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Accounting treatment for redemption of preference shares?
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Accounting treatment for redemption of preference shares?
Accounting Treatment for Redemption of Preference Shares
Preference shares are those shares that carry preferential rights as compared to equity shares. A company can decide to redeem preference shares as per the terms of issue. The accounting treatment for the redemption of preference shares involves the following steps:
The following entries will be passed in the books of accounts:
In conclusion, the redemption of preference shares involves the transfer of capital redemption reserve, payment to preference shareholders, debit to preference share capital account, and debit to securities premium account (if applicable). These entries need to be passed in the books of accounts to reflect the redemption of preference shares.
Preference shares are those shares that carry preferential rights as compared to equity shares. A company can decide to redeem preference shares as per the terms of issue. The accounting treatment for the redemption of preference shares involves the following steps:
- Transfer of Capital Redemption Reserve: When a company redeems its preference shares, it needs to transfer an amount equivalent to the nominal value of the shares being redeemed from the capital redemption reserve to the capital account. This is required as the company cannot use the capital redemption reserve to pay dividends or issue bonus shares.
- Payment to Preference Shareholders: The company needs to pay the redemption amount to the preference shareholders along with any arrears of dividend. This payment needs to be made out of the profits available for distribution or out of the proceeds of a fresh issue of shares or debentures.
- Debit to Preference Share Capital Account: The preference share capital account is debited with the amount of shares redeemed and the nominal value of the shares cancelled. This will reduce the preference share capital of the company.
- Debit to Securities Premium Account: If the company has issued preference shares at a premium, then the securities premium account needs to be debited with the amount of premium written off on the redemption of such shares.
The following entries will be passed in the books of accounts:
- For transfer of capital redemption reserve to capital account:
- Debit: Capital Redemption Reserve Account
- Credit: Preference Share Capital Account
- For payment to preference shareholders:
- Debit: Profit and Loss Account or Securities Premium Account or Fresh Issue of Shares/Debentures Account
- Credit: Bank Account
- For debiting preference share capital account:
- Debit: Preference Share Capital Account
- Credit: Bank Account
- For debiting securities premium account:
- Debit: Securities Premium Account
- Credit: Profit and Loss Account
In conclusion, the redemption of preference shares involves the transfer of capital redemption reserve, payment to preference shareholders, debit to preference share capital account, and debit to securities premium account (if applicable). These entries need to be passed in the books of accounts to reflect the redemption of preference shares.
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Accounting treatment for redemption of preference shares?
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Accounting treatment for redemption of preference shares? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Accounting treatment for redemption of preference shares? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Accounting treatment for redemption of preference shares?.
Accounting treatment for redemption of preference shares? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Accounting treatment for redemption of preference shares? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Accounting treatment for redemption of preference shares?.
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