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Assignment
Redemption of Preference Shares
Q. Questions & Solutions
No.
1. The capital structure of a company consists of 20,000 Equity Shares of ₹ 10 each fully paid up and
1,000 8% Redeemable Preference Shares of ₹ 100 each fully paid up (issued on 1.4.20X1).

Undistributed reserve and surplus stood as: General Reserve ₹ 80,000; Profit and Loss Account ₹
20,000; Investment Allowance Reserve out of which ₹ 5,000, (not free for distribution as dividend)
₹ 10,000; Securities Premium ₹ 2,000, Cash at bank amounted to ₹ 98,000. Preference shares are
to be redeemed at a Premium of 10% and for the purpose of redemption, the directors are
empowered to make fresh issue of Equity Shares at par after utilizing the undistributed reserve
and surplus, subject to the conditions that a sum of ₹ 20,000 shall be retained in general reserve
and which should not be utilized.

Pass Journal Entries to give effect to the above arrangements and also show how the relevant
items will appear in the Balance Sheet of the company after the redemption carried out.
(ICAI SM / March 2021 MTP /May 2020 RTP/Nov 2021 RTP/January 2021)
Sol. In the books of ……….
Journal Entries

Date Particulars L.F. Dr. (₹) Cr. (₹)

Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of ₹ 10 each
at a premium of Re. 1 per share as per Board’s
Resolution No. dated)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000
Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c 75,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)
8% Redeemable Preference Share Capital Dr. 1,00,000
A/c
Premium on Redemption of Preference Dr. 10,000
Shares A/c
To Preference Shareholders A/c 1,10,000
(Being the amount paid on redemption transferred
to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of 10,000
Preference Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)

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Balance Sheet as at ………[Extracts]

Particulars Notes No. (₹)

EQUITY AND LIABILITIES;
1. Shareholders’ funds;
A Share capital 1 2,25,000
B Reserves and Surplus 2 1,02,000
ASSETS;
2. Current Assets;
Cash and cash equivalents (98,000 + 25,000 – 1,10,000) 13,000

Notes to Accounts;
1. Share Capital
22,500 Equity shares (20,000 + 2,500) of ₹10 2,25,000
each fully paid up
2. Reserves and Surplus
General Reserve 20,000
Securities Premium 2,000
Capital Redemption Reserve 75,000
Investment Allowance Reserve 5,000
1,02,000
Working Note: -

Calculation of number of shares to be issued for redemption of Preference Shares:

Face Value of shares redeemed ₹ 1,00,000
Less: Profit available for distribution as dividend:
-General Reserve: ₹ (80,000-20,000) (₹60,000)
-Profit and Loss (20,000 – 10,000 set aside for adjusting premium payable on (₹ 10,000)
redemption of preference shares)
- Investment Allowance Reserve: (₹ 10,000-5,000) (₹ 5,000)
₹ 25,000
*Therefore, No. of shares to be issued = ₹ 25,000/₹10 = 2,500 shares.
2. The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 20X1.
Share capital: 40,000 Equity shares of ₹ 10 each fully paid – ₹ 4,00,000; 1,000 10% Redeemable
preference shares of ₹ 100 each fully paid – ₹ 1,00,000.

Reserve & Surplus: Capital reserve – ₹ 50,000; Securities premium – ₹ 50,000; General reserve –₹
75,000; Profit and Loss Account – ₹ 35,000

On 1st January 20X2, the Board of Directors decided to redeem the preference shares at par by
utilization of reserve.

You are required to pass necessary Journal Entries including cash transactions in the books of the
company.

(ICAI SM /November 2020 RTP/May 2021 RTP/June 2013(M))

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Sol. In the books of ABC Limited
Journal Entries
Date Particulars L.F. Dr. (₹) Cr. (₹)
20X2
Jan 1 10% Redeemable Preference Share Capital Dr. 1,00,000
A/c
To Preference Shareholders A/c 1,00,000
(Being the amount payable on redemption transferred
to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,00,000
To Bank A/c 1,00,000
(Being the amount paid on redemption of preference
shares)
General Reserve A/c Dr. 75,000
Profit & Loss A/c Dr. 25,000
To Capital Redemption Reserve A/c 1,00,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)
Note: -
*Securities premium and capital reserve cannot be utilized for transfer to Capital Redemption
Reserve.
3. The Balance Sheet of XYZ Ltd. as at 31st December, 20X1
following information:
Particulars (₹)
 50,000, 8% Preference Shares of ₹100 each, ₹70 paid up 35,00,000
 1,00,000 Equity Shares of ₹100 each fully paid up 1,00,00,000
 Securities Premium 5,00,000
 Capital Redemption Reserve 20,00,000
 General Reserve 50,00,000
 Bank 15,00,000

Under the terms of their issue, the preference shares are redeemable on 31st March, 20X2 at 5%
premium. In order to finance the redemption, the company makes a rights issue of 50,000 equity
shares of ₹ 100 each at ₹ 110 per share, ₹ 20 being payable on application, ₹ 35 (including
premium) on allotment and the balance on 1st January, 20X3. The issue was fully subscribed and
allotment made on 1st March, 20X2. The money due on allotment were duly received by 31st
March, 20X2. The preference shares were redeemed after fulfilling the necessary conditions of
Section 55 of the Companies Act, 2013.

