CU-BCOM-SEM-IV-Corporate Accounting-Second Draft

 Advanced Accounting – Dr. Arulnandam and Dr. Raman, Himalaya Publishing house, Mumbai  Advanced Accounting – S.P. Iyengar, Chand & Sons, New Delhi 51 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3 FORFEITURE AND REISSUE STRUCTURE 3.0. Learning Objectives 3.1. Introduction 3.2. Accounting Treatment 3.3. Reissue of Forfeited shares 3.4. Problems on Issue of Shares at Par, Premium 3.5. Summary 3.6. Keywords 3.7. Learning Activity 3.8. Unit End Questions 3.9. References 3.0 LEARNING OBJECTIVES After studying this unit, students should be able to:  Explain the concepts relating to Forfeiture of shares  Describe the Accounting Treatment for Forfeiture of shares  Discuss the concepts relating to Reissue of Forfeited shares  Explain problems on Forfeiture and Reissue of Forfeited shares 3.1 INTRODUCTION FORFEITURE OF SHARES The term ‘forfeit’ actually means taking away of property on breach of a condition. It is very common that one or more shareholders fail to pay their allotment and/or calls on the due dates. Failure to pay call money results in forfeiture of shares. Forfeiture of shares is the action taken by a company to cancel the shares. The directors are usually empowered by the Articles of Association to forfeit those shares by serving proper notice to the defaulting shareholder(s). When shares are forfeited, the title of such shareholder is extinguished but the amount paid to date is not refunded to him. The shareholder then has no further claim on the company. The power of forfeiture must be exercised strictly having regard to the rules and regulations provided in the Articles of Association and it should be bonafide in the interests of the company. The Articles of a company usually authorise the Directors to forfeit shares of a 52 CU IDOL SELF LEARNING MATERIAL (SLM)

member on account of non-payment of a call or interest thereon after serving him a prior notice as prescribed by the Articles. Directors also have the right to cancel such forfeiture before the forfeited shares are re-allotted. 3.2 ACCOUNTING TREATMENT When a member fails to pay allotment or calls of the issue price of his shares within a stipulated time then the company has a power to cease his membership and forfeit his shares. Statutory provisions regarding forfeiture of shares: (i) Normally, shares are forfeited when allotment and call money are not paid by shareholders. (ii) The Articles of Association of the company must expressly provide for forfeiture of shares. (iii) If the Articles of Association do not expressly provide for forfeiture of shares, the company can forfeit shares by passing a special resolution. (iv) The shareholders should be served a notice at least 14 days before the forfeiture. (v) A resolution to forfeit the shares must be passed by the Board of Directors. (vi) Forfeiture of share should take place in good faith and should be in the larger interest of the company. Accounting Treatment Following entries are passed in three alternative circumstances: (1) Forfeiture of Shares issued at Par: Share Capital A/c Dr. (amount called up so far) To Share Allotment A/c (amount not received on allotment) To Share Calls A/c (amount not received on calls) To Shares Forfeiture A/c (amount received so far) (Being shares issued at par forfeited) (2) Forfeiture of Shares issued at Premium: (a) If Premium has not been received: Share Capital A/c Dr. (amount called up so far Less Premium) Securities Premium Reserves A/c Dr. (premium amount called up) To Share Allotment A/c (amount not received on Allotment) To Share Calls A/c (amount not received on Calls) To Shares Forfeiture A/c (amount received so far) (Being shares issued at premium forfeited) (b) If Premium has been received: 53 CU IDOL SELF LEARNING MATERIAL (SLM)

Share Capital A/c Dr. (amount called up so far Less premium) To Share Allotment A/c (amount not received on Allotment) To Share Calls A/c (amount not received on Calls) To Shares Forfeiture A/c (amount received so far Less premium) (Being shares issued at premium forfeited) The balance of Share Forfeiture Account is added to the capital under ‘Subscribed Share Capital’ in the Notes to Accounts of Share Capital, being part of Shareholders’ Funds shown under Equity and Liabilities part of the Balance Sheet. (c) If re-issued at Premium: Bank A/c Dr. (with the total amount received) To ….Share Capital A/c (with the paid-up value of shares) To Securities Premium A/c (with the amount of premium) (2) For transfer of balance of forfeited share account to capital reserve: Shares Forfeiture A/c Dr. To Capital Reserve A/c 3.3 REISSUE OF FORFEITED SHARES Re-issue of forfeited shares The Board of Directors can sell/ reissue or dispose of forfeited shares on such terms as it thinks fit. However, the amount receivable on re-issue of such shares together with the amount already received from the defaulting member, shall not, in any case, be less than the face value of the shares. Forfeited shares may be re-issued at par, at a premium or even at a discount. 54 CU IDOL SELF LEARNING MATERIAL (SLM)

