Important Questions & Answers: Redemption of Preference Shares | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


ACCOUNTING FOR SHARES
Floatation of a Company
This mainly involves preparation of necessary documents like Memorandum of Association,
Articles of Association and filing them with the Registrar of companies along with requisite fee. Then
the company will be issued a certificate of incorporation which brings the company into existence as a
legal person. The company’s life commences from the date mentioned in the certificate of
incorporation. A private company can commence business right from the date of its incorporation. But
in case of a public company, it has to wait for a certificate of commencement of business also. That
certificate will be issued if the following conditions are satisfied.
? Shares which have to be paid for in cash must have been allotted upto the amount of the
minimum subscription.
? Directors must have paid in cash the application and allotment money in respect of the shares
contracted to be taken by them for cash.
? No money is liable to become refundable to the applicants by reason of failure to apply for or
to obtain permission for shares or debentures to be dealt in on any recognised stock exchange.
This certificate is a conclusive evidence of formation of a company.
Shares
Total capital of a company is divided into units of small denomination which are called as shares.
If the share capital of a company is 5,00,000, then it can be divided into 50,000 shares of ` 10 each, if
issued at face value. The Companies Act provides that the shares or other interest of any member in a
company shall be movable property, transferable in the manner provided by the Articles of the
company and that each share in a company shall be distinguished by its appropriate number.
Classes of Shares
The Companies Act provides for two classes of shares: equity and preference shares. Preference
shareholders enjoy preferential treatment with regard to payment of dividend and return of capital at
the time of winding up of the company.
Redemption of
Preference Shares
Page 2


ACCOUNTING FOR SHARES
Floatation of a Company
This mainly involves preparation of necessary documents like Memorandum of Association,
Articles of Association and filing them with the Registrar of companies along with requisite fee. Then
the company will be issued a certificate of incorporation which brings the company into existence as a
legal person. The company’s life commences from the date mentioned in the certificate of
incorporation. A private company can commence business right from the date of its incorporation. But
in case of a public company, it has to wait for a certificate of commencement of business also. That
certificate will be issued if the following conditions are satisfied.
? Shares which have to be paid for in cash must have been allotted upto the amount of the
minimum subscription.
? Directors must have paid in cash the application and allotment money in respect of the shares
contracted to be taken by them for cash.
? No money is liable to become refundable to the applicants by reason of failure to apply for or
to obtain permission for shares or debentures to be dealt in on any recognised stock exchange.
This certificate is a conclusive evidence of formation of a company.
Shares
Total capital of a company is divided into units of small denomination which are called as shares.
If the share capital of a company is 5,00,000, then it can be divided into 50,000 shares of ` 10 each, if
issued at face value. The Companies Act provides that the shares or other interest of any member in a
company shall be movable property, transferable in the manner provided by the Articles of the
company and that each share in a company shall be distinguished by its appropriate number.
Classes of Shares
The Companies Act provides for two classes of shares: equity and preference shares. Preference
shareholders enjoy preferential treatment with regard to payment of dividend and return of capital at
the time of winding up of the company.
Redemption of
Preference Shares
Equity shareholders enjoy voting rights. But there is no obligation to the company to pay
dividends at a fixed rate every year. Even at the time of winding up of a company, they receive their
capital only after payment to preference shareholders.
Share Capital
The Capital raised by the company by the issue of shares is known as share capital.
(a) Authorised or Nominal Share Capital: Authorised or Nominal share capital is the share
capital which the company is authorised to issue by its memorandum of association. It is the
maximum amount up to which a company is authorised to issue shares to the public without
altering the memorandum of association.
(b) Issued Capital: The nominal value of the shares which are offered to the public for
subscription is called issued capital.
(c) Subscribed Capital: The nominal value of the shares taken up by the public is subscribed
capital. Subscribed capital will be equal to issued capital when all the shares offered to the
public are taken up by the public.
(d) Called up Capital: Called up capital is that part of the subscribed capital which has been
called up. The called up capital will be equal to the subscribed capital when the board of
directors have called up the total amount payable in the shares.
(e) Paid-up Capital: The part of the called up share capital which has been paid up by the
shareholders is called paid-up capital.