You are asked to pass the necessary Journal Entries and show the relevant extracts from the
balance sheet as on 31st March, 20X2 with the corresponding figures as on 31st December, 20X1.
(ICAI SM /June 2016(M)/November 2020)

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Sol. Journal Entries
Particulars L.F. (₹) (₹)
8% Preference Share Final Call A/c Dr. 15,00,000
To 8% Preference Share Capital A/c 15,00,000
(For final call made on preference shares @ ₹ 30 each to make
them fully paid up)
Bank A/c Dr. 15,00,000
To 8% Preference Share Final Call A/c 15,00,000
(For receipt of final call money on preference shares)
Bank A/c Dr. 10,00,000
To Equity Share Application A/c 10,00,000
(For receipt of application money on 50,000 equity shares @ ₹ 20
per share)
Equity Share Application A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(For capitalization of application money received)
Equity Share Allotment A/c Dr. 17,50,000
To Equity Share Capital A/c 12,50,000
To Securities Premium A/c 5,00,000
(For allotment money due on 50,000 equity shares @ ₹ 35 per
share including a premium of ₹ 10 per share)
Bank A/c Dr. 17,50,000
To Equity Share Allotment A/c 17,50,000
(For receipt of allotment money on equity shares)
General Reserve A/c Dr. 27,50,000
To Capital Redemption Reserve A/c 27,50,000
(For transfer of CRR the amount not covered by the proceeds of
fresh issue of equity shares i.e., 50,00,000 - 10,00,000 - 12,50,000)
8% Preference Share Capital A/c Dr. 50,00,000
Premium on Redemption of Preference Shares Dr. 2,50,000
A/c
To Preference Shareholders A/c 52,50,000
(For amount payable to preference shareholders on redemption at
5% premium)
Preference Shareholders A/c Dr. 52,50,000
To Bank A/c 52,50,000
(For amount paid to preference shareholders)
General Reserve A/c Dr. 2,50,000
To Premium on Redemption A/c 2,50,000
(For writing off premium on redemption of preference shares)

Balance Sheet (extracts);

Particulars Notes As at As at
No. 31.3.20X2 31.12.20X1
(₹) (₹)
EQUITY AND LIABILITIES;
1. Shareholders’ funds;
a) Share capital 1 1,22,50,000 1,35,00,000
b) Reserves and Surplus 2 77,50,000 75,00,000
ASSETS;
2. Current Assets;
a) Cash & Cash Equivalents 3 5,00,000 15,00,000

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Notes to accounts: -
Particulars As at As at
31.3.20X2 31.12.20X1
1. Share Capital;
Issued, Subscribed and Paid up;
 1,00,000 Equity shares of ₹100 each fully paid up 1,00,00,000 1,00,00,000
 50,000 Equity shares of ₹100 each ₹45 paid up 22,50,000 -
 50,000, 8% Preference shares of ₹100 each, ₹70 - 35,00,000
called up
1,22,50,000 1,35,00,000
2. Reserves and Surplus;
 Capital Redemption Reserve 47,50,000 20,00,000
 Securities Premium 10,00,000 5,00,000
 General Reserve 20,00,000 50,00,000
77,50,000 75,00,000
3. Cash & Cash Equivalents;
 Bank balance 5,00,000 15,00,000
Note: -Amount received (excluding premium) on fresh issue of shares till the date of
redemption should be considered for calculation of proceeds of fresh issue of shares. Thus,
proceeds of fresh issue of shares ₹ 22,50,000 (₹ 10,00,000 application money plus ₹
12,50,000 received on allotment towards share capital) will be considered.
4. X Ltd. gives you the following information as at 31st March, 20X3;

Particulars (₹)
EQUITY AND LIABILITIES;
1) Shareholders’ funds;
a) Share capital 2,90,000
b) Reserves and Surplus 48,000
2) Current liabilities;
Trade Payables 56,500
ASSETS;
1) Property, Plant and Equipment; 3,45,000
2) Non-current investments; 18,500
3) Current Assets;
Cash and cash equivalents (bank) 31,000
The share capital of the company consists of ₹ 50 each equity shares of ₹ 2,25,000 and ₹ 100 each
Preference shares of ₹65,000(issued on 1.4.20X1). Reserves and Surplus comprises Profit and
Loss Account only.

