REDEMPTION OF PREFERENCE SHARES-2

Sometimes when the company built up a substantial amount of reserve which becomes utilized, the company may then decide to capitalize
these reserves. This is being done in two ways:
a) Making partly paid-up shares into fully paid up shares without getting any consideration amount from ESH.
b) Issuing fully paid up bonus shares to existing ESH without getting any consideration amount from ESH.
JOURNAL ENTRIES

a) Making partly paid-up shares into fully paid up shares

 On declaration of bonus
Capital Reserve A/C ….Dr. An alternative entry may be for all the three entries:
General Reserve A/C ….Dr.
P&L (App) A/C or surplus A/C ….Dr. Capital Reserve A/C ….Dr.
To Bonus to ESH A/C General Reserve A/C ….Dr.
 On making final call money due P&L (App) A/C or surplus A/C ….Dr.
Equity share final call A/C ….Dr.
To Equity Share Capital A/C
To Equity Share Capital A/C
 On adjusting amount due
Bonus to ESH A/C ….Dr.
To Equity share final call A/C

Example: A ltd. has 1000 ESC of Rs. 100 each. The company has called up Rs. 80 only. Company wishes to make partly paid-up into fully paid. It
has capital reserve of Rs. 18,000 and general reserve of Rs. 5,000.

b) Issuing fully paid up bonus shares to existing ESH

 On declaration of bonus
C. R. R. A/C ….Dr.
Securities Premium A/C ….Dr.
Capital Reserve A/C ….Dr.
General Reserve A/C ….Dr.
P&L (App) A/C or surplus A/C ….Dr.
To Bonus to ESH A/C
 On adjusting amount due
Bonus to ESH A/C ….Dr.
To Equity share final call A/C

Q1) Sale of investment + Redemption partly out of profits & partly out of new issue + Bonus issue.
XYZ Ltd. has paid up equity capital of Rs. 12,50,000 of Rs. 100 Face Value. Besides this, the company has preference share capital of Rs. 2,50,000
of Rs. 10 face value. Balances on other accounts were: securities premium = Rs. 28,000; Investment allowance reserve = Rs. 30,000; development
rebate reserve = Rs.20,000; P&L A/C = 3,72,000. The sundry assets include investment of face value Rs. 30,000 carried in the books at cost of Rs.
34,000. The company decided to redeem preference share capital at 10% premium and for this and for this Rs. 1,20,000 ESC issued at 10%
premium. Investments were sold at 105% of face value. All PSH were paid off except 250. Three months after the redemption, the company issued
fully paid up bonus shares in the ratio of 1:4.

CALCULATION OF MINIMUM FRESH ISSUE OF SHARES

a) Based on Simple calculation
b) Use of algebraic method
Based on Simple calculation- Generaly, when the question does not specify the number of fresh shares to be issued for redemption, in this case this
simple calculation method is used:
Formula: Minimum fresh issue = Nominal value of PSC – Divisible profits available with company (which will be transferred to CRR)
 It is to be noted that the said method is only applicable when the company has enough amount of securities premium plus surplus
funds/ reserve which could be utilized to write off the premium on redemption of PSC.
 It is also to be noted that the minimum amount of fresh issue must be divided by the proceeds from one share which the company will
have.

QUESTION: A Ltd. has 1,000, 12% PSC to be redeemed @10% premium and having face value = Rs. 100. It has Rs. 60,000 in general reserves,
Rs. 20,000 in P & L A/C and Rs. 12,000 in securities premium. Calculate minimum number of shares to be issued for redemption with the face
value = Rs. 10 if:

a) Shares are issued at par.

b) Shares are issued at 20% premium.
c) Shares are issued at 10% discount.