Issue of Shares
The Companies Act stipulates that when shares are issued to public for cash, the company has to
come out with prospectus. Prospectus is defined by Section 2(36) as “A prospectus means any
document described or issued as prospectus and includes any notice, circular, advertisement or other
document inviting deposits from public or inviting offers from the public for the subscription or
purchase of any shares or debentures of a corporate body.”
Prospectus contains the details such as the number and class of shares offered and the manner in
which the amount of shares is payable by the public.
Public apply for shares of a company in an application form in a prescribed format. When an
application is accepted, it is an allotment.
The application should be filed with the company or its bankers and should be accompanied by
the application money. The application money is fixed by the company and should not be less than 5%
of nominal value of the shares.
If the company asks the subscriber to pay a minimum amount along with the application and the
rest in 2 or more instalments, then 1st instalment is called ‘Application money’ and 2nd instalment –
share allotment money; 3rd instalment – share first call and 4th instalment – share second call.
Accounting treatment for these transactions is as follows:
On receipt of application money (which must be deposited in a scheduled bank)
? Bank Account Dr.
To Share Application Account
(Being share application money received and deposited in a bank)
Page 3


ACCOUNTING FOR SHARES
Floatation of a Company
This mainly involves preparation of necessary documents like Memorandum of Association,
Articles of Association and filing them with the Registrar of companies along with requisite fee. Then
the company will be issued a certificate of incorporation which brings the company into existence as a
legal person. The company’s life commences from the date mentioned in the certificate of
incorporation. A private company can commence business right from the date of its incorporation. But
in case of a public company, it has to wait for a certificate of commencement of business also. That
certificate will be issued if the following conditions are satisfied.
? Shares which have to be paid for in cash must have been allotted upto the amount of the
minimum subscription.
? Directors must have paid in cash the application and allotment money in respect of the shares
contracted to be taken by them for cash.
? No money is liable to become refundable to the applicants by reason of failure to apply for or
to obtain permission for shares or debentures to be dealt in on any recognised stock exchange.
This certificate is a conclusive evidence of formation of a company.
Shares
Total capital of a company is divided into units of small denomination which are called as shares.
If the share capital of a company is 5,00,000, then it can be divided into 50,000 shares of ` 10 each, if
issued at face value. The Companies Act provides that the shares or other interest of any member in a
company shall be movable property, transferable in the manner provided by the Articles of the
company and that each share in a company shall be distinguished by its appropriate number.
Classes of Shares
The Companies Act provides for two classes of shares: equity and preference shares. Preference
shareholders enjoy preferential treatment with regard to payment of dividend and return of capital at
the time of winding up of the company.
Redemption of
Preference Shares
Equity shareholders enjoy voting rights. But there is no obligation to the company to pay
dividends at a fixed rate every year. Even at the time of winding up of a company, they receive their
capital only after payment to preference shareholders.
Share Capital
The Capital raised by the company by the issue of shares is known as share capital.
(a) Authorised or Nominal Share Capital: Authorised or Nominal share capital is the share
capital which the company is authorised to issue by its memorandum of association. It is the
maximum amount up to which a company is authorised to issue shares to the public without
altering the memorandum of association.
(b) Issued Capital: The nominal value of the shares which are offered to the public for
subscription is called issued capital.
(c) Subscribed Capital: The nominal value of the shares taken up by the public is subscribed
capital. Subscribed capital will be equal to issued capital when all the shares offered to the
public are taken up by the public.
(d) Called up Capital: Called up capital is that part of the subscribed capital which has been
called up. The called up capital will be equal to the subscribed capital when the board of
directors have called up the total amount payable in the shares.
(e) Paid-up Capital: The part of the called up share capital which has been paid up by the
shareholders is called paid-up capital.
Issue of Shares
The Companies Act stipulates that when shares are issued to public for cash, the company has to
come out with prospectus. Prospectus is defined by Section 2(36) as “A prospectus means any
document described or issued as prospectus and includes any notice, circular, advertisement or other
document inviting deposits from public or inviting offers from the public for the subscription or
purchase of any shares or debentures of a corporate body.”
Prospectus contains the details such as the number and class of shares offered and the manner in
which the amount of shares is payable by the public.
Public apply for shares of a company in an application form in a prescribed format. When an
application is accepted, it is an allotment.