In order to facilitate the redemption of preference shares at a premium of 10%, the Company
decided:

1) To sell all the investments for ₹ 15,000.

2) To finance part of redemption from company funds, subject to, leaving a bank balance of ₹
12,000.
3) To issue minimum equity share of ₹ 50 each share to raise the balance of funds required.
You are required to pass:

The necessary Journal Entries to record the above transactions and prepare the balance sheet as
on completion of the above transactions.
(ICAI SM /May 2019)

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Sol. Journal Entry
Date Particulars L.F. Dr. (₹) Cr. (₹)
Bank A/c Dr. 37,500
To Share Application A/c 37,500
(For application money received on 750 shares @ ₹ 50
per share)
Share Application A/c Dr. 37,500
To Equity Share Capital A/c 37,500
(For disposition of application money
received)
Preference Share Capital A/c Dr. 65,000
Premium on Redemption of Preference Shares Dr. 6,500
A/c
To Preference Shareholders A/c 71,500
(For amount payable on redemption of preference
shares)
Bank A/c Dr. 15,000
Profit and Loss A/c (loss on sale) A/c Dr. 3,500
To Investment A/c 18,500
(For sale of investments at a loss of ₹ 3,500)
Profit and Loss A/c Dr. 27,500
To Capital Redemption Reserve A/c 27,500
(For transfer to CRR out of divisible profits an amount
equivalent to excess of nominal value of preference shares
over proceeds (face value of equity shares) i.e., (65,000-
37,500=27,500)
Preference Shareholders A/c Dr. 71,500
To Bank A/c 71,500
(For payment of preference shareholders)
Profit and Loss A/c Dr. 6,500
To Premium on Redemption of Preference 6,500
Shares A/c
(For writing off premium on redemption out of profits)

Balance Sheet (after redemption);

Particulars Notes (₹)

No.
EQUITY AND LIABILITIES;
1. Shareholders’ funds;
a) Share capital 1 2,62,500
b) Reserves and Surplus 2 38,000
2. Current liabilities;
Trade Payables 56,500
Total 3,57,000
ASSETS;
1. Property, Plant and Equipment 3,45,000
2. Current Assets
a) Cash and cash equivalents (bank) 3 12,000
Total 3,57,000

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Notes to accounts;

Particulars (₹)
1. Share Capital
Equity share capital (2,25,000 + 37,500) 2,62,500
2. Reserves and Surplus
Capital Redemption Reserve 27,500
Profit and Loss Account (48,000 – 6,500 – 3,500 – 27,500) 10,500
38,000
3. Cash and cash equivalents
Balances with banks (31,000 + 37,500 +15,000 – 71,500) 12,000

Working Note: -

 Calculation of Number of Shares:

 Amount payable on redemption 71,500
 Less: Sale price of investment (15,000)
56,500
 Less: Available bank balance (31,000 - 12,000) (19,000)
 Funds from fresh issue 37,500
 No. of shares = 37,500/50=750 shares
5. C Limited had 3,000, 12% Redeemable Preference Shares of ₹100 each, fully paid up. The
company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:

1) 25,000 Equity Shares of ₹10 each at par,

2) 1,000 14% Debentures of ₹100 each.
The issue was fully subscribed and all amounts were received in full. The payment was duly made.
The company had sufficient profits. Show Journal Entries in the books of the company.
(ICAI SM /May 2018)
Sol. In the books of C Limited Journal Entries
Date Particulars L.F. Dr. (₹) Cr. (₹)
Bank A/c Dr. 2,50,000
To Equity Share Capital A/c 2,50,000
(Being the issue of 25,000 equity shares of ₹
10 each at par as per Board’s resolution
No……dated…..)
Bank A/c Dr. 1,00,000
To 14% Debenture A/c 1,00,000
(Being the issue of 1,000 Debentures of
₹ 100 each as per Board’s Resolution No…..dated……)
Profit & Loss A/c Dr. 50,000
To Capital Redemption Reserve A/c 50,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)

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12% Redeemable Preference Share Capital A/c Dr. 3,00,000
Premium on Redemption of Preference Shares Dr. 30,000
A/c
To Preference Shareholders A/c 3,30,000
(Being the amount payable on redemption
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 3,30,000
To Bank A/c 3,30,000
(Being the amount paid on redemption of preference
shares)
Profit & Loss A/c Dr. 30,000
To Premium on Redemption of Preference 30,000
Shares A/c
(Being the adjustment of premium on
redemption against Profits & Loss Account)

Working Note: -
Amount to be transferred to Capital Redemption Reserve Account;

 Face value of shares to be redeemed 3,00,000

 Less: Proceeds from new issue (2,50,000)
 Total Balance 50,000
6. Bumbum Limited gives you the following information as at 31st March, 20X1;