Re-Issue of Forfeited Shares - At a Premium If forfeited shares are re-issued at a premium, the amount of such premium should be credited to Securities Premium Account. In such a case also, the entire amount standing to the credit of Shares Forfeited Account would be treated as net gain and transferred to Capital Reserve Account. 1. On re-issue of shares: Bank Dr. (with the total amount received on reissue.) To Share Capital A/c (with nominal value or paid-up value of shares.) To Securities Premium A/c (with the premium amount received.) On transfer of Shares Forfeited A/c to Capital Reserve A/c: Shares Forfeited A/c Dr. (with the forfeited amount on shares Forfeited) To Capital Reserve A/c Re-Issue of Forfeited Shares - At a Discount If forfeited shares are re-issued at a discount, the amount of discount can, in no case, exceed the amount credited to Shares Forfeited Account. Discount thus allowed on re-issue has to be debited to Shares Forfeited Account. If the discount allowed on re-issue is less than the forfeited amount, there will be a surplus left in the Shares Forfeited Account which will be treated as net gain on forfeiture. As this gain is in the nature of capital profits, it should be transferred to Capital Reserve Account. Capital Reserve Account will appear on the liabilities side of the balance sheet under the head “Reserves and Surplus”. JOURNAL ENTRIES 1. On re-issue of shares: Bank Dr. (with the amount received on re-issue.) Shares Forfeited A/c Dr. (with the discount allowed on re-issue.) To Share Capital A/c (with the total.) 2. On transfer of balance in Shares Forfeited Account, if any, to Capital Reserve Account: Shares Forfeited A/c Dr. (with the net gain, if any, on shares reissued) To Capital Reserve A/c FORFEITURE AND RE-ISSUE OF SHARES ALLOTTED ON PRO-RATA BASIS IN CASE OF OVER-SUBSCRIPTION In case, the shares of a Company are over-subscribed, it is not possible for the company to satisfy the demand of all the applicants. In such a case allotment may be made on pro-rata basis, i.e., proportionately. For example, 10,000 shares are allotted pro-rata among the applicants for 12,000 shares. In this case, the ratio between allotment of shares and application for shares will be 10,000: 12,000 or 5:6, i.e., those applying for every 6 shares 55 CU IDOL SELF LEARNING MATERIAL (SLM)

will be allotted 5 shares. If shares are allotted on pro-rata basis, the excess application money received on shares allotted will be retained by the company and adjusted subsequently against allotment money and/or call money. If such shares are subsequently forfeited for non- payment of allotment money and/or call money, the entries will be the same, but it may involve some difficulty in calculation. In such a case, it is to be noted carefully that if there is any excess amount received along with the application and it is adjusted against the allotment money which is failed by the shareholder, such amount should be deducted from the amount due on allotment to arrive at the net amount defaulted by the shareholder Calculation of Profit on Re-Issue of Forfeited Shares Students will appreciate that the credit balance of forfeited shares account cannot be considered a surplus until the shares forfeited have been re-issued, because the company may, on re-issue, allow the discount to the new purchaser equivalent to the amount held in credit in this regard in the forfeited shares Account. Suppose 120 shares of a nominal value of Rs.10 have been forfeited upon which Rs. 5 per share was paid up and transferred to Forfeited Share Account. Afterwards, 50 shares are re- issued, Rs. 6 per share being collected to make them fully paid up; Rs. 200 (50 shares x Rs.10- 50 shares x Rs.6) out of shares forfeited will be credited to Share Capital Account to make up the deficiency on re-issued shares, and Rs.50 (50 shares x Rs.5 - Rs.200) will be transferred to the Capital Reserve Account being the surplus on re-issue of the 50 shares. It would have in the Forfeited shares Account balance equivalent to the amount collected on the remaining 70 forfeited shares i.e. Rs. 350 which will be carried forward till these are re- issued. In the above case, it has been assumed that the amount paid up on all the 120 forfeited shares was Rs.5 per share. But in practice, shares may be forfeited on which varying amounts are outstanding. For instance, if in the above case 70 shares were forfeited with Rs.5 paid up thereon and 50 shares with Rs.7.50 was paid up thereon then: Share Forfeited Account Balance = (70 x 5) + (50 x 7.50) = Rs. 725 Thus if 50 shares with Rs.7.50 paid up are re-issued for Rs.6 per share then Capital Reserve balance will be as follows: Rs. (7.50 + 6 -10) x 50 shares = Rs. 175 3.4 PROBLEMS ON FORFEITURE OF SHARES AND REISSUE OF FORFEITED SHARES Illustration No.1 56 CU IDOL SELF LEARNING MATERIAL (SLM)

