Redemption of preference share

1. Accounting for Preference
Shares
Presented by:
Harshit Garg
Assistant Professor
IBM (UG)
BCCC0011: Company accounts and
Practices
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2. Preference Shares
• Preference share capital as that part of the share
capital of a company which fulfills both the following
conditions namely:
• (i) It carries a preferential right in respect of the
dividends;
• (ii) It carries preferential right in regard to the
repayment of capital.
• The preference shareholders are entitled to receive the
fixed rate of dividend out of the net profits of the
company.
• The limitation of the preference shares is that it does
not carry voting rights.
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3. 1) Cumulative Preference Share
• In case where a company does not declare
dividends for a particular year, they are
carried to next year. They are treated as
arrears.
• And a preference share is said to be
cumulative in a case when the arrears
pertaining to dividend are cumulative in
nature and such arrears are cleared before any
dividend payment to equity shareholders.
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4. 2) Non- Cumulative Preference shares:
• As the name suggests, it does not accumulate
dividends. Dividend skipped by the company are
not paid, which means they have the right to avail
dividend from the profits earned from that
particular year. Notably, dividends are only
payable from net profits of each year. So, in case
where there are no profits for a particular year,
the arrears of dividend cannot be claimed in
subsequent years.
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5. 3) Redeemable Preference shares:
These are shares which can be redeemed or
repaid after the fixed period as issued by the
company or even before at the option of the
company.
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6. 4) Non-redeemable
• These shares cannot be redeemed during the
life of the company.
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7. 5) Convertible Shares
• Shares can be converted into equity at the
option of the holder after the stated tenure.
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8. 6) Non-convertible shares
• Shares which cannot be converted to equity
are called non convertible
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9. 7) Participating shares
• Such shares have the right to participate in
surplus profits of the company at the time of
liquidation after the company had paid to
other holders.
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10. 8) Non-participating Preference Shares
• Preference shares, which have no right to
participate in the surplus profits or in any
surplus on liquidation of the company, are
called non-participating preference shares.
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11. Redemption of Preference Shares
• Redemption of preference shares means
returning the preference share capital to the
preference shareholders either at a fixed date
or after a certain time period during the life
time of the company provided company must
complied certain conditions.
• Preference shares cannot be redeemed unless
they are fully paid up. In other words partly
paid-up shares cannot be redeemed.
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12. • Preference shares can be redeemed either out of profits
which would be available for dividend or out of the
proceeds of a fresh issue of shares made with the object of
redemption. These shares cannot be redeemed out of the
proceeds of fresh issue of debentures or out of the sale
proceeds of any property of the company
• When Preference shares are redeemed out of profits
available for distribution as dividend, a sum equal to the
nominal amount of the shares so redeemed must be
transferred out of profits to a reserve account to be called
‘Capital Redemption Reserve Account’. Such reserve can be
used for issuing fully paid bonus shares to the shareholders.
Redemption of Preference Shares
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13. BCCC0011: Company accounts and
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14. REDEMPTION OUT OF PROFITS OF
THE COMPANY:
• The expression “out of the profits of the company which
would otherwise be available for dividend means” that a
company may use its accumulated profit for redemption of
preference shares. So, any account in which profits earned
by the company is kept may be used; but security premium
account, capital redemption reserve, capital reserve and
debenture redemption reserve, etc. which are not available
for distribution by way of dividend cannot be
used. However the companies proposing to redeem out of
its profits are required to keep a sum equal to the nominal
amount of the share to be redeemed, to a reserve known
as Capital Redemption Reserve Account.
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15. BCCC0011: Company accounts and
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16. Redemption out of the profits
• When a company decides to redeem the
redeemable preference shares out of the profits
that are otherwise available for paying dividends,
it needs to create the Capital Redemption
Reserve A/c.
• The amount in the Capital Redemption Reserve is
equal to the nominal value of the redeemable
preference shares. The company has to transfer
the profits available for dividends to the CRR.
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17. 1. Transfer of profits to the CRR A/c
General Reserve A/c Dr.
Profit & Loss Appropriation A/c Dr.
Dividend Equalization A/c Dr.
To Capital Redemption Reserve A/c
(Being transfer of profits from general reserve or P&L
Appropriation A/c or Dividend Equalization A/c of an
amount equal to the nominal value of the redeemable
preference shares to the Capital Redemption Reserve A/c)
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18. 2. When current assets
are sold to provide
cash for redemption
Bank A/c Dr.