Particulars (₹)
Authorized capital:
 50,000 Equity shares of ₹ 10 each 5,00,000
 10,000 Preference shares of ₹ 100 each (8% redeemable) 10,00,000
15,00,000
Issued, subscribed and paid up capital:
 30,000 Equity shares of ₹ 10 each 3,00,000
 5,000, 8% Redeemable Preference shares of ₹ 100 each 5,00,000
8,00,000
Reserves & Surplus:
 Securities Premium 6,00,000
 General Reserve 6,50,000
 Profit & Loss A/c 40,000
 12,90,000
 2,500, 9% Debentures of ₹ 100 each 2,50,000
 Trade payables 1,70,000
 Property, Plant and Equipment (net) 7,80,000
 Investments (market value ₹ 5,80,000) 4,90,000
 Deferred Tax Assets 3,40,000
 Trade receivables 6,20,000
 Cash & Bank balance 2,80,000
In Annual General Meeting held on 20th June, 20X1 the company passed the following
resolutions:
1) To split equity share of ₹ 10 each into 5 equity shares of ₹ 2 each from 1st July.
2) To redeem 8% preference shares at a premium of 5%.

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3) To redeem 9% Debentures by making offer to debenture holders to convert their holdings
into equity shares at ₹ 10 per share or accept cash on redemption.
4) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on
record date.
On 10th July, 20X1 investments were sold for ₹ 5,55,000 and preference shares were redeemed.
40% of Debenture holders exercised their option to accept cash and their claims were settled on
1st August, 20X1.
The company fixed 5th September, 20X1 as record date and bonus issue was concluded by 12th
September, 20X1
You are requested to journalize the above transactions including cash transactions and prepare
Balance Sheet as at 30th September, 20X1. All working notes should form part of your answer.
(ICAI SM/December 2008)
Sol. Bumbum Limited Journal Entries
20X1 Particulars L.F. Dr. (₹) Cr. (₹)
July 1 Equity Share Capital A/c (₹ 10 each) Dr. 3,00,000
To Equity share capital A/c (₹ 2 each) 3,00,000
(Being equity share of ₹10 each split into 5 equity shares
of ₹ 2 each) {1,50,000 X 2}
July 10 Bank A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited to
Profit & Loss A/c)
July 10 8% Redeemable preference share capital A/c Dr. 5,00,000
Premium on redemption of pref. share A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference shareholders on
redemption) (refer W.N.1)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference shareholders)
July 10 General reserve A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to Capital Redemption Reserve A/c on
its redemption as per the law)
Aug 1 9% Debentures A/c Dr. 2,50,000
Interest on debentures A/c Dr. 7,500
(2,50,000 x 9% x 4/12)
To Debenture holder’s A/c 2,57,500
(Being amount payable to debenture holders along with
interest payable)
Aug. 1 Debenture holder’s A/c Dr. 2,57,500
To Cash & bank A/c (1,00,000 + 7,500) 1,07,500
To Equity share capital A/c (15,000 2) 30,000
To Securities premium A/c (15,000 8) 1,20,000
(Being claims of debenture holders satisfied) (refer
W.N.2)
Sept. 5 Capital Redemption Reserve A/c Dr. 1,10,000
To Bonus to shareholders A/c 1,10,000
(Being balance in capital redemption reserve capitalized
to issue bonus shares) (refer W.N.3)

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Sept. 12 Bonus to shareholders A/c Dr. 1,10,000
To Equity share capital A/c 1,10,000
(Being 55,000 fully paid equity shares of ₹ 2 each issued
as bonus in ratio of 1 share for every 3 shares held)
Sept. 30 General Reserve A/c Dr. 25,000
To Premium on redemption of preference shares 25,000
A/c
(Being premium on preference shares adjusted from
general reserve)
Sept. 30 Profit & Loss A/c Dr. 7,500
To Interest on debentures A/c 7,500
(Being interest on debentures transferred to Profit and
Loss Account)
Balance Sheet as at 30th September, 20X1;
Particulars Notes (₹)
Equity and Liabilities;
1) Shareholders' funds;
a) Share capital 1 4,40,000
b) Reserves and Surplus 2 13,32,500
2) Current liabilities;
a) Trade Payables 1,70,000
Total 19,42,500
Assets;
1) Non-current assets;
a) Property, Plant a d Equipment 7,80,000
b) Deferred tax asset 3,40,000
2) Current assets;
Trade receivables 6,20,000
Cash and bank balances (W.N.4) 2,02,500
Total 19,42,500