The application should be filed with the company or its bankers and should be accompanied by
the application money. The application money is fixed by the company and should not be less than 5%
of nominal value of the shares.
If the company asks the subscriber to pay a minimum amount along with the application and the
rest in 2 or more instalments, then 1st instalment is called ‘Application money’ and 2nd instalment –
share allotment money; 3rd instalment – share first call and 4th instalment – share second call.
Accounting treatment for these transactions is as follows:
On receipt of application money (which must be deposited in a scheduled bank)
? Bank Account Dr.
To Share Application Account
(Being share application money received and deposited in a bank)
Redemption of Preference Shares
REDEMPTION OF PREFERENCE SHARES
As per the Companies Act, 1956 as amended in 1988, only preference shares which are
redeemable within 20 years can be issued. The preference shares may be redeemed at par or at
premium. Redemption may be done from the proceeds of fresh issue of shares or undistributed profits.
The premium on redemption of preference shares may be adjusted against the Share Premium A/c or
the Profit and Loss A/c.
Section 80 of the Companies Act allows a company, if authorised by the articles of association,
to issue preference shares which can be redeemed by the company according to terms of the issue
subject to the following legal restrictions:
(i) Shares cannot be redeemed unless they are fully paid up.
(ii) Shares can be redeemed only out of the profits of the company which would otherwise be
available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of
redemption.
(iii) To the extent that the shares are redeemed out of profits, capital redemption account must be
credited, debiting the profit and loss account, general reserve or other accounts showing
profits otherwise available for distribution of dividends.
(iv) Before the shares are redeemed, the premium, if any, payable on redemption must be
provided for out of the profits of the company or out of the share premium account.
Accounting Entries – On Redemption
1. Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(Being amount payable on redemption of preference shares transferred to Shareholders A/c)
2. Preference Shareholders A/c Dr.
To Bank A/c
(Being the amount due on redemption paid)
For Premium on Redemption
1. Redeemable Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares A/c Dr.
To Preference Shareholders A/c
(Being the amount payable on redemption transferred to Shareholders A/c)
2. Preference Shareholders A/c Dr.
To Bank A/c
(Being the payment made to Preference Shareholders)
3. Profit and Loss A/c Dr.
or
Share Premium A/c Dr.
To Premium on Redemption of Preference Shares A/c
(Being the premium on redemption adjusted against Profit and Loss A/c and Share Premium
A/c)
Capital Redemption Reserve
Where the preference shares are redeemed without there being a corresponding issue of shares
and the redemption is made out of distributable profits, the ‘gap’ created in the capital needs to be
Page 4


ACCOUNTING FOR SHARES
Floatation of a Company
This mainly involves preparation of necessary documents like Memorandum of Association,
Articles of Association and filing them with the Registrar of companies along with requisite fee. Then
the company will be issued a certificate of incorporation which brings the company into existence as a
legal person. The company’s life commences from the date mentioned in the certificate of
incorporation. A private company can commence business right from the date of its incorporation. But
in case of a public company, it has to wait for a certificate of commencement of business also. That
certificate will be issued if the following conditions are satisfied.
? Shares which have to be paid for in cash must have been allotted upto the amount of the
minimum subscription.
? Directors must have paid in cash the application and allotment money in respect of the shares
contracted to be taken by them for cash.
? No money is liable to become refundable to the applicants by reason of failure to apply for or
to obtain permission for shares or debentures to be dealt in on any recognised stock exchange.
This certificate is a conclusive evidence of formation of a company.
Shares
Total capital of a company is divided into units of small denomination which are called as shares.
If the share capital of a company is 5,00,000, then it can be divided into 50,000 shares of ` 10 each, if
issued at face value. The Companies Act provides that the shares or other interest of any member in a
company shall be movable property, transferable in the manner provided by the Articles of the
company and that each share in a company shall be distinguished by its appropriate number.
Classes of Shares
The Companies Act provides for two classes of shares: equity and preference shares. Preference
shareholders enjoy preferential treatment with regard to payment of dividend and return of capital at
the time of winding up of the company.
Redemption of
Preference Shares
Equity shareholders enjoy voting rights. But there is no obligation to the company to pay
dividends at a fixed rate every year. Even at the time of winding up of a company, they receive their
capital only after payment to preference shareholders.
