Preference shares represent partial ownership in a company and carry preferential rights to dividends and assets. Preference shareholders receive dividends first before common shareholders and do not have voting rights. Preference shares can be redeemed either through company profits, issuing new shares, or a combination. When redeemed through profits, an equivalent amount must be transferred to a capital redemption reserve account.

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
company's assets than common stockholders.
 The Preference Shares will have the maximum redemption
period of 20 years.
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 1
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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,
2/12/2012 Daksh Professional Education Meerut 2
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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,
2/12/2012 Daksh Professional Education Meerut 3
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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,
2/12/2012 Daksh Professional Education Meerut 4
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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,
2/12/2012 Daksh Professional Education Meerut 5
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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,
2/12/2012 Daksh Professional Education Meerut 6
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7. REDEMPTION OF PREFERENCE SHARE
AT PAR
Issuing 20,000 8% RPS @ RS. 100 at PAR
For 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 : 1,00,000
For This Obligation Co. Issues:
1,00,000 Equity Shares @ RS. 10 at 10% Premium
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 7
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8. REDEMPTION OF PREFERENCE SHARE
Co. 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 : 1,00,000
Funds are out of profits for Dividend will be transferred to CRR A/C
P&L Appropriation A/C Dr. 5,00,000
General Reserve Dr. 3,00,000
Workmen’s Accident Fund Dr. 2,00,000
To Capital Redemption Reserve A/C 10,00,000
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 8
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9. REDEMPTION OF PREFERENCE SHARE
Co. issues:
1,00,000 Equity Shares @ RS. 10 at 10% Premium
Bank 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,
2/12/2012 Daksh Professional Education Meerut 9
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10. REDEMPTION OF PREFERENCE SHARE
Co. issues:
Issuing 20,000 8% RPS @ RS. 100 at PAR
Due Amount to 8% RPS Shareholders
8% Redeemable Preference Share Capital A/C Dr. 20,00,000
To Preference Shareholders A/C 20,00,000
Payment to 8% RPS Shareholders
Preference Shareholders A/C Dr. 20,00,000
To Bank A/C 20,00,000
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 10
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11. REDEMPTION OF PREFERENCE SHARE
AT PREMIUM
Issuing 20,000 8% RPS @ RS. 100 at 10% Premium
For 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 : 1,00,000
For This Obligation Co. Issues:
1,00,000 Equity Shares @ RS. 10 at 10% Premium
4,000 9% Preference Shares @ RS. 100 at 20% Premium
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 11
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12. REDEMPTION OF PREFERENCE SHARE
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 : 1,00,000
Funds are out of profits for Dividend will be transferred to CRR A/C
P&L Appropriation A/C Dr. 4,00,000
General Reserve Dr. 2,00,000
To Capital Redemption Reserve A/C 10,00,000
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 12
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13. REDEMPTION OF PREFERENCE SHARE
Co. issues:
1,00,000 Equity Shares @ RS. 10 at 10% Premium
4,000 9% Preference Share @ RS. 100 at 20% Premium
Bank 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,
2/12/2012 Daksh Professional Education Meerut 13
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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. 1,80,000
Profit & Loss A/C Dr. 20,000
To Premium on Preference Share Redemption A/C 2,00,000
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 14
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15. REDEMPTION OF PREFERENCE SHARE
Co. issues:
Issuing 20,000 8% RPS @ RS. 100 at 10% Premium
 Due Amount to 8% RPS Shareholders
8% Redeemable Preference Share Capital A/C Dr. 20,00,000
Premium on Preference Share Redemption A/C Dr. 2,00,000
To Preference Shareholders A/C 22,00,000
 Payment to 8% RPS Shareholders
Preference Shareholders A/C Dr. 22,00,000
To Bank A/C 22,00,000
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 15
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16. REDEMPTION OF PREFERENCE SHARE
AT PREMIUM
Issuing 30,000 10% RPS @ RS. 100 at 10% Premium
For 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 : 1,00,000
For This Obligation Co. Issues:
1,00,000 Equity Shares @ RS. 10 at 10% Premium
4,000 9% Preference Shares @ RS. 100 at 20% Premium
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 16
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17. REDEMPTION OF PREFERENCE SHARE
AT PREMIUM
Issuing 15,000 10% RPS @ RS. 100 at 10% Premium
For This Obligation Co. has:
CR Balance of P&L A/C : Sufficient Balance
For This Obligation Co. 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 Par
For This Obligation Co. Sales:
Investment costing 1,25,000 at 1,18,000
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 17
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18. REDEMPTION OF PREFERENCE SHARE
Co. 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 Par
Bank A/C Dr. 11,50,000
Discount 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,
2/12/2012 Daksh Professional Education Meerut 18
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19. REDEMPTION OF PREFERENCE SHARE
Co. sales:
Investment Costing 1,25,000 at 1,18,000
Bank A/C Dr. 1,18,000
Loss 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,
2/12/2012 Daksh Professional Education Meerut 19
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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. 50,000
Profit & Loss A/C Dr. 1,00,000
To Premium on Preference Share Redemption A/C 1,50,000
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 20
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21. REDEMPTION OF PREFERENCE SHARE
 Funds are out of profits for Dividend will be transferred
to CRR A/C
P&L Appropriation A/C Dr. 5,50,000
To Capital Redemption Reserve A/C 5,50,000
Payment to be made 15,00,000
LESS Funds from Issuing Equity Shares 4,50,000
LESS Funds from Issuing 9% Pref Shares 5,00,000 9,50,000
5,50,000
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 21
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22. REDEMPTION OF PREFERENCE SHARE
Co. issues:
Issuing 15,000 10% RPS @ RS. 100 at 10% Premium
 Due Amount to 10% RPS Shareholders
10% Redeemable Preference Share Capital A/C Dr. 15,00,000
Premium on Preference Share Redemption A/C Dr. 1,50,000
To Preference Shareholders A/C 16,50,000
 Payment to 10% RPS Shareholders
Preference Shareholders A/C Dr. 16,50,000
To Bank A/C 16,50,000
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 22
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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 redeemed
ADD Premium on redemption
=
Existing premium in the balance sheet
ADD Profits available for dividend
ADD x
ADD Premium on new issue (x * Premium Rate) OR
LESS Discount on new issue (x * Discount Rate)
A Presentation By Himanshu Arya,
2/12/2012 Daksh Professional Education Meerut 23
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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,
2/12/2012 Daksh Professional Education Meerut 24
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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.
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2/12/2012 Daksh Professional Education Meerut 25
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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,
2/12/2012 Daksh Professional Education Meerut 26
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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,
2/12/2012 Daksh Professional Education Meerut 27
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28. BUY-BACK
Section 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,
2/12/2012 Daksh Professional Education Meerut 28
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29. ACCOUNTING TREATEMENT OF BONUS
SHARES
 Declaration of bonus from Profits and Reserves of LAST
YEAR
On 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,
2/12/2012 Daksh Professional Education Meerut 29
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30. ACCOUNTING TREATEMENT OF BONUS
SHARES
 Declaration of bonus from Profits and Reserves of LAST YEAR
On Issue of Bonus Shares at PAR :-
Bonus to Shareholders A/C Dr.
To Equity Share Capital A/C
On 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,
2/12/2012 Daksh Professional Education Meerut 30
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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.
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2/12/2012 Daksh Professional Education Meerut 31
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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,
2/12/2012 Daksh Professional Education Meerut 32
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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,
2/12/2012 Daksh Professional Education Meerut 33
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