Notes to accounts;
Particulars (₹) (₹)
1) Share Capital
Authorized share capital
2,50,000 Equity shares of ₹ 2 each 5,00,000
10,000 Preference shares of ₹100 each 10,00,000 15,00,000
Issued, subscribed and paid up
2,20,000 Equity shares of ₹ 2 each [(30,000 x 5) + 4,40,000
15,000 + 55,000]
2) Reserves and Surplus
Security Premium A/c
Balance as per balance sheet 6,00,000
Add: Premium on equity shares issued on conversion of
debentures (15,000 x 8) 1,20,000
Balance 7,20,000
Capital Redemption Reserve (5,00,000-1,10,000) 3,90,000
General Reserve (6,50,000 – 5,00,000- 25,000) 1,25,000
Profit & Loss A/c 40,000
Add: Profit on sale of investment 65,000
Less: Interest on debentures (7,500) 97,500
Total 13,32,500

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Working Notes: -

Particulars (₹)
1) Redemption of preference share:
5,000 Preference shares of ₹ 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2) Redemption of Debentures
2,500 Debentures of ₹100 each 2,50,000
Less: Cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000
Equity shares issued on conversion = 1,50,000/10 = 15,000 shares
3) Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 55,000 shares
4) Cash and Bank Balance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Paid to Debenture holders (7,500 + 1,00,000) (1,07,500)
Balance 2,02,500
5) Interest of ₹7,500 paid to debenture holders have been debited to Profit
& Loss Account.
7. The Board of Directors of a Company decided to issue minimum number of equity shares of ₹ 9 to
redeem ₹ 5,00,000 preference shares. The maximum amount of divisible profits available for
redemption is ₹ 3,00,000. Calculate the number of shares to be issued by the company to ensure
that the provisions of Section 55 are not violated. Also determine the number of shares if the
company decides to issue shares in multiples of ₹ 50 only.
(ICAI SM)
Sol.  Nominal value of preference shares ₹ 5,00,000
 Maximum possible redemption out of profits ₹ 3,00,000
 Minimum proceeds of fresh issue ₹ 5,00,000 – 3,00,000 = ₹ 2,00,000
Proceed of one share =₹9
 Minimum number of shares

As fractional shares are not permitted, the minimum number of shares to be issued is
22,223 shares.
If shares are to be issued in multiples of 50, then the next higher figure which is a multiple
of 50 is 22,250. Hence, minimum number of shares to be issued in such a case is 22,250
shares.

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8. G India Ltd. had 9,000 10% redeemable Preference Shares of ₹ 10 each, fully paid up. The company
decided to redeem these preference shares at par by the issue of sufficient number of equity
shares of ₹ 9 each fully paid up.
You are required to pass necessary Journal Entries including cash transactions in the books of the
company.
(ICAI SM)
Sol. In the books of G India Limited
Journal Entry

Date Particulars L.F. Dr. (₹) Cr. (₹)

Bank A/c Dr. 90,000
To Equity Share Capital A/c 90,000
(Being the issue of 10,000 Equity Shares of ₹9 each at par, as
per Board’s Resolution No Dated)
10% Redeemable Preference Shares Capital A/c Dr. 90,000
To Preference Shareholders A/c 90,000
(Being the amount payable on redemption of preference
shares transferred to Preference Shareholders A/c)
Preference Shareholders A/c Dr. 90,000
To Bank A/c 90,000
(Being the amount paid on redemption of preference
shares)
9. Hinduja Company Ltd. had 5,000, 8% Redeemable Preference Shares of ₹ 100 each, fully paid up.
The company decided to redeem these preference shares at par by the issue of sufficient number
of equity shares of ₹ 10 each fully paid up at par. You are required to pass necessary Journal
Entries including cash transactions in the books of the company.
(ICAI SM)
Sol. In the books of Hinduja Company Ltd.
Journal Entries

Date Particulars L.F. Dr. (₹) Cr. (₹)

Bank A/c Dr. 5,00,000
To Equity Share Capital A/c 5,00,000
(Being the issue of 50,000 Equity Shares of ₹10 each
at par for the purpose of redemption of preference
shares, as per Board Resolution No. dated)
8% Redeemable Preference Share Capital Dr. 5,00,000
A/c
To Preference Shareholders A/c 5,00,000
(Being the amount payable on redemption of
preference shares transferred to Preference
Shareholders Account)
Preference Shareholders A/c Dr. 5,00,000
To Bank A/c 5,00,000
(Being the amount paid on redemption of preference
shares)

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10. Trinity Ltd. gives you the following information as at 31.3.20X1;