To Asset A/c
(Being sale proceeds of the asset)
3. Transfer of the
redeemable
preference share
capital to shareholders
A/c
Redeemable Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(Being the nominal value of the shares to be
redeemed transferred to the shareholders A/c)
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19. 4. On redemption
at Premium
Redeemable Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares A/c
(premium amt.)
Dr.
To Preference Shareholders A/c
(Being the nominal value and redemption premium
on the shares to be redeemed transferred to the
shareholders A/c)
5. For providing
Redemption
Premium
Securities Premium A/c Dr.
Profit and Loss A/c Dr.
To Premium on Redemption of Preference Shares
A/c
(Being premium on redemption provided for)
6. On redemption
of preference
shares
Preference Shareholders A/c Dr.
To Bank A/c
(Being preference shares redeemed)
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20. Redemption out of the proceeds from
a fresh issue
• A company may redeem the redeemable
preference shares out of the proceeds from a
fresh issue of shares. In this case, firstly the
company needs to pass the entries regarding the
fresh issue and then that regarding the
redemption.
• Thus, in this case, the new Equity or Preference
Share Capital A/c shall be equal to the nominal
value of the Redeemable Preference Shares.
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21. Redemption partly out of the profits
and partly out of the proceeds from a
fresh issue
• In the above situation, the Redeemable
Preference Share Capital is equal to the
amount in Capital Redemption Reserve A/c
and the new Share Capital A/c.
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22. Question -1
• Sony Ltd. Co. issued 10000, 8% redeemable
preference shares of ₹100 each on 1 January
2008. The shares are redeemable at a premium
of 10%. The shares are now due for redemption.
• The company decides to redeem the preference
shares out of the General Reserves and write off
the premium payable on redemption out of the
Securities Premium A/c. Show the necessary
journal entries.
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23. 1. General Reserve A/c Dr. 1000000
To Capital Redemption Reserve A/c 1000000
(Being transfer of profits from a general reserve of an
amount equal to the nominal value of the 8% redeemable
preference shares to the Capital Redemption Reserve A/c)
2. 8% Redeemable Preference Share Capital A/c Dr. 1000000
A premium on Redemption of Preference Shares A/c
(premium amt.)
Dr. 100000
To 8% Preference Shareholders A/c 1100000
(Being the nominal value and redemption premium @
10% on the shares to be redeemed transferred to the
shareholders A/c)
3. Securities Premium A/c Dr. 100000
To Premium on Redemption of Preference Shares A/c 100000
(Being premium on redemption written off)
4. 8% Preference Shareholders A/c Dr. 1100000
To Bank A/c 1100000
(Being preference shares redeemedBCCC0011: Company accounts and
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24. Hinduja Company Ltd. had 5,000 8%Redeemable
Preference Shares of Rs. 100each, fully paid up.
The company decided toredeem these
preference shares at par by theissue of sufficient
number of equity shares ofRs. 10 each fully up
at par. You are required topass necessary Journal
Entries including cashtransactions in the books
of the company.
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25. BCCC0011: Company accounts and
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26. BCCC0011: Company accounts and
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27. Applications of Securities premium
account (Section 52)
• a. Towards issue of fully paid bonus shares
• b. To write off preliminary expenses
• c. To write off the expenses or, or commission
paid, or discount allowed on any of the securities
or debentures
• d. To provide for premium on the redemption of
redeemable preference shares or debentures of
the company
• e. For the purchase of its own shares or other
securities.
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28. Capital Redemption Reserve
Account
When the company proposes to redeem the
preference shares out of the profits, it transfers
an amount equal to the nominal value of the
redeemable preference shares to the Capital
Redemption Reserve A/c out of the profits of the
company.
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29. Premium on Redemption of
Preference Shares
• it shall provide the premium on redemption
out of the profits or out of the securities
premium account of the company.
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30. Note:
• 1. Only fully paid up preference shared can be
redeemed.
2. Redemption does not result in reduction in
capital.
3. Capital Redemption Reserve shall be created
from the profits of the company to the extent of
nominal value of the preference shares redeemed
4. Capital Redemption Reserve can be utilized to
issuance of fully paid up bonus shares only.
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