Share Capital
The Capital raised by the company by the issue of shares is known as share capital.
(a) Authorised or Nominal Share Capital: Authorised or Nominal share capital is the share
capital which the company is authorised to issue by its memorandum of association. It is the
maximum amount up to which a company is authorised to issue shares to the public without
altering the memorandum of association.
(b) Issued Capital: The nominal value of the shares which are offered to the public for
subscription is called issued capital.
(c) Subscribed Capital: The nominal value of the shares taken up by the public is subscribed
capital. Subscribed capital will be equal to issued capital when all the shares offered to the
public are taken up by the public.
(d) Called up Capital: Called up capital is that part of the subscribed capital which has been
called up. The called up capital will be equal to the subscribed capital when the board of
directors have called up the total amount payable in the shares.
(e) Paid-up Capital: The part of the called up share capital which has been paid up by the
shareholders is called paid-up capital.
Issue of Shares
The Companies Act stipulates that when shares are issued to public for cash, the company has to
come out with prospectus. Prospectus is defined by Section 2(36) as “A prospectus means any
document described or issued as prospectus and includes any notice, circular, advertisement or other
document inviting deposits from public or inviting offers from the public for the subscription or
purchase of any shares or debentures of a corporate body.”
Prospectus contains the details such as the number and class of shares offered and the manner in
which the amount of shares is payable by the public.
Public apply for shares of a company in an application form in a prescribed format. When an
application is accepted, it is an allotment.
The application should be filed with the company or its bankers and should be accompanied by
the application money. The application money is fixed by the company and should not be less than 5%
of nominal value of the shares.
If the company asks the subscriber to pay a minimum amount along with the application and the
rest in 2 or more instalments, then 1st instalment is called ‘Application money’ and 2nd instalment –
share allotment money; 3rd instalment – share first call and 4th instalment – share second call.
Accounting treatment for these transactions is as follows:
On receipt of application money (which must be deposited in a scheduled bank)
? Bank Account Dr.
To Share Application Account
(Being share application money received and deposited in a bank)
Redemption of Preference Shares
REDEMPTION OF PREFERENCE SHARES
As per the Companies Act, 1956 as amended in 1988, only preference shares which are
redeemable within 20 years can be issued. The preference shares may be redeemed at par or at
premium. Redemption may be done from the proceeds of fresh issue of shares or undistributed profits.
The premium on redemption of preference shares may be adjusted against the Share Premium A/c or
the Profit and Loss A/c.
Section 80 of the Companies Act allows a company, if authorised by the articles of association,
to issue preference shares which can be redeemed by the company according to terms of the issue
subject to the following legal restrictions:
(i) Shares cannot be redeemed unless they are fully paid up.
(ii) Shares can be redeemed only out of the profits of the company which would otherwise be
available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of
redemption.
(iii) To the extent that the shares are redeemed out of profits, capital redemption account must be
credited, debiting the profit and loss account, general reserve or other accounts showing
profits otherwise available for distribution of dividends.
(iv) Before the shares are redeemed, the premium, if any, payable on redemption must be
provided for out of the profits of the company or out of the share premium account.
Accounting Entries – On Redemption
1. Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(Being amount payable on redemption of preference shares transferred to Shareholders A/c)
2. Preference Shareholders A/c Dr.
To Bank A/c
(Being the amount due on redemption paid)
For Premium on Redemption
1. Redeemable Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares A/c Dr.
To Preference Shareholders A/c
(Being the amount payable on redemption transferred to Shareholders A/c)
2. Preference Shareholders A/c Dr.
To Bank A/c
(Being the payment made to Preference Shareholders)
3. Profit and Loss A/c Dr.
or
Share Premium A/c Dr.
To Premium on Redemption of Preference Shares A/c
(Being the premium on redemption adjusted against Profit and Loss A/c and Share Premium
A/c)
Capital Redemption Reserve
Where the preference shares are redeemed without there being a corresponding issue of shares
and the redemption is made out of distributable profits, the ‘gap’ created in the capital needs to be
filled up. For this purpose, an amount equal to the face value of the shares redeemed is transferred to
Capital Redemption Reserve from the undistributed profits such as the credit balances in Profit and
Loss account, General Reserve, Dividend Equalisation reserve.
The accounting entries for this are as follows:
General Reserve A/c Dr.