Mr. Shami has applied for 1,000 shares of Company XYZ Ltd. paying application money @ Rs. 2 per share but has been allotted only 600 shares. The shares have a face value of Rs.10 and a premium of Rs. 2 per share, which are payable as: on Allotment- Rs. 5 (including premium) and on final call Rs. 5. Now in case Mr. Shami doesn't pay allotment money and - final call and his shares are forfeited, then following entry will be passed on forfeiture: Illustration No 2 Better Farms Ltd. issued 1,00,000 equity shares of Rs. 10 each at a premium of Re. 1 per share. The amount was payable as follows : Rs. 3 on application ; Rs. 3 including premium on allotment ; Rs. 2.50 on first call ; and Rs. 2.50 on second call. The public applied for 90,000 shares and these shares were allotted. The directors made both the calls. The first call was not received on 1,000 shares and the second call on 1,500 shares. The directors forfeited the shares on which the first call was not paid. 800 of these shares were re-issued as fully paid at Rs. 8 per share. Give journal entries and balance sheet of the company. 57 CU IDOL SELF LEARNING MATERIAL (SLM)

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Illustration No.3 Alankit Limited issued at par 2,00,000 Equity shares of Rs. 100 each payable Rs. 25 on application; Rs. 30 on allotment; Rs. 20 on first call and balance on the final call. All the shares were fully subscribed. Mr. Dhawan who held 40,000 shares paid full remaining amount on first call itself. The final call which was made after 3 months from first call was fully paid except a shareholder having 4,000 shares who paid his due amount after 2 months along with interest on calls in arrears. Company also paid interest on calls in advance to Mr. Dhawan. You are required to prepare journal entries to record these transactions. 61 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration No.4 Samuel who was the holder of 12,000 preference shares of Rs. 100 each, on which Rs. 75 per share has been called up could not pay his dues on Allotment and First call each at Rs. 25 per 62 CU IDOL SELF LEARNING MATERIAL (SLM)

share. The Directors forfeited the above shares and reissued 10,000 of such shares to Mr. Robort at Rs. 65 per share paid-up as Rs.75 per share. You are required to prepare journal entries to record the above forfeiture and re-issue in the books of the company. Illustration No.5 Mr. Long who was the holder of 2,000 preference shares of Rs.100 each, on which Rs. 75 per share has been called up could not pay his dues on Allotment and First call each at Rs. 25 per 63 CU IDOL SELF LEARNING MATERIAL (SLM)

share. The Directors forfeited the above shares and reissued 1500 of such shares to Mr. Short at Rs. 65 per share paid-up as Rs.75 per share. Give Journal Entries to record the above forfeiture and re-issue in the books of the company. Working Note: Calculation of amount to be transferred to Capital Reserve Forfeited amount per share = Rs. 50,000/2000 = Rs. 25 Loss on re-issue = Rs. 75 – Rs. 65 = Rs. 10 Surplus per share re-issued Rs. 15 Transferred to capital Reserve Rs. 15 x 1500 = Rs. 22,500 Illustration No.6 Beautiful Co. Ltd issued 30,000 equity shares of Rs.10 each payable as Rs.3 per share on Application, Rs.5 per share (including Rs.2 as premium) on Allotment and Rs.4 per share on Call. All the shares were subscribed. Money due on all shares was fully received except from Ram, holding 500 shares, who failed to pay the Allotment and Call money and Shyam, holding 1,000 shares, who failed to pay the Call Money. All those 1,500 shares were forfeited. Of the shares forfeited, 1,250 shares (including whole of Ram’s shares) were subsequently re- issued to Jadu as fully paid up at a discount of Rs. 2 per share. 64 CU IDOL SELF LEARNING MATERIAL (SLM)