Particulars (₹)
Property, Plant and Equipment;
 Gross Block 3,00,000
 Less: Depreciation 1,00,000
 2,00,000
 Investments 1,00,000
 Inventory 45,000
 Trade receivables 25,000
 Cash and Bank Balances 50,000
 Share Capital:
 Authorized:
 10,000 10% Redeemable Preference Shares of ₹ 10 each 1,00,000
 90,000 Equity Shares of ₹10 each 9,00,000
 Issued, Subscribed and Paid-up Capital:
 10,000 10% Redeemable Preference Shares of ₹ 10 each 1,00,000
 10,000 Equity Shares of ₹ 10 each 1,00,000
 Reserves and Surplus:
 General Reserve 1,20,000
 Securities Premium 70,000
 Profit and Loss A/c 18,500
 Current Liabilities and Provisions 11,500
For the year ended 31.3.20X2, the company made a net profit of ₹35,000 after providing ₹20,000
depreciation.
The following additional information is available with regard to company’s operation:
1) The preference dividend for the year ended 31.3.20X2 was paid.
2) Except cash and bank balances other current assets and current liabilities as on
31.3.20X2, was the same as on 31.3.20X1.
3) The company redeemed the preference shares at a premium of 10%.
4) The company issued bonus shares in the ratio of one share for every equity share held as
on 31.3.20X2.
5) To meet the cash requirements of redemption, the company sold investments.
6) Investments were sold at 90% of cost on 31.3.20X2.
You are required to prepare necessary journal entries to record redemption and issue of bonus
shares
(ICAI SM)

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Sol. Journal Entries
in the Books of Trinity Ltd.

Particulars L.F. Dr. (₹) Cr. (₹)

General Reserve A/c Dr. 10,000
To Premium on Redemption of Preference shares A/c 10,000
(Being amount of premium payable on
redemption of preference shares)
10% Redeemable Preference Capital A/c Dr. 1,00,000
Premium on redemption of Preference Shares A/c Dr. 10,000
To Preference Shareholders A/c 1,10,000
(Being the amount payable to preference
shareholders on redemption)
General Reserve A/c Dr. 1,00,000
To Capital Redemption Reserve A/c 1,00,000
(Being transfer to the latter account on redemption of
shares)
Bank A/c Dr. 90,000
Profit and Loss A/c Dr. 10,000
To Investments A/c 1,00,000
(Being amount realized on sale of Investments and loss
thereon adjusted)
Preference shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being payment made to preference
shareholders)
Capital Redemption Reserve A/c Dr. 1,00,000
To Bonus to Shareholders A/c 1,00,000
(Amount adjusted for issuing bonus share in the ratio of 1:
1)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital A/c 1,00,000
(Balance on former account transferred to latter)
11. The books of B Ltd. showed the following balance on 31st December, 20X3:
30,000 Equity Shares of ₹10 each fully paid; 18,000 12% Redeemable Preference Shares of ₹10
each fully paid; 4,000 10% Redeemable Preference Shares of ₹ 10 each, ₹ 8 paid up (all shares
issued on 1st April, 20X2).
Undistributed Reserve and Surplus stood as: Profit and Loss Account ₹ 80,000; General Reserve ₹
1,20,000 Securities Premium Account ₹ 15,000 and Capital Reserve ₹ 21,000.

For redemption, 3,000 equity shares of ₹10 each are issued at 10% premium. At the same time,
Preference shares are redeemed on 1st January, 20X4 at a premium of ₹2 per share. The
whereabouts of the holders of 100 shares of ₹10 each fully paid are not known.
A bonus issue of equity share was made at par, two shares being issued for every five held on that
date out of the Capital Redemption Reserve Account. However, equity shares, issued for
redemption are not eligible for bonus.
Show the necessary Journal Entries to record the transactions.
(ICAI SM)

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Sol. In the books of B Limited
Journal Entries

Date Particulars L.F. Dr. (₹) Cr. (₹)

20X1 12% Redeemable Preference Share Capital Dr. 1,80,000
A/c
Jan 1 Premium on Redemption of Preference Dr. 36,000
Shares A/c
To Preference Shareholders A/c 2,16,000
(Being the amount payable on redemption of 18,000 12%
Redeemable Preference Shares transferred to
Shareholders Account)
Preference Shareholders A/c Dr. 2,14,800
To Bank A/c 2,14,800
(Being the amount paid on redemption of 17,900
preference shares)
Bank A/c Dr. 33,000
To Equity Shares Capital A/c 30,000
To Securities Premium A/c 3,000
(Being the issue of 3,000 Equity Shares of
₹ 10 each at a premium of 10% as per Board’s
Resolution No. Dated)
General Reserve A/c Dr. 1,20,000
Profit & Loss A/c Dr. 30,000
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital Redemption
Reserve A/c as per the requirement of the Act.)
Capital Redemption Reserve A/c Dr. 1,20,000
To Bonus to Shareholders A/c 1,20,000
(Being the amount appropriated for issue of bonus share
in the ratio of 5:2 as per shareholders Resolution No
dated)
Bonus to Shareholders A/c Dr. 1,20,000
To Equity Share Capital A/c 1,20,000
(Being the utilization of bonus dividend for issue of
12,000 equity shares of ₹ 10 each fully paid)
Profit & Loss A/c Dr. 36,000
To Premium on Redemption of 36,000
Preference Shares A/c
(Being premium on redemption of preference
shares adjusted against to Profit & Loss Account)

Working Note: -
 Partly paid-up preference shares cannot be redeemed.
 Amount to be Transferred to Capital Redemption Reserve Account

 Face value of share to be redeemed ₹1,80,000

 Less: Proceeds from fresh issue (excluding premium) (₹ 30,000)
₹1,50,000
 No bonus shares on 3,000 equity shares issued for redemption.

