ACCOUNTING FOR PREFERENCE SHARE CAPITAL

Introduction

Shares are divided into two types: Equity and Preference.

Preference shares are given a preferential right over equity shares, in terms of dividend
payment. They are also given a preferential right for repayment of capital in case of winding
up of the company.

• Generally, holders of these shares do not get voting rights.

• Dividend is generally cumulative in nature and need not be paid every year in case of
deficiency of profits.

• As per the provisions of Companies Act, 2013; a company needs to redeem its
preference shares within 20 years from the date of issue. Thus, a company cannot
issue irredeemable preference shares.

Accounting for Preference Share Capital

1. On receipt of the application money

Bank A/c Dr.
To Preference Share Application A/c

2. On allotment of shares
Preference Share Application A/c Dr.
Share Discount A/c Dr.[if shares issued at discount]
To Preference Share Capital A/c
To Securities Premium A/c [if shares issued at premium]

3. On allotment Money Due of shares

Preference Share Allotment
To Preference Share Capital A/c

4. On receipt of allotment money

Bank A/c Dr.
To Preference Share Allotment A/c

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ACCOUNTING FOR PREFERENCE SHARE CAPITAL

Illustration 1

Iconic Ltd. invited applications for 30,000 preference shares of Rs. 100 each; Rs. 60
payable on application and Rs. 40 on allotment. Shares have been allotted in full.
Show the necessary journal entries in the books of the company.

Illustration 2

Oscar Ltd. invited applications for 25,000 preference shares of Rs. 10 each issued at
20% discount; Rs. 5 payable on application and Rs. 3 on allotment. Shares have been
allotted in full. Show the necessary journal entries in the books of the company.

Illustration 3

Oyster Ltd. invited applications for 50,000 preference shares of Rs. 100 each issued
at 30% premium; Rs. 70 (Including Premium) payable on application and Rs. 60 on
allotment. Shares have been allotted in full. Show the necessary journal entries in
the books of the company.

Redemption of Preference Share

• Redemption of preference shares means repayment by the company of the obligation

on account of shares issued. It is the process of repayment of an obligation, at
predefined amounts and timings.

• The redemption date is the maturity date, which specifies when repayment takes place.
• As per the provisions of Companies Act, 2013; a company needs to redeem its
preference shares within 20 years from the date of issue. Thus, a company cannot
issue irredeemable preference shares.
• Shares can be redeemed at par, at premium or at discount.

Accounting:

1. Redemption at Par
Preference Share Capital A/c Dr.
To Preference Shareholders A/c

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ACCOUNTING FOR PREFERENCE SHARE CAPITAL

2. Redemption at Premium
Preference Share Capital A/c Dr.
Premium on redemption A/c Dr.
To Preference Shareholders A/c

3. Redemption at Discount
Preference Share Capital A/c Dr.
To Preference Shareholders A/c
To Discount on Redemption A/c

4. On payment
Preference Shareholders A/c Dr.
To Bank A/c

5. Adjustment of Premium
Profit and Loss A/c Dr.
To Premium on Redemption A/c

6. Adjustment of Discount
Discount on Redemption A/c Dr.
To Profit and Loss A/c

Illustration 4

Krishna Flute Ltd. redeemed 30,000 preference shares of Rs. 10 each fully paid-up at
par. Record the necessary journal entry.

Illustration 5

Arjun Weapons Ltd. redeemed 20,000 preference shares of Rs. 10 each fully paid-up
at 10% discount. Record the necessary journal entry.

Illustration 6

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ACCOUNTING FOR PREFERENCE SHARE CAPITAL

Hanuman Textiles Ltd. redeemed 40,000 preference shares of Rs. 100 each fully
paid-up at 5% premium. Record the necessary journal entry.

Conditions for Redemption of Preference Shares

1. Preference shares can be redeemed only if they are fully paid-up.

2. Redemption of Preference Shares can be done from the following sources:
a) Proceeds of fresh issue of shares
b) Capitalization of undistributed profits
c) Combination of (a) and (b)
[Purpose: Because of Redemption, Share Capital Should not reduce]
3. the premium on redemption shall be write-off from the Profit and Loss
Account or securities premium account.

Redemption of Preference Shares by Fresh Issue of Shares

Sufficient No. of = Face Value of Preference Share Capital to be redeemed

Equity share to be issued Face Value of Equity share (Per Share)

Illustration 7
Hinduja Company Ltd. had 5,000, 8% Redeemable Preference Shares of Rs.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 Rs.10 each fully paid up at
par. You are required to pass necessary Journal Entries including cash
transactions in the books of the company.

Illustration 8
C Ltd. had 10,000, 10% Redeemable Preference Shares of Rs.100 each, fully paid
up. The company decided to redeem these preference shares at par, by issue of
sufficient number of equity shares of Rs.10 each at a premium of Rs.2 per share as
fully paid up. You are required to pass necessary Journal Entries including cash
transactions in the books of the company.

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ACCOUNTING FOR PREFERENCE SHARE CAPITAL

Redemption of Preference Shares by Capitalization of Undistributed Profits

1. Where any such shares are redeemed out of the distributable profits of the
company, an amount equal to the face value of the redeemed shares should
be transferred to Capital Redemption Reserve A/c.

2. For transferring nominal amount of shares redeemed to Capital Redemption

Reserve Account
General Reserve Account Dr.
Profit and Loss Account Dr.
To Capital Redemption Reserve Account
3. CRR can be used only for issuing fully paid-up bonus shares.

Illustration 8

The following are the extracts from the Balance Sheet of ABC Ltd.

Share capital: Amount

40,000 Equity shares of Rs.10 each fully paid 4,00,000

1,000 10% Redeemable preference shares of Rs.100 1,00,000

each fully paid
Reserve & Surplus
Capital reserve 50,000

Securities premium 50,000

General reserve 75,000

Profit and Loss Account 35,000

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.

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ACCOUNTING FOR PREFERENCE SHARE CAPITAL

Redemption of Preference Shares by Fresh Issue of Shares and

Capitalization of Undistributed Profits

Amount to be Transferred to Capital Redemption Reserve

Rs.
Face value of shares redeemed ***
Less: Proceeds from new issue ***
Amount to be Transferred to Capital Redemption Reserve ***

Illustration 9
C Limited had 3,000, 12% Redeemable Preference Shares of Rs.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 25,000 Equity Shares of Rs.10 each at par

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.

Illustration 10
The Board of Directors of a Company decide to issue minimum number of equity
shares of Rs.9 to redeem Rs.5,00,000 preference shares. The maximum amount of
divisible profits available for redemption is Rs.3,00,000. Calculate the number of
shares to be issued by the company to ensure that provisions of Section 55 are not
violated. Also determine the number of shares if the company decides to issue
shares in multiples of Rs.50 only.