Pass the necessary entries in the Journal of the company to record the forfeiture and re-issue of the share. Also prepare the Balance Sheet of the company. 65 CU IDOL SELF LEARNING MATERIAL (SLM)

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Illustration No.7 B Ltd. issued 20,000 equity shares of Rs.100 each at a premium of Rs.20 per share payable as follows: on application Rs.50; on allotment Rs.50 (including premium); on final call Rs.20. Applications were received for 24,000 shares. Letters of regret were issued to applicants for 4,000 shares and shares were allotted to all the other applicants. Mr. A, the holder of 150 shares, failed to pay the allotment and call money, the shares were forfeited. Show the Journal Entries and Cash Book in the books of B Ltd. 67 CU IDOL SELF LEARNING MATERIAL (SLM)

3.5 SUMMARY  Shareholders sometimes fail to pay the amount due on allotment or calls. The total unpaid amount on one or more instalments is known as Calls-in-Arrears or Unpaid Calls. 68 CU IDOL SELF LEARNING MATERIAL (SLM)

 Some shareholders may sometimes pay a part, or whole, of the amount not yet called up, such amount is known as Calls-in-advance.  The term ‘forfeit’ actually means taking away of property on breach of a condition. It is very common that one or more shareholders fail to pay their allotment and/or calls on the due dates. Failure to pay call money results in forfeiture of shares.  A forfeited share is merely a share available to the company for sale and remains vested in the company for that purpose only. Reissue of forfeited shares is not allotment of shares but only a sale.  Forfeiture of shares may be said to be the compulsory termination of membership by way of penalty for non-payment of allotment and/or any call money. – The forfeited shares may be re-issued at par, at a premium or even at a discount.  If forfeited shares are re-issued at a discount, the amount of discount can, in no case, exceed the amount credited to Shares Forfeited Account. 3.6 KEYWORDS  Forfeiture :The compulsory termination of membership by way of penalty for non- payment of allotment and/or any call money  Prorata: Proportional  Reissue: Reissue of shares which have been forfeited due to non-payment of call money 3.7 LEARNING ACTIVITY 1. A company forfeited 1,000 shares of Rs. 10 each held by Mr. X for non-payment of allotment money of Rs. 4 per share. Called up value is Rs. 9 what will be total amount debited to share capital? ___________________________________________________________________________ ___________________________________________________________________________ 2. A company forfeited 2000 shares of Rs. 10 each for non-payment of final call of Rs. 2 per share. What will be the amount of share forfeiture account? ___________________________________________________________________________ ___________________________________________________________________________ 3.8 UNIT END QUESTIONS A.Descriptive Questions 69 Short Questions CU IDOL SELF LEARNING MATERIAL (SLM)

1.What do you mean by Forfeiture of shares? 2.Explain what Re-issue of Forfeited shares is 3.What is the maximum discount for which Forfeited shares can be re issued? 4.Explain the Accounting treatment when Forfeited shares are partly re-issued. 5.Explain the Statutory provisions regarding forfeiture of shares Long Questions 1. X Ltd. forfeited 100 shares of Rs. 10 each for non-payment of the final call of Rs. 2; the shares were reissued @ Rs. 9 per share. How much was credited to shares forfeited account and what amount was transferred to capital reserve? 2. Z Ltd. forfeited 150 shares of Rs. 10, issued at a premium of Rs. 2, for non-payment of the final call of Rs. 3. Of these 100 shares were re-issued @ Rs. 11 per share. How much would be transferred to capital reserve? 3. Alpha Ltd issued a prospectus inviting applications for 2,000 shares of Rs. 10 each at a premium of Rs. 2 per share, payable as follows: On Application Rs. 2, On Allotment Rs. 5 (including premium) On First Call Rs. 3, On Second & Final Call Rs. 2 Applications were received for 3,000 shares and pro rata allotment was made on the applications for 2,400 shares. It was decided to utilise excess application money towards the amount due on allotment. Mohit, to whom 40 shares allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited. Jagat, the holder of 60 shares failed to pay the two calls and on his such failure, his shares were forfeited. Of the shares forfeited, 80 shares were sold to Rishav credited as fully paid for Rs. 9 per share, the whole of Mohit’s shares being included. Required: Give Journal Entries to record the above transactions (including cash transactions) 4. Fair Practice Limited invited applications for 1,00,000 equity shares of Rs. 10 each at a discount of 40 paise per share. The amount was to be paid as follows : On application Rs. 3 On allotment Rs. 2 after discount of 40 P.; and On first and final call Rs. 4.60 P The public applied for 90,000 shares and these were allotted. All moneys due were collected with the exception of the first and final call on 4,000 shares. These shares were forfeited. 2,000 of these shares were re-issued as fully paid for a payment of Rs. 8 per share. Pass entries in the cash book of the company and in its journal assuming that all legal requirements have been complied with. Prepare ledger accounts showing balances. Give also the balance sheet of the company relating to these transactions. 5. SOS Limited issued a prospectus inviting applications for 6,000 shares of Rs. 10 each at a premium of Rs. 2 per share, payable as follows; On application Rs. 2 per share; On allotment Rs. 5 per share (including premium): On 1st call Rs. 3 per share; On Second and Final Call Rs. 2 per share., Applications were received for 9,000 shares and allotment was made prorate to the applicants of 7,500 shares, the remaining applicants were refused 70 CU IDOL SELF LEARNING MATERIAL (SLM)