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12. Jolly Ltd. has the following balance sheet as on 31st March, 20X1;

Liabilities (₹)
Share Capital;
 Issued, subscribed and fully paid-up (10,000 equity shares of ₹ 100 each) 10,00,000

 5,000 Preference shares of ₹ 100 each 5,00,000

 Capital Reserve 1,00,000
 Securities premium account 1,00,000
 General reserve 2,00,000
 Profit and loss account 1,00,000
 Current liabilities 10,00,000
30,00,000
Assets;
 Property, Plant and Equipment 22,00,000
 Current assets 8,00,000
30,00,000

The preference shares are to be redeemed at 10% premium, Fresh issue of equity shares is to be
made to the extent it is required under the Companies Act, 2013 for the purpose of this
redemption. The shortfall in funds for the purpose of the redemption after utilising the proceeds of
the fresh issue are to be met by taking a bank loan. Show Journal entries.

(June 2009)
Sol. Journal Entries in the
Books of Jolly Ltd.
Particulars L.F. Dr. (₹) Cr. (₹)
Securities Premium A/c Dr. 50,000
To Premium on Redemption of Preference 50,000
Shares Account
(Utilization of securities premium on Redemption of
Preferences Shares)
General Reserves A/c Dr. 2,00,000
Profit & Loss Account Dr. 1,00,000
To Capital Redemption Reserve A/c 3,00,000
(Creation of Capital Redemption Reserve to the maximum
possible extent)
Bank A/c Dr. 2,00,000
To Equity Share Application and Allotment, A/c 2,00,000
(Receipt of money for equity shares of ₹ 2,00,000)
Equity Share Application and Allotment Account Dr. 2,00,000
To Equity Share Capital Account 2,00,000
(Allotment of equity shares of the face value of ₹ 2,00,000
at par)
Preference Share Capital Account Dr. 5,50,000
Premium on Redemption of Preference Share Dr. 50,000
A/c
To Sundry Preference Shareholders A/c 5,50,000
(Amount payable to sundry preference shareholders to
redeem 5,000 preference shares of ₹ 100 each at a
premium of ₹ 10 per share)

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Bank A/c Dr. 3,50,000
To Bank Loan Account 3,50,000
(Raising a bank loan to pay off the amount due to sundry
preference shareholders)
Sundry Preference Shareholders Account Dr. 5,50,000
To Bank A/c 5,50,000
(Payment made to Sundry preference shareholders)
13. Lily Ltd., having sufficient balance to the credit of general reserve and ₹ 1,00,000 balance in
securities premium account, decides to;

‒ Redeem 5,000, 10% redeemable preference shares of ₹ 100 each fully paid-up at a premium
of 5%; and
‒ Capital redemption reserve arising as a result of redemption be utilised in allotting the un-
issued shares of the company as fully paid equity shares of ₹ 10 each by way of bonus to its
members.
Show Journal Entries for redemption of preference shares and issue of bonus shares.
(December 2016)
Sol. Journal Entries
in the books of Lily Ltd.
Particulars L.F. Dr. (₹) Cr. (₹)
1) 10% Redeemable Preference Share Capital Dr. 5,00,000
A/c
Premium on redemption A/c Dr. 25,000
To Preference Shareholders 5,25,000
(Amount due to redeemable preference shareholders on
redemption at 5% premium)
2) Profit and loss A/c Dr. 25,000
To Premium on redemption A/c 25,000
(Premium on redemption provided)
3) General Reserve A/c Dr. 5,00,000
To Capital Redemption Reserve A/c 5,00,000
(Amount of redemption transferred)
4) Preference Shareholders A/c Dr. 5,25,000
To Bank 5,25,000
(Amount paid to preference shareholders)
5) Capital Redemption Reserve A/c Dr. 5,00,000
To Bonus to shareholders A/c 5,00,000
(Being the amount appropriated for issue of
bonus share)
6) Bonus to shareholders A/c Dr. 5,00,000
To Equity shareholders A/c 5,00,000
(Being bonus money transferred to equity
shareholder)
Equity Shareholders A/c Dr. 5,00,000
To Equity Share Capital A/c 5,00,000
(Being Amount transferred to equity capital
account)

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14. The Balance Sheet of XYZ Ltd. as at 31st December, 20X1 following information:

