Preference Shares @ RS. 100 at 20% Premium A Presentation By Himanshu Arya, Daksh2/12/2012 11 Professional Education Meerut
  12. 12. REDEMPTION OF PREFERENCE SHARECo. has: CR Balance of P&L A/C : 4,00,000 General Reserve : 2,00,000 Capital Reserve : 5,00,000 Share Forfeiture A/C : 1,00,000Funds are out of profits for Dividend will be transferred to CRR A/CP&L Appropriation A/C Dr. 4,00,000General Reserve Dr. 2,00,000 To Capital Redemption Reserve A/C 10,00,000 A Presentation By Himanshu Arya, Daksh2/12/2012 12 Professional Education Meerut
  13. 13. REDEMPTION OF PREFERENCE SHARECo. issues: 1,00,000 Equity Shares @ RS. 10 at 10% Premium 4,000 9% Preference Share @ RS. 100 at 20% PremiumBank A/C Dr. 11,00,000 To Equity Share Capital A/C 10,00,000 To 9% Pref Share Capital A/C 4,00,000 To Securities Premium A/C 1,80,000 Securities Premium A/C cannot be transferred to CRR A/C. Securities Premium A/C can be provided for the amount of paying premium on redemption of Preference Shares. A Presentation By Himanshu Arya, Daksh2/12/2012 13 Professional Education Meerut
  14. 14. REDEMPTION OF PREFERENCE SHAREPremium on Preference Share Redemption will be provided out of “Securities Premium A/c” and/or “Profit & Loss A/c”Securities Premium A/c Dr. 1,80,000Profit & Loss A/C Dr. 20,000 To Premium on Preference Share Redemption A/C 2,00,000 A Presentation By Himanshu Arya, Daksh2/12/2012 14 Professional Education Meerut
  15. 15. REDEMPTION OF PREFERENCE SHARECo. issues: Issuing 20,000 8% RPS @ RS. 100 at 10% Premium Due Amount to 8% RPS Shareholders8% Redeemable Preference Share Capital A/C Dr. 20,00,000Premium on Preference Share Redemption A/C Dr. 2,00,000 To Preference Shareholders A/C 22,00,000 Payment to 8% RPS ShareholdersPreference Shareholders A/C Dr. 22,00,000 To Bank A/C 22,00,000 A Presentation By Himanshu Arya, Daksh2/12/2012 15 Professional Education Meerut
  16. 16. REDEMPTION OF PREFERENCE SHAREAT PREMIUMIssuing 30,000 10% RPS @ RS. 100 at 10% PremiumFor This Obligation Co. has: CR Balance of P&L A/C : 5,00,000 General Reserve : 2,00,000 Capital Reserve : 5,00,000 Share Forfeiture A/C : 1,00,000For This Obligation Co. Issues:1,00,000 Equity Shares @ RS. 10 at 10% Premium4,000 9% Preference Shares @ RS. 100 at 20% Premium A Presentation By Himanshu Arya, Daksh2/12/2012 16 Professional Education Meerut
  17. 17. REDEMPTION OF PREFERENCE SHAREAT PREMIUMIssuing 15,000 10% RPS @ RS. 100 at 10% PremiumFor This Obligation Co. has:CR Balance of P&L A/C : Sufficient BalanceFor This Obligation Co. Issues:50,000 Equity Shares @ RS. 10 at 10% Discount5,000 9% Preference Shares @ RS. 100 at 10% Premium10,000 12% Debenture @ RS. 10 at ParFor This Obligation Co. Sales:Investment costing 1,25,000 at 1,18,000 A Presentation By Himanshu Arya, Daksh2/12/2012 17 Professional Education Meerut
  18. 18. REDEMPTION OF PREFERENCE SHARECo. issues: 50,000 Equity Shares @ RS. 10 at 10% Discount 5,000 9% Preference Shares @ RS. 100 at 10% Premium 10,000 12% Debenture @ RS. 10 at ParBank A/C Dr. 11,50,000Discount on Issue of Shares Dr. 50,000 To Equity Share Capital A/C 5,00,000 To 9% Pref Share Capital A/C 5,00,000 To 12% Debentures A/C 1,00,000 To Securities Premium A/C 50,000 Securities Premium A/C cannot be transferred to CRR A/C. Securities Premium A/C can be provided for the amount of paying premium on redemption of Preference Shares. A Presentation By Himanshu Arya, Daksh2/12/2012 18 Professional Education Meerut