allotment. Money overpaid on applications were applied towards sums due on allotment. D to whom 100 shares were allotted, failed to pay the allotment money and on his subsequent failure to pay the first call, his shares were forfeited. Z, the holder of 200 shares, failed to pay both the calls, and his shares were forfeited after the second and final call. Of the shares forfeited 200 shares were sold to C credited as fully paid up for Rs. 8.50 per share, the whole of D’s shares being included. B.Multiple choice Questions 1.Profit on Re issue of Forfeited shares is credited to _________ a. Capital Reserve b. General Reserve c. P/L d. None of these 2.Forfeiture of shares results in the reduction of: a. Subscribed Capital b. Authorised Capital c. Reserve Capital d. Fixed Assets 3. If the Premium on the forfeited shares has already been received, then Securities Premium A/c should be: a. Credited b. Debited c. No treatment d. None of these 4. If a share of ₹10 issued at a premium of ₹3 on which the full amount has been called and ₹8 (including premium) paid is forfeited the capital account should be debited with: a. ₹5 b. ₹8 c. ₹10 d. ₹13 71 CU IDOL SELF LEARNING MATERIAL (SLM)

5. 600 shares of ₹10 each were forfeited for non-payment of ₹2 per share on first call and ₹5 per share on final call. Share Forfeiture Account will be credited with: a. ₹1,200 b. ₹1,800 c. ₹3,000 d. ₹4,200 Answers 1-a ,2-a,3-c,4-a,5-b 3.9 REFERENCES Reference books  Advanced Accountancy – M.C. Shukla and T.S. Grewal, Sultan Chand, Publications, New Delhi  S. N. Maheshwari & Advanced Accounting, Volume I; Vikas Publishing House (Pvt.) Ltd., Jangpura, S. K. Maheshwari New Delhi-14.  S. P. Jain & Advanced Accounting, Volume I; Kalyani Publishers, Daryaganj, New Delhi –  K. L. Narang Advanced Accounting – S.P. Iyengar, Chand & Sons, New Delhi 72 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 4 REDEMPTION OF PREFERANCE SHARES STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 Conditions for redemption of preference shares 4.3 Summary 4.4 Keywords 4.5 Learning Activity 4.6 Unit End Questions 4.7 References 4.0 LEARNING OBJECTIVES After studying this unit, students will be able to  Explain the meaning of redemption and the purpose of issuing redeemable preference shares;  Learn various provisions of the companies act, 2013 regarding preference shares and their redemption;  Familiarize yourself with various methods of redemption of fully paid-up preference shares  Describe the logic behind the creation of capital redemption reserve; 4.1 INTRODUCTION Redemption is the process of repaying an obligation, at prearranged amounts and timings. It is a contract giving the right to redeem preference shares within or at the end of a given time period at an agreed price. These shares are issued on the terms that shareholders will at a future date be repaid the amount which they invested in the company (apart from the frequent payments of a specified amount of dividend as return on investment during the tenure of the preference shares). The redemption date is the maturity date, which specifies when repayment is scheduled to take place and is usually printed on the preference share certificate. Through the process of redemption, a company can also adjust its financial structure, for example, by eliminating preference shares and replacing those with other securities if future growth of the company makes such change advantageous. The preference shares can be redeemed only when they are fully paid up- 73 CU IDOL SELF LEARNING MATERIAL (SLM)

