ICAI Notes 9.3: Redemption of Preference Shares - 3 - CA Foundation PDF Download

5. REDEMPTION OF PARTLY CALLED-UP PREFERENCE SHARES

One of the conditions of redemption is that only fully paid up preference shares can be redeemed by a company. If the examination problem states that it is decided to redeem preference shares which are partly called up, then it is assumed that final call on these shares is demanded and received before proceeding with redemption of these shares. If information about both fully paid and partly paid preference shares is provided, then, only fully paid shares are redeemed.

Illustration 11 

The Balance Sheet of XYZ as at 31st December, 2012 inter alia includes the following:

Under the terms of their issue, the preference shares are redeemable on 31st March, 2013 at 5% premium. In order to finance the redemption, the company makes a rights issue of 50,000 equity shares of Rs 100 each at Rs 110 per share, Rs 20 being payable on application, Rs 35 (including premium) on allotment and the balance on 1st January, 2014. The issue was fully subscribed and allotment made on 1st March, 2013. The money due on allotment were received by 31st March, 2013. The preference shares were redeemed after fulfilling the necessary conditions of Section 55 of the Companies Act, 2013. The company decided to make minimum utilisation of general reserve.

You are asked to pass the necessary Journal Entries and show the relevant extracts from the balance sheet as on 31st March, 2013 with the corresponding figures as on 31st December, 2012.

Solution

Journal Entries

Balance Sheet (extracts)

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 are ` 22,50,000 (` 10,00,000 application money plus ` 12,50,000 received on allotment towards share capital).

6. REDEMPTION OF FULLY CALLED BUT PARTLY PAID-UP PREFERENCE SHARES 

The problem of unpaid calls on fully called up shares may be studied under following categories:

6.1 WHEN CALLS-IN-ARREARS IS RECEIVED By THE COMPANY

If the amount of unpaid calls is received by the Company before redemption, the entry passed is as under:

After receipt of calls in arrears, the shares become fully paid up and, then, company can proceed with redemption in the normal course.

6.2 IN CASE OF FORFEITED SHARES

If, on getting a proper notice from the company, the shareholders fail to pay the unpaid calls, the Board of Directors may decide to forfeit the shares and cancel these shares instead of reissuing the forfeited shares because redemption of these share is due immediately or in near future. In this case, entry for forfeiture is passed as usual.