(or) P & L A/c Dr.
To Capital Redemption Reserve
(Being the amount transferred to Capital Redemption Reserve A/c)
The reasons behind the creation of the Capital Redemption Reserve are:
(a) To keep the capital intact, when the shares are redeemed out of the undistributed profits of the
company.
(b) To protect the interest of the creditors of the company, as the directors may distribute
divisible profits by way of dividend
ISSUE OF BONUS SHARES
Bonus shares are allotted to the existing shareholders without any consideration being received
from them, if authorised by the articles of association. They are issued to capitalise the profits of the
company. Bonus shares can be issued only out of free reserves built out of the genuine profits or share
premium collected in cash.
As per Chapter XV of Guidelines for Bonus Issues given by SEBI, a listed company proposing to
issue bonus shares shall comply with the following:
(a) No company shall, pending conversion of FCDs/PCDs, issue any shares by way of bonus
unless similar benefit is extended to the holders of such FCDs/PCDs, through reservation of
shares in proportion to such convertible part of FCDs or PCDs.
(b) The shares so reserved may be issued at the time of conversion(s) of such debentures on the
same terms on which the bonus issues were made.
The bonus issue shall be made out of free reserves built out of the genuine profits or share
premium collected in cash only.
Reserves created by revaluation of fixed assets are not capitalised.
The declaration of bonus issue, in lieu of dividend, is not made.
The bonus issue is not made unless the partly paid shares, if any existing, are made fully paid up.
The Company:
(a) Has not defaulted in payment of interest or principal in respect of fixed deposits and interest
on existing debentures or principal on redemption thereof and
(b) Has sufficient reason to believe that it has not defaulted in respect of the payment of statutory
dues of the employees such as contribution to provident fund, gratuity, bonus etc.
A company which announces its bonus issue after the approval of the Board of Directors must
implement the proposal within a period of six months from the date of such approval and shall not
have the option of changing the decision.
The Articles of Association of the company shall contain a provision for capitalisation of reserves,
etc. If there is no such provision in the Articles, the company shall pass a Resolution at its general
body meeting making provisions in the Articles of Associations for capitalisation.
Page 5


ACCOUNTING FOR SHARES
Floatation of a Company
This mainly involves preparation of necessary documents like Memorandum of Association,
Articles of Association and filing them with the Registrar of companies along with requisite fee. Then
the company will be issued a certificate of incorporation which brings the company into existence as a
legal person. The company’s life commences from the date mentioned in the certificate of
incorporation. A private company can commence business right from the date of its incorporation. But
in case of a public company, it has to wait for a certificate of commencement of business also. That
certificate will be issued if the following conditions are satisfied.
? Shares which have to be paid for in cash must have been allotted upto the amount of the
minimum subscription.
? Directors must have paid in cash the application and allotment money in respect of the shares
contracted to be taken by them for cash.
? No money is liable to become refundable to the applicants by reason of failure to apply for or
to obtain permission for shares or debentures to be dealt in on any recognised stock exchange.
This certificate is a conclusive evidence of formation of a company.
Shares
Total capital of a company is divided into units of small denomination which are called as shares.
If the share capital of a company is 5,00,000, then it can be divided into 50,000 shares of ` 10 each, if
issued at face value. The Companies Act provides that the shares or other interest of any member in a
company shall be movable property, transferable in the manner provided by the Articles of the
company and that each share in a company shall be distinguished by its appropriate number.
Classes of Shares
The Companies Act provides for two classes of shares: equity and preference shares. Preference
shareholders enjoy preferential treatment with regard to payment of dividend and return of capital at
the time of winding up of the company.
Redemption of
Preference Shares
Equity shareholders enjoy voting rights. But there is no obligation to the company to pay
dividends at a fixed rate every year. Even at the time of winding up of a company, they receive their
capital only after payment to preference shareholders.
Share Capital
The Capital raised by the company by the issue of shares is known as share capital.
(a) Authorised or Nominal Share Capital: Authorised or Nominal share capital is the share
capital which the company is authorised to issue by its memorandum of association. It is the
maximum amount up to which a company is authorised to issue shares to the public without
altering the memorandum of association.
(b) Issued Capital: The nominal value of the shares which are offered to the public for
subscription is called issued capital.
