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4.M-2 Redumption of Pref Shares

Redeemable preference shares can be repaid to holders, and the redemption process must follow specific provisions, including ensuring shares are fully paid-up and identifying sources for redemption. The redemption can occur from profits or through new share issues, and any premiums must be covered from profits or share premium accounts. The accounting treatment involves transferring funds to a Capital Redemption Reserve and ensuring proper payments to shareholders.

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7 views25 pages

4.M-2 Redumption of Pref Shares

Redeemable preference shares can be repaid to holders, and the redemption process must follow specific provisions, including ensuring shares are fully paid-up and identifying sources for redemption. The redemption can occur from profits or through new share issues, and any premiums must be covered from profits or share premium accounts. The accounting treatment involves transferring funds to a Capital Redemption Reserve and ensuring proper payments to shareholders.

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chaitanyashinde172
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Redemption of Redeemable

Preference Shares
Redeemable Preference Shares :
• The Redeemable Preference shares are those,
the amount of which can be paid back to the
holders of such shares.
• The paying back of capital is called the
redemption.
• To redeem means to repay.
• Redemption is the process of repaying an
obligation as per predetermined terms and
conditions.
Provision For The Redemption
of Preference Shares :
1. Fully paid-up:
• The shares to be redeemed must be fully
paid-up.
• If the company has partly paid preference
shares, it must see that they are made fully
paid up before they are redeemed.
Provision For The Redemption
of Preference Shares :
2. The Sources of Redeeming:
A. The redeemable preference shares can be
redeemed either out of the profits of the
company which would otherwise be
available for dividend or
B. Out of the proceeds of a fresh issue of
shares made for this purpose only. [By Issue
of New Shares - Equity OR Preference Shares]
Provision For The Redemption
of Preference Shares :
2. The Sources of Redeeming:
A. From Divisible Profits: Such as
• General Reserve
• Profits and Loss a/c
• Dividend Equalization Fund
• Reserve Fund
• Revenue portion of profit on sale of investments
• Revenue portion of profit on sale of fixed assets
• Workmen‟s Accident Compensation Fund
• Insurance Fund
Provision For The Redemption
of Preference Shares :
4. Any premium payable on redemption must be
provided out of profits or out of the company‟s
share premium account.
5. Where redemption is made out of profits, a sum
equal to the nominal amount of the shares so
redeemed must be transferred, out of the profits of
the company to a reserve called the Capital
Redemption Reserve a/c.
Provision For The Redemption
of Preference Shares :
4. Capital Redemption Reserve a/c can be utilized for
the issue of fully paid bonus shares to the equity
shareholders.
5. Redemption of preference shares shall not be
taken as the reduction of the authorized share
capital.
Method of Redemption of
Preference Shares :

1. Redemption form the Profits of Company

2. Redemption from Issue of new Shares

3. Redemption form Profits and Issue of new


shares

4. Redemption by the conversion of preference


shares into equity shares
Process / Stages of Redemption of
Preference Shares :
1. Stage 1 : Ascertainment of Amount of Capital
Redemption Reserve (CRR)

2. Stage 2 : Premium on Redemption of Preference


Shares

3. Stage 3 : Tackling “Cash Problem”

4. Stage 4 : Transfers and Payment


Stage 1 : Ascertainment of Amount of
Capital Redemption Reserve (CRR):

• Preference shares may be redeemed in one of the following ways:


(i) Out of revenue reserves
(ii) Out of the proceeds of a fresh issue of shares
(iii) Combination of (i) and (ii)
(iv) Converted into equity shares
• The amount to be transferred to CRR may be ascertained by
using the following formula:
Amount to be Transfer CRR=
Face value of preference shares to be Redeemed ---
Less: Amount Received from new issue of share ---
(Excluding Premium ) ---------
Transfer to CRR ---
Stage 2 : Premium on Redemption of
Preference Shares
• Premium on the redemption of preference shares, if
any, has to be provided in the following order:

a) Source (i): Securities premium existing in the balance


sheet

b) Source (ii): Premium on new issue of shares

c) Source (iii): Revenue reserves


Stage 3 : Tackling “Cash Problem”

Cash position may not be strong even in reputed companies. Cash


problem, i.e., shortage of cash, may arise in certain companies.
Shortage of cash is to be determined in the following way:
Stage 3 : Tackling “Cash Problem”

• Shortage of cash is determined one of the following


orders, which are based on assumption:

(i) Investments in balance sheet are sold at par

(ii) Trade debtors are realized at par

(iii) Bank overdraft is utilized to the possible limit


Stage 4 : Transfers and Payment

• Step 1: Revenue reserves that are used for redemption


of preference shares have to be transferred to CRR
account.
• Step 2: Premium on redemption has to be provided out
of appropriate source of accumulated profits.
• Step 3: These two, i.e., redeemable preference share
capital and premium payable on redemption, have to be
transferred to each preference shareholders’ account
individually.
• Step 4: In general, cash payment has to be made to the
shareholders.
Redemption of Preference Shares:
Accounting Treatment
1. Transfer funds to Capital Redemption Reserve:
General Reserve a/c.………………………………….Dr.
Profit & Loss a/c…………………………………………Dr.
Reserve Fund a/c……………………………………….Dr.
To, Capital Redemption Reserve a/c
To, Premium on Redemption of Prf. Share a/c (if any)

2. CRR Fund Transfer to Pref. Sh. Capital a/c:


Capital Redemption Reserve a/c……………….Dr.
Premium on Redemption of Prf. Share a/c….Dr.
To, Redeemable Prf. Sh. Capital a/c
Redemption of Preference Shares:
Accounting Treatment

3. For Amount Payable On Redemption:


Redeemable Prf. Sh. Capital a/c…………………Dr.
To, Redeemable Pref. Shareholders A/c

4. For Payment Made to Shareholders:


Redeemable Preference Shareholders A/c ….Dr.
To Bank A/c
Practical Q 1:
Practical Q 2:
Determination of the Amount of
New Issue :
• After familiarizing with the legal provisions with
respect to issue and redemption of preference
shares, we have to understand the term
“minimum fresh issue of shares”.
• In general, companies decide to utilize all the
permissible reserves, for the redemption and for
the balance amount, if any required, to make new
issue of shares.
Determination of the Amount of
New Issue :

• The main objective is to minimize the quantum of


new issue of shares:
That minimum new issue shall be made
(a) At par (or)
(b) At a premium (or)
(c) At a discount
Determination of the Amount of
New Issue :
• The amount of such new issue is ascertained by
using the following formula:

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