  19. 19. REDEMPTION OF PREFERENCE SHARECo. sales: Investment Costing 1,25,000 at 1,18,000Bank A/C Dr. 1,18,000Loss on Sales of Investment Dr. 7,000 To Investment A/C 1,25,000 This Loss or Profit on sales of Assets is transferred to P&L A/C.Profit & Loss A/C Dr. 7,000 To Loss on Sales of Investment 7,000 A Presentation By Himanshu Arya, Daksh2/12/2012 19 Professional Education Meerut
  20. 20. REDEMPTION OF PREFERENCE SHAREPremium on Preference Share Redemption will be provided out of “Securities Premium A/c” and/or “Profit & Loss A/c”Securities Premium A/c Dr. 50,000Profit & Loss A/C Dr. 1,00,000 To Premium on Preference Share Redemption A/C 1,50,000 A Presentation By Himanshu Arya, Daksh2/12/2012 20 Professional Education Meerut
  21. 21. REDEMPTION OF PREFERENCE SHARE Funds are out of profits for Dividend will be transferred to CRR A/CP&L Appropriation A/C Dr. 5,50,000 To Capital Redemption Reserve A/C 5,50,000Payment to be made 15,00,000LESS Funds from Issuing Equity Shares 4,50,000LESS Funds from Issuing 9% Pref Shares 5,00,000 9,50,000 5,50,000 A Presentation By Himanshu Arya, Daksh2/12/2012 21 Professional Education Meerut
  22. 22. REDEMPTION OF PREFERENCE SHARECo. issues: Issuing 15,000 10% RPS @ RS. 100 at 10% Premium Due Amount to 10% RPS Shareholders10% Redeemable Preference Share Capital A/C Dr. 15,00,000Premium on Preference Share Redemption A/C Dr. 1,50,000 To Preference Shareholders A/C 16,50,000 Payment to 10% RPS ShareholdersPreference Shareholders A/C Dr. 16,50,000 To Bank A/C 16,50,000 A Presentation By Himanshu Arya, Daksh2/12/2012 22 Professional Education Meerut
  23. 23. REDEMPTION OF PREFERENCE SHARECalculate the Face Value of Shares to be issued For the obligation of Redemption.Suppose the face value of shares to be issued = x Face Value of Pref Shares to be redeemedADD Premium on redemption = Existing premium in the balance sheetADD Profits available for dividendADD xADD Premium on new issue (x * Premium Rate) ORLESS Discount on new issue (x * Discount Rate) A Presentation By Himanshu Arya, Daksh2/12/2012 23 Professional Education Meerut
  24. 24. BONUS SHARES Shares without Cost for which nothing is paid by shareholders. Issued to only Existing Shareholders. Issued in a ratio of the shares an investor hold. Usually announced by the company with a record date. Usually gives bonus shares as a substitute of dividend payouts. The face value of the share doesn’t get change after bonus. Bonus shares increases the number of shares in the market which goes down EPS. A Presentation By Himanshu Arya, Daksh2/12/2012 24 Professional Education Meerut
  25. 25. WHY BONUS SHARES Company has more accumulated more reserve. Accumulated Reserve > Normally Necessity. Company shares this Excess Reserve with their Existing Shareholders in the form of Bonus Shares. Company is not in position to pay Cash Bonus or Dividend due to Insufficient Cash. Cash Bonus affects the Working Capital & future plans of Capatilisation. Issued Capital is Increased. Assets remain Intact. Liquidity of the company is not affected. A Presentation By Himanshu Arya, Daksh2/12/2012 25 Professional Education Meerut