(c) Subscribed Capital: The nominal value of the shares taken up by the public is subscribed
capital. Subscribed capital will be equal to issued capital when all the shares offered to the
public are taken up by the public.
(d) Called up Capital: Called up capital is that part of the subscribed capital which has been
called up. The called up capital will be equal to the subscribed capital when the board of
directors have called up the total amount payable in the shares.
(e) Paid-up Capital: The part of the called up share capital which has been paid up by the
shareholders is called paid-up capital.
Issue of Shares
The Companies Act stipulates that when shares are issued to public for cash, the company has to
come out with prospectus. Prospectus is defined by Section 2(36) as “A prospectus means any
document described or issued as prospectus and includes any notice, circular, advertisement or other
document inviting deposits from public or inviting offers from the public for the subscription or
purchase of any shares or debentures of a corporate body.”
Prospectus contains the details such as the number and class of shares offered and the manner in
which the amount of shares is payable by the public.
Public apply for shares of a company in an application form in a prescribed format. When an
application is accepted, it is an allotment.
The application should be filed with the company or its bankers and should be accompanied by
the application money. The application money is fixed by the company and should not be less than 5%
of nominal value of the shares.
If the company asks the subscriber to pay a minimum amount along with the application and the
rest in 2 or more instalments, then 1st instalment is called ‘Application money’ and 2nd instalment –
share allotment money; 3rd instalment – share first call and 4th instalment – share second call.
Accounting treatment for these transactions is as follows:
On receipt of application money (which must be deposited in a scheduled bank)
? Bank Account Dr.
To Share Application Account
(Being share application money received and deposited in a bank)
Redemption of Preference Shares
REDEMPTION OF PREFERENCE SHARES
As per the Companies Act, 1956 as amended in 1988, only preference shares which are
redeemable within 20 years can be issued. The preference shares may be redeemed at par or at
premium. Redemption may be done from the proceeds of fresh issue of shares or undistributed profits.
The premium on redemption of preference shares may be adjusted against the Share Premium A/c or
the Profit and Loss A/c.
Section 80 of the Companies Act allows a company, if authorised by the articles of association,
to issue preference shares which can be redeemed by the company according to terms of the issue
subject to the following legal restrictions:
(i) Shares cannot be redeemed unless they are fully paid up.
(ii) Shares can be redeemed only out of the profits of the company which would otherwise be
available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of
redemption.
(iii) To the extent that the shares are redeemed out of profits, capital redemption account must be
credited, debiting the profit and loss account, general reserve or other accounts showing
profits otherwise available for distribution of dividends.
(iv) Before the shares are redeemed, the premium, if any, payable on redemption must be
provided for out of the profits of the company or out of the share premium account.
Accounting Entries – On Redemption
1. Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(Being amount payable on redemption of preference shares transferred to Shareholders A/c)
2. Preference Shareholders A/c Dr.
To Bank A/c
(Being the amount due on redemption paid)
For Premium on Redemption
1. Redeemable Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares A/c Dr.
To Preference Shareholders A/c
(Being the amount payable on redemption transferred to Shareholders A/c)
2. Preference Shareholders A/c Dr.
To Bank A/c
(Being the payment made to Preference Shareholders)
3. Profit and Loss A/c Dr.
or
Share Premium A/c Dr.
To Premium on Redemption of Preference Shares A/c
(Being the premium on redemption adjusted against Profit and Loss A/c and Share Premium
A/c)
Capital Redemption Reserve
Where the preference shares are redeemed without there being a corresponding issue of shares
and the redemption is made out of distributable profits, the ‘gap’ created in the capital needs to be
filled up. For this purpose, an amount equal to the face value of the shares redeemed is transferred to
Capital Redemption Reserve from the undistributed profits such as the credit balances in Profit and
Loss account, General Reserve, Dividend Equalisation reserve.
The accounting entries for this are as follows:
General Reserve A/c Dr.
(or) P & L A/c Dr.
To Capital Redemption Reserve
(Being the amount transferred to Capital Redemption Reserve A/c)
The reasons behind the creation of the Capital Redemption Reserve are:
(a) To keep the capital intact, when the shares are redeemed out of the undistributed profits of the
company.