– 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 purposes of such redemption PURPOSE OF ISSUING REDEEMABLE PREFERENCE SHARES A company may issue redeemable preference shares because of the following: 1. It is a proper way of raising finance in a dull primary market. 2. A company may face difficulty in raising share capital, as its shares are not traded on the stock exchange. Potential investors, hesitate in putting money into shares that cannot easily be sold, may be encouraged to invest if the shares are redeemable by the company. 3. The preference shares may be redeemed when there is a surplus of capital, and the surplus funds cannot be utilised in the business for profitable use. 4. No dividend is required to be paid, if there is loss or no profit, whereas interest is payable on debentures or loans even in case of loss. In India, the issue and redemption of preference shares is governed by Section 55 of the Companies Act, 2013. 4.2 CONDITIONSFORREDEMPTIONOFPREFERENCESHARES Provisions Of The Companies Act (Section 55) A company limited by shares if so, authorised by its Articles, may issue preference shares which at the option of the company, are liable to be redeemed within a period, normally not exceeding 20 years from the date of their issue. It should be noted that: (a) no shares can be redeemed except out of divisible or distributable profit, (i.e., out of the profit of the company which would otherwise be available for dividend) or out of proceeds of fresh issue of shares made for the purpose of redemption; (b) no such shares can be redeemed unless they are fully paid; (c) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under Section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed: Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed. (ii) in case of other companies (not falling under (i) above), the premium, if any payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed. (d) where any such shares are proposed to be redeemed out of the profits of the company, there shall, out of the divisible profits, i.e. the profits which would otherwise have been 74 CU IDOL SELF LEARNING MATERIAL (SLM)

available for dividends, be transferred to a reserve account to be called Capital Redemption Reserve Account, a sum equal to the nominal amount of the shares redeemed; and the provisions of the Act relating to the reduction of the share capital of a company shall, except as provided in the Section, apply as if the Capital Redemption Reserve (CRR) Account were the paid-up share capital of the company. The utilisation of CRR Account is further restricted to issuance of fully paid-up bonus shares only. From the legal provision outlined above, it is apparent that on the redemption of redeemable preference shares out of accumulated divisible profits, it will be necessary to transfer to the Capital Redemption Reserve Account an amount equal to the amount repaid on the redemption of preference shares on account of face value less proceeds of a fresh issue of shares made for the purpose of redemption. The object is that with the repayment of redeemable preference shares, the security for creditors/ bankers, etc. should not be reduced. At times, a part of the preference share capital may be redeemed out of accumulated divisible profits and the balance out of a fresh issue. Methods of Redemption Of Fully Paidup Shares Redemption of preference shares means repayment by the company of the obligation on account of shares issued. According to the Companies Act, 2013, preference shares issued by a company must be redeemed within the maximum period (normally 20 years) allowed under the Act. Thus, a company cannot issue irredeemable preference shares. Section 55 of the Companies Act, 2013, deals with provisions relating to redemption of preference shares. It ensures that there is no reduction in shareholders’ funds due to redemption and, thus, the interest of outsiders is not affected. For this, it requires that either fresh issue of shares is made, or distributable profits are retained and transferred to ‘Capital Redemption Reserve Account’. The rationale behind these provisions is to protect the interest of outsiders to whom the amount is payable before redemption of preference share capital. The interest of outsiders is protected if the nominal value of capital redeemed is substituted, thus, ensuring the same amount of shareholder’s fund. In case of redemption of preference shares out of proceeds of a fresh issue of shares, replacement of capital and tangible assets is obvious. But, if redemption is done out of distributable profits, replacement of capital is ensured in an indirect manner by retention of profit by transfer to Capital Redemption Reserve. In this case, the amount which would have gone to shareholders in the form of dividend is retained in the business and is used for settling the claim of preference shareholders. Thus, there is no additional drain from the net assets of the Company. The transfer of divisible profits to Capital Redemption Reserve makes them non-divisible profits. As Capital Redemption Reserve can be used only for issue of fully paid bonus shares, profits retained in the business ultimately get converted into share capital. Security cover available to outside stakeholders depends upon called-up capital as well as uncalled capital to be demanded by the company as per its requirements. To ensure that the interests of outsiders are not reduced, Section 55 provides for redemption of 75 CU IDOL SELF LEARNING MATERIAL (SLM)

only fully paid-up shares. From the above paras, it can be concluded that the ‘gap’ created in the company’s capital by the redemption of redeemable preference shares must be filled in by: (a) the proceeds of a fresh issue of shares; or (b) the capitalization of undistributed profits; or (c) a combination of (a) and (b) above Redemption of Preference Shares By Fresh Issue Of Shares One of the methods for redemption of preference shares is to use the proceeds of a fresh issue of shares. A company can issue new shares (equity shares or preference shares) and the proceeds from such new shares can be used for redemption of preference shares. The proceeds from issue of debentures cannot be utilised for the purpose. A problem arises when a fresh issue is made for the purpose of redemption of preference shares, at a premium. The point to ponder is that whether the proceeds of a fresh issue of shares will include the amount of securities premium for the purpose of redemption of preference shares. For securities premium account, Section 52 of the Companies Act, 2013 provides that the securities premium account may be applied by the company; (a) Towards issue of un-issued shares of the company to be issued to members of the company as fully paid bonus securities (b) To write off preliminary expenses of the company (c) To write off the expenses of, or commission paid, or discount allowed on any of the securities or debentures of the company (d) To provide for premium on the redemption of redeemable preference shares or debentures of the company. (e) For the purchase of its own shares or other securities. It may be noted that certain class of Companies whose financial statements comply with the Accounting Standards as prescribed under Section 133 of the Companies Act, 2013, can’t apply the securities premium account for the purposes (b) and (d) mentioned above. Reasons for issue of New Equity Shares A company may prefer issue of new equity shares for the following reasons: (a) When the company has come to realise that the capital is needed permanently, and it makes more sense to issue Equity Shares in place of Redeemable Preference Shares as Preference Shares carry a fixed rate of dividend. 76 CU IDOL SELF LEARNING MATERIAL (SLM)

(b) When the balance of profit, which would otherwise be available for dividend, is insufficient. (c) When the liquidity position of the company is not good enough. 4.3 SUMMARY  Redemption is the process of repaying an obligation, at prearranged amount and timing.  In India, the issue and redemption of preference shares is governed by Section 55 of the Companies Act, 2013.  A company limited by shares if so, authorised by its Articles, may issue preference shares which at the option of the company, are liable to be redeemed. It should be noted that: no shares can be redeemed except out of profit of the company which would otherwise be available for dividend or out of proceeds of fresh issue of shares made for the purpose of redemption. no such shares can be redeemed unless they are fully paid.  Methods of redemption of fully paid-up preference shares:  by Fresh issue of shares.  (ii) by Capitalisation of undistributed profits.  (iii) Combination of (i) and (ii), 4.4 KEYWORDS  Securities premium: The difference between the nominal value of the securities and the offer price is known as the securities premium  Redemption:Redemption of preference shares means repayment by the company of the obligation on account of shares issued.  CRR:Capital Redemption reserve 4.5 LEARNING ACTIVITY 1.Why should CRR be created at the time of Redemption of preference shares ___________________________________________________________________________ ___________________________________________________________________________ 2.Can preference shares have voting rights? ___________________________________________________________________________ ___________________________________________________________________________ 77 CU IDOL SELF LEARNING MATERIAL (SLM)

4.6 UNIT END QUESTIONS A.Descriptive Questions Short Questions 1. What is the purpose of issuing redeemable preference shares? 2. What are the provisions of the Companies Act, 2013 related with redemption of preference shares? Explain in brief. 3. Explain briefly about CRR creation at the time of redemption of preference shares 4. Write short notes on Utilization of securities premium account. 5. Explain the sources of redemption of preference shares. Long Questions 1. Explain the provisions of Section 55 of Companies Act 2013 governing redemption of preference shares 2. Explain the methods of redemption of Fully paid-up preference shares in detail 3. Explain redemption of preference shares by fresh issue of shares 4. What are Redeemable preference shares? Explain the Purpose of Issuing Redeemable preference shares 5. Explain the reasons for Redemption of preference shares by fresh issue of Equity shares B.Multiple choice Questions 1. When shares are redeemed by utilising distributable profit, an amount equal to the face value of shares redeemed is transferred to _______________________ account by debiting the distributable profit. a. Capital replacement Reserve. b. Capital Redemption Reserve. c. Capital Reserve. d. None of these 2. Which of the following accounts can be used for transfer to capital redemption reserve account? a. General reserve account b. Forfeited shares account c. Profit prior to incorporation d. None of these 3. Which of the following can be utilized for redemption of preference shares? 78 CU IDOL SELF LEARNING MATERIAL (SLM)