  26. 26. CAPITALIZATION OF PROFITConversion of Retained Earnings into Paid-Up Capital.Profits or Reserves become the part of Issued Capital.By issuing bonus shares to current shareholders in proportion to their shareholdings.By Making Partly Paid Shares as Fully Paid without getting Cash from the shareholders.By issuing a stock dividend. A Presentation By Himanshu Arya, Daksh2/12/2012 26 Professional Education Meerut
  27. 27. METHODS OF ISSUING BONUS SHARESAletrnative-1 Capitalisation of Profit by Issuing Bonus Shares Issuing of FREE Fully Paid Shares as Bonus Shares.Alternative-2 Capitalisation of Profit by Without Issuing Bonus Shares Making Partly Paid Shares as Fully Paid without getting Cash from the shareholders. A Presentation By Himanshu Arya, Daksh2/12/2012 27 Professional Education Meerut
  28. 28. BUY-BACKSection 77A Provides the provisions of Buy-Back.A company buy its own shares.Shares can buy-back from:- Open Market through Book Building Process & Stock Exchanges. Existing Equity Shareholders on a Pro-Rata basis. Odd Lot Shareholders where the lot of securities of a public company, whose shares are listed on a recognized stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange. Employees of the company pursuant to a scheme of Stock Option or Sweat Equity. A Presentation By Himanshu Arya, Daksh2/12/2012 28 Professional Education Meerut
  29. 29. ACCOUNTING TREATEMENT OF BONUS SHARES Declaration of bonus from Profits and Reserves of LAST YEAROn Declaration of Bonus Shares:- Capital Redemption Reserve A/C Dr. Capital Reserve A/C Dr. Securities Premium A/C Dr. General Reserve A/C Dr. P&L Appropriation A/C Dr. To Bonus to Shareholders A/C A Presentation By Himanshu Arya, Daksh2/12/2012 29 Professional Education Meerut
  30. 30. ACCOUNTING TREATEMENT OF BONUS SHARES Declaration of bonus from Profits and Reserves of LAST YEAROn Issue of Bonus Shares at PAR :- Bonus to Shareholders A/C Dr. To Equity Share Capital A/COn Issue of Bonus Shares at PREMIUM :- Bonus to Shareholders A/C Dr. To Equity Share Capital A/C To Securities Premium A/C A Presentation By Himanshu Arya, Daksh2/12/2012 30 Professional Education Meerut
  31. 31. WHY BUY-BACKTo increase promoters holding.To Increase earning per share.To Support share value.To pay surplus cash not required by business.To Thwart takeover bid.To Rationalise the capital structure by writing off. capital not represented by available assets. A Presentation By Himanshu Arya, Daksh2/12/2012 31 Professional Education Meerut
  32. 32. RESOURCES OF BUY-BACKFree reserves- A sum equal to the nominal value of the buy-back shares shall be transferred to the CRR A/C. Securities Premium AccountProceeds of any shares or securities – A Company cannot buy-back its shares or securities out of the proceeds of an earlier issue of the same kind of shares or securities. A Presentation By Himanshu Arya, Daksh2/12/2012 32 Professional Education Meerut
  33. 33. CONDITIONS FOR BUY-BACK Should be Authorized by the Articles of Association of the Company. The Special Resolution is to be passed in the General Meeting of shareholders. Less Than 25% of the Total Paid-UP Capital & Free Reserves of the company. DEBT-Equity Ratio should not more than 2:1 after such buy-back. All the shares for buy-back should be Fully Paid-Up. Should be completed within 12 months from the date of passing the Special Resolution. A Presentation By Himanshu Arya, Daksh2/12/2012 33 Professional Education Meerut
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