Particulars (₹)
 50,000, 8% Preference Shares of ₹100 each, ₹70 paid up 35,00,000
 1,00,000 Equity Shares of ₹100 each fully paid up 1,00,00,000
 Securities Premium 5,00,000
 Capital Redemption Reserve 20,00,000
 General Reserve 50,00,000
 Bank 15,00,000

Under the terms of their issue, the preference shares are redeemable on 31st March, 20X2 at 5%
premium. In order to finance the redemption, the company makes a rights issue of 50,000 equity
shares of ₹ 100 each at ₹ 110 per share, ₹ 20 being payable on application, ₹ 35 (including
premium) on allotment and the balance on 1st January, 20X3. The issue was fully subscribed and
allotment made on 1st March, 20X2. The money due on allotment were duly received by 31st
March, 20X2. The Preference Shareholders holding 2,000 shares fail to make the payment for the
Final Call made under Section 55, you are asked to pass the necessary Journal Entries and show
the relevant extracts from the balance sheet as on 31st March, 20X2 with the corresponding
figures as on 31st December, 20X1 assuming that the shares in default are forfeited after giving
proper notices.
(ICAI SM)
Sol. Journal Entries
Particulars L.F. (₹) (₹)
8% Preference Share Final Call A/c Dr. 15,00,000
To 8% Preference Share Capital A/c 15,00,000
(For final call made on preference shares @
₹ 30 each to make them fully paid up)
Bank A/c (48,000 x ₹30) Dr. 14,40,000
Calls in arrears A/c (2,000x ₹30) 60,000
To 8% Preference Share Final Call A/c 15,00,000
(For receipt of final call money on preference shares)
Preference Share Capital A/c (2000 X ₹100) Dr. 2,00,000
To Calls in Arrears A/c (2000 X ₹30) 60,000
To Shares Forfeited A/c (2000 X ₹70) 1,40,000
(For Shares Forfeited after shareholders fail to
pay the Final Call)
Bank A/c Dr. 10,00,000
To Equity Share Application A/c 10,00,000
(For receipt of application money on 50,000 equity
shares @ ₹ 20 per share)
Equity Share Application A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(For capitalisation of application money
received)
Equity Share Allotment A/c Dr. 17,50,000
To Equity Share Capital A/c 12,50,000
To Securities Premium A/c 5,00,000
(For allotment money due on 50,000 equity shares @
₹ 35 per share including a premium of ₹ 10 per
share)

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Bank A/c Dr. 17,50,000
To Equity Share Allotment A/c 17,50,000
(For receipt of allotment money on equity shares)
General Reserve A/c Dr. 25,50,000
To Capital Redemption Reserve A/c 25,50,000
(For transfer of CRR the amount not covered by the
proceeds of fresh issue of equity
shares i.e., 48,00,000 – 10,00,000 – 12,50,000)
8% Preference Share Capital A/c Dr. 48,00,000
Premium on Redemption of Preference Dr. 2,40,000
Shares A/c
To Preference Shareholders A/c 50,40,000
(For amount payable to preference
shareholders on redemption at 5% premium)
Preference Shareholders A/c Dr. 50,40,000
To Bank A/c 50,40,000
(For amount paid to preference shareholders)
General Reserve A/c Dr. 2,40,000
To Premium on Redemption A/c 2,40,000
(For writing off premium on redemption of preference
shares)

Balance Sheet (extracts);

Particulars Notes No. As at As at
31.3.20X2 31.12.20X1
(₹) (₹)
EQUITY AND LIABILITIES
1. Shareholders’ funds
a) Share capital 1 1,23,90,000 1,35,00,000
b) Reserves and Surplus 2 77,60,000 75,00,000
ASSETS;
1. Current Assets;
a) Cash & Cash Equivalents 3 6,50,000 15,00,000
Notes to accounts;
Particulars As at As at
31.3.20X2 31.12.20X1
1. Share Capital;
Issued, Subscribed and Paid up:
1,00,000 Equity shares of ₹100 each fully paid up 1,00,00,000 1,00,00,000
50,000 Equity shares of ₹100 each ₹45 paid up 22,50,000 -
50,000, 8% Preference shares of - 35,00,000
₹ 100 each, ₹ 70 called up Shares
Forfeited 1,40,000 -
1,23,90,000 1,35,00,000
2. Reserves and Surplus;
Capital Redemption Reserve 45,50,000 20,00,000
Securities Premium 10,00,000 5,00,000
General Reserve 22,10,000 50,00,000
77,60,000 75,00,000
3. Cash & Cash Equivalents
Bank 6,50,000 15,00,000

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Note: -
Amount received (excluding premium) on fresh issue of shares till the date of redemption should
be considered for calculation of proceeds of fresh issue of shares. Thus, proceeds of fresh issue of
shares ₹ 22,50,000 (₹10,00,000 application money plus ₹ 12,50,000 received on asllotment
towards share capital) will be considered.

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