(b) To protect the interest of the creditors of the company, as the directors may distribute
divisible profits by way of dividend
ISSUE OF BONUS SHARES
Bonus shares are allotted to the existing shareholders without any consideration being received
from them, if authorised by the articles of association. They are issued to capitalise the profits of the
company. Bonus shares can be issued only out of free reserves built out of the genuine profits or share
premium collected in cash.
As per Chapter XV of Guidelines for Bonus Issues given by SEBI, a listed company proposing to
issue bonus shares shall comply with the following:
(a) No company shall, pending conversion of FCDs/PCDs, issue any shares by way of bonus
unless similar benefit is extended to the holders of such FCDs/PCDs, through reservation of
shares in proportion to such convertible part of FCDs or PCDs.
(b) The shares so reserved may be issued at the time of conversion(s) of such debentures on the
same terms on which the bonus issues were made.
The bonus issue shall be made out of free reserves built out of the genuine profits or share
premium collected in cash only.
Reserves created by revaluation of fixed assets are not capitalised.
The declaration of bonus issue, in lieu of dividend, is not made.
The bonus issue is not made unless the partly paid shares, if any existing, are made fully paid up.
The Company:
(a) Has not defaulted in payment of interest or principal in respect of fixed deposits and interest
on existing debentures or principal on redemption thereof and
(b) Has sufficient reason to believe that it has not defaulted in respect of the payment of statutory
dues of the employees such as contribution to provident fund, gratuity, bonus etc.
A company which announces its bonus issue after the approval of the Board of Directors must
implement the proposal within a period of six months from the date of such approval and shall not
have the option of changing the decision.
The Articles of Association of the company shall contain a provision for capitalisation of reserves,
etc. If there is no such provision in the Articles, the company shall pass a Resolution at its general
body meeting making provisions in the Articles of Associations for capitalisation.
Redemption of Preference Shares
Consequent to the issue of Bonus shares if the subscribed and paid-up capital exceed the
authorised share capital, a Resolution shall be passed by the company at its general body meeting for
increasing the authorised capital.
A Certificate duly signed by the issuer company and countersigned by statutory auditor or by
Company Secretary in practice to the effect that all the above provisions have been complied with
shall be forwarded to the Board.
Illustration 1: Phoolandevi Ltd. has issued 50,000 12% redeemable preference shares of ` 10
each, ` 8 paid. In order to redeem these shares now being redeemable, the company issued for cash
30,000 equity shares of ` 10 each at a premium of ` 2/- per share. Out of the proceeds, preference
shares were redeemed, balance being met out of the General Reserve which stood at ` 2,50,000. The
company then declared the bonus issue of 20,000 ordinary shares to the existing ordinary shareholders
out of reserve created for redemption purpose.
Pass the necessary journal entries giving effect to the above transactions. (T.Y. BAF, Modified)
Solution: Journal Entries
Particulars Debit Credit
1 For final call made on partly paid preference shares:
Cash/Bank A/c (50,000 × 2) Dr. 1,00,000
To 12% Preference Share Capital A/c 1,00,000
2 For fresh issue of shares:
Cash/Bank A/c Dr.
3,60,000
To Share Capital A/c (30,000 × 10) 3,00,000
To Share Premium A/c (30,000 × 2) 3,00,000
3 For redemption of preference shares:
(a) For premium payable No entry
(b) For transfer of preference share capital to holders:
12% Preference Share Capital A/c Dr. 5,00,000
To Preference Shareholders A/c 5,00,000
(c) For payment:
Preference Shareholders A/c Dr. 5,00,000
To Cash/Bank A/c 5,00,000
(d) For CRR:
Normal Value of Preference Shares Redeemed = Fresh Issue + CRR
? 5,00,000 = 3,00,000 + CRR
? CRR = 2,00,000
General Reserve A/c Dr. 2,00,000
To CRR A/c 2,00,000
4 For issue of bonus shares:
(a) For appropriation of bonus shares:
CRR A/c Dr. 2,00,000
To Bonus to Shareholders A/c (20,000 × 10) 2,00,000
(b) For actual issue:
Bonus to Shareholders A/c Dr. 2,00,000
To Equity Share Capital A/c 2,00,000
Illustration 2: Young Turks Ltd. decided to redeem their preference shares as on March, 2015
on which date their position was as under: