Company Accounts -Module-2
Module 2- Redemption of redeemable preference shares
Preference shares
Preference shares are those shares which have preferential rights in respect of payment of
dividend and repayment of capital at the time of winding up of the company. Usually, they will get
a fixed percentage of dividends periodically. The following are the different types of preference shares
1. Cumulative preference shares
2. Non-cumulative preference shares
3. Participating preference shares
4. Non participating preference shares
5. Convertible preference shares
6. Non convertible preference shares
7. Redeemable preference shares
8. Irredeemable preference shares
Redemption of preference shares
Redemption of preference shares we mean repayment of preference share capital. The redeemable
preference shares are redeemed after a stipulated period of time. Such shares are redeemed in
accordance with section 80 of the Companies Act. The redeemable preference can be redeemed
either out of the profit available for distribution as dividend or out of the proceeds from the issue of
fresh shares. But the irredeemable preference shares are redeemed at the time of liquidation of the
company
Provisions in the Companies Act for the redemption of redeemable
preference shares
As per section 80 of the Companies Act 1956, the following conditions should be followed in
connection with redemption of redeemable preference shares
1. Redeemable preference shares cannot be redeemed unless they are fully paid up. That means
the partly paid up preference should not be redeemed. In order to redeem the partly paid up
preference shares, such shares should be made fully paid up before such redemption.
2. Redeemable preference shares can be redeemed either out of profit available for distribution
as dividend (P&L, General reserve) or out of the proceeds from the issue of fresh shares.
3. When preference shares are to be redeemed at a premium, the premium on redemption can
be provided either out of securities premium or out of the profit available for distribution as
dividend
4. When the redemption is made out of profit available for distribution as dividend, an amount
equal to the nominal value of such shares should be transferred to Capital redemption
reserve.
5. The amount in the capital redemption reserve can be utilised for the issue or bonus shares
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6. The redemption of preference shares will not affect the authorised capital of the company.
That means the authorised capital of the company will be the same before such redemption.
Capital redemption reserve
Capital redemption reserve is the reserve which is created in connection with redemption of
redeemable preference shares. When the redemption is made out of profit available for
distribution as dividend, an amount equal to the nominal value of such shares should be
transferred to Capital redemption reserve. The amount in the capital redemption reserve can be
utilised for the issue or bonus shares
Bonus shares
Bonus shares are those shares which are issued by an existing company to its existing share holders
without any consideration. Bonus shares are issued mainly for the purpose of converting
accumulated reserves and surplus into share capital. The bonus shares may be issued out of revenue
profits and capital profits. Bonus shares are issued only on fully paid up equity shares. But bonus
may be given on partly paid up equity shares by converting the partly paid up equity shares into fully
paid up shares.
Journal entries
For the issue of bonus shares
a) When the accumulated profit is utilised for bonus issue
Capital redemption reserve/Securities premium/P&L/Gl. reserve a/c / Div. equi. Fund Dr.
To Bonus to share holders account
b) When bonus shares issued
Bonus to shareholder account Dr.
To Share capital
For converting partly paid up shares into fully paid by giving bonus
c) When the accumulated profit is utilised for bonus issue
Dividend equalisation fund/P&L/General reserve a/c Dr.
To Bonus to share holders account
d) When final call is made
Share final call account Dr.
To Share capital
e) When bonus is adjusted towards final call money
Bonus to shareholders account Dr.
To Share Final Call
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Question:-The following is the Balance sheet of X Ltd as on 31st March 2020
Balance sheet of X Ltd.
Liabilities Amount Asset Amount
Share capital(fully paid)10 500000 Land & Building 600000
S. capital -20000shares@8 160000 Plant and Machinery 200000
General Reserve 200000 Furniture 260000
Capital reserve 100000 Current assets :-
Capital redemption 50000 Cash 50000
reserve
80000 Stock 120000
Securities premium
20000 Debtors 30000
P& L account
150000
Current liabilities
1260000 1260000
It is resolved the following. (1) To make the shares fully paid up by the issue of bonus.
(2) To issue bonus shares to its shareholders at the rate of three shares for every five shares
held (existing fully paid 50000 equity shares)
Ie, 50000*3/5=30000 shares @ Rs 10
=30000*10=300000
JOURNAL ENTRIES
P&L a/c Dr. 20000
Gen. Reserve a/c Dr. 20000
To bonus to share holders 40000
( Amount used for bonus issue)
Share final call Dr 40000
To Share capital 40000
(Shares made fully called up)
Bonus to share holder Dr 40000
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To Share final call 40000
( Shares made fully paid up)
--------------------------------------------------
(2) Capital redemption reserve a/c Dr. 50000
Securities premium a/c Dr 80000
General reserve a/c Dr 170000
To Bonus to share holders 300000
(CRR, Securities premium and G R are utilised for bonus issue)
---------------------------------------------------------
Bonus to share holders a/c Dr. 300000
To Share capital 300000
(30000 shares issued as fully paid bonus shares)
Problem No.1
Z Ltd. has capital of Rs. 10, 00,000 in equity shares of Rs. 10 each fully paid up. It is resolved to
issue fully paid bonus shares in the ratio of one share for every four shares held (1/4) at a
premium of Rs. 2 per share to the existing shareholders. The company has Rs. 200,000 in profit
and Loss account, Rs. 250,000 in General reserve
Give entries in connection with bonus issue.
Journal Entries
Date Particulars L/F Amount Amount
Profit and loss a/c Dr. 200000
General reserve a/c Dr. 100000
To Bonus to share holders 300000
(Profits utilised for bonus)
Bonus to share holders a/c Dr. 300000
To Share capital 250000
To share premium 50000
(Bonus shares issued)
Problem No. 2
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X Ltd. has 100,000 equity shares of Rs. 10 each Rs. 8 paid-up. It is resolved to make the shares
fully paid up by bonus issue. It is also resolved to issue fully paid up bonus shares in the ratio of
one share for every four shares held. The company has General reserve Rs. 250,000 and securities
premium balance of Rs. 250,000 and Capital redemption reserve Rs. 100,000.Give journal entries .
. Journal entries
Date Particulars L/F Amount Amount
General reserve account a/c Dr 200000
To Bonus to share holders 200000
(General reserve utilised for
bonus)
-----------------------------------------------
- 200000
200000
Share final call account a/c
To share capital
(Final call is made)
--------------------------------------------- 200000
200000
Bonus to share holders a/c Dr.
To Share final call
(Bonus adjusted towards final call)
----------------------------------------------- 100000
- 150000
Capital redemption reserve a/c 250000
Dr.
Securities premium a/c Dr
To Bonus to shareholders
250000
(Profit utilised for bonus)
250000
-------------------------------------------
Bonus to shareholder a/c Dr.
To share capital
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(Bonus shares issued)
Buy-Back of shares
Buy-back of shares is a process of capital restructuring, whereby, a company re-
purchases or re-acquires its own shares from its shareholders for cancellation, after fulfilling
all the provision in Companies Act, 2013 and SEBI’s regulations thereon. Buying back of
shares from existing shareholders is made usually on proportionate basis. Purchase of its
own shares through any subsidiary company or investment company is not allowed.
Accounting treatment of buy-back of shares
Accounting treatment of buy-back is similar to the treatment for redemption of
preference shares, except that, any proceeds from issue of ‘specified securities’ and
securities premium can also be considered as a source of fund for buy-back. The loss on buy-
back of shares should be debited to securities premium account or general reserve.
Problem-1
On 31st March 2018, B Ltd has an issued equity share capital of Rs. 1000000 in shares of Rs.
10 each fully paid. It has resolved to buy-back 20% of shares at their face value. The
company has Rs. 120000 in its profit and loss account, Rs, 60000 in securities premium and
Rs. 90000 in General reserves. Give journal entries on buy-back of the shares.
Journal entries
Date Particulars L/F Amount Amount
Profit and loss a/c Dr 120000
Securities premium Dr. 60000
General reserve a/c Dr. 20000
To Capital redemption reserve 200000
(Profits utilised for buy back of
shares)
200000
Equity share capital Dr.
200000
To Equity share holders
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(Equity share capital a/c closed and
transferred to equity share holders
a/c)
200000
-------------------------------------------------
---- 200000
Equity share holders a/c Dr.
To Bank
(paid to equity share holders)
Problem No. 2
On 31st March 2018 X Ltd has an issued equity share capital of Rs. 10, 00,000 in shares of Rs.
10 each fully paid. It has resolved to buy-back 20,000 shares at Rs. 15 per share. The
company has a securities premium account balance Rs. 110000 and General Reserve Rs.
400000. Give journal entries on buy-back of the shares.
Journal entries
Date Particulars L/F Amount Amount
Equity share capital a/c Dr. 200000
Securities premium a/c Dr. 100000
To Equity share holders 300000
(Equity share capital account closed
and transferred to shareholders a/c)
Equity share holders a/c Dr.
300000
To Bank
300000
(Paid to equity share holders)
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General reserve a/c Dr. 200000
To Capital redemption reserve 200000
(Accumulated profits utilised for buy
back)
Problem No. 3
Z. Ltd. resolved to buy back 300000 of its fully paid equity shares of R. 10 each at Rs. 12 per
share. For the purpose, it issued 10,000 13% preference shares of Rs. 100 each at par, the
total sum being payable with applications. The company uses Rs. 850000 of its balance in
securities premium account apart from its adequate balance in General Reserve account to
fulfil the legal requirements regarding buy-back.
Pass journal entries for all the transactions involved in the buy-back.
Journal entries
Date Particulars L/F Amount Amount
Bank a/c Dr 1000000
To Preference share capital 1000000
(New shares issued for buy-back)
Equity share capital a/c Dr 3000000
Securities premium a/c Dr (loss) 600000
To equity share holders 3600000
(Capital account closed and transferred to
shareholders a/c)
Equity shareholders a/c Dr
3600000
To Bank
3600000
(Paid to equity share holders)
Securities premium a/c Dr.(850000-600000)
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General reserve a/c Dr 250000
To Capital redemption reserve 1750000
(Accumulated profit utilised for capital 2000000
redemption)
Provisions/conditions for Buy-back as per Companies Act. 2013
1. Buy-back should be authorised by the Articles of Association of the company
2. A special resolution should be passed at a general meeting of the company
authorising the buy-back. No special resolution is required when:
i. The buy-back is not exceeding 10% of total paid up equity capital and free
reserves of the company, and
i. Such buy-back is authorised by the Board by means of a resolution passed at
its meeting.
3. Buy-back should be 25% or less than the aggregate of paid up capital and free
reserves of the company.
4. After buy-back, the debit equity ratio should not exceed 2:1 where debit is the
outsiders fund and equity is the shareholders fund.
5. Only fully paid up shares can be acquired
6. If shares of securities are listed, buy-back should be in accordance with SEBI’s
regulations
7. Shares bought back shall be physically destroyed within 7 days from the date of buy-
back
8. After buy-back of its own shares, it shall not make any further issue of the same kind
of shares within a period of six months from the date of completion of the process
of buy-back.
9. Buy-back of shares by a defaulter company is not allowed. The default may be in
respect of repayment of deposits or term loans, payment of interest thereon,
redemption of debentures or preference shares etc.
10. A company can buy back its shares out of free reserves, securities premium account
or proceeds of any shares or other specified security
11. When the company purchases its own shares out of free reserves, a sum equal to
the nominal value of the shares so purchased shall be transferred to capital
redemption reserve.
12. There should be a time gap of at least one year between 2 buy-backs. The time gap
of one year between the two buy-backs is called cooling off period.
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