a. The proceeds of fresh issue of equity shares b. The proceeds of issue of debentures c. The proceeds of issue of fixed deposit d. None of these 4. According to Section 52 of the Companies Act, 2013, the amount in the Securities Premium A/c cannot be used for the purpose of a. Issue of fully paid bonus shares b. Writing off losses of the company c. For purchase of own securities d. All of these 5. Securities premium cannot be used to _______. a. Issue bonus shares b. Redeem preference shares c. Write-off preliminary expenses d. All of these Answers 1-a, 2-c,3-b, 4-b, 5-b 4.7 REFERENCES Reference books  Advanced Accountancy – M.C. Shukla and T.S. Grewal, Sultan Chand, Publications, New Delhi  P. C. Tulsian Financial Accounting, Sultan Chand & Company, New Delhi.  R. Narayanaswamy Financial Accounting – A Managerial Prospective; PHI Learning Pvt. Ltd. 79 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 5 ACCOUNTING TREATMENT(REDEMPTION OF PREFERENCE SHARES) STRUCTURE 5.0 Learning objectives 5.1 Introduction 5.2 Problems on redemption of preference shares 5.3 Summary 5.4 Keywords 5.5 Learning Activity 5.6 Unit End Questions 5.7 References 5.0 LEARNING OBJECTIVES After studying this unit, students will be able to  Explain the Accounting Treatment for redemption of preference shares  Analyse the calculation of Minimum Fresh issue for redemption  Describe the need for creating CRR when redemption is made from distributable profits  Solve problems relating to redemption of preference shares 5.1 INTRODUCTION Accounting treatment Methods of redemption of fully paid-up preference shares are as follows:  by Fresh issue of shares.  (ii) by Capitalisation of undistributed profits.  (iii) Combination of (i) and (ii), Let us take each of these methods for discussion Redemption of preference shares by Fresh Issue Advantages of redemption of preference shares by issue of fresh equity shares 80 CU IDOL SELF LEARNING MATERIAL (SLM)

Following are the advantages of redemption of preference shares by the issue of fresh equity shares: (1) No cash outflow of money – now or later. (2) New equity shares may be valued at a premium. (3) Shareholders retain their equity interest. Disadvantages of redemption of preference shares by issue of fresh equity shares The disadvantages are: (1) There will be dilution of future earnings; (2) Share-holding in the company is changed. Accounting Entries for Redemption by Fresh issue 1. When new shares are issued at par Bank Account Dr. To Share Capital Account (Being the issue of …….shares of Rs……each for the purpose of redemption of preference shares, as per Board’s Resolution No…… dated……. ) 2. When new shares are issued at a premium Bank Account Dr. To Share Capital Account To Securities Premium Account (Being the issue of …….shares of Rs……each at a premium of Rs……each for the purpose of redemption of preference shares as per Board’s Resolution No…. dated……) 3. When preference shares are redeemed at par Redeemable Preference Share Capital Account Dr. To Preference Shareholders Account 4. When preference shares are redeemed at a premium Redeemable Preference Share Capital Account Dr. Premium on Redemption of Preference Shares Account Dr. To Preference Shareholders Account 5. When payment is made to preference shareholders Preference Shareholders Account Dr. To Bank Account 81 CU IDOL SELF LEARNING MATERIAL (SLM)

6. For adjustment of premium on redemption Profit and Loss Account Dr. To Premium on Redemption of Preference Shares Account Calculation of Minimum Fresh Issue of Shares Sometimes, examination problem does not specify the number of shares to be issued for the purpose of redemption of preference shares and requires that the minimum number of shares should be issued to ensure that provisions of Section 55 of the Companies Act, 2013, are not violated. This is done in four steps as given below: (1) In such cases, the maximum amount of reserves and surplus available for redemption is ascertained taking into account the balances appearing in the balance sheet before redemption and the additional information provided in the problem. Sometimes the question may impose a condition to maintain minimum reserves (2) After ascertaining the maximum amount of reserves and surplus available for redemption, adjustment for premium on redemption payable out of profits is made and then it is compared with the nominal value of shares to be redeemed. By comparison, one gets the minimum proceeds of fresh issue as Section 55 permits redemption either out of proceeds of fresh issue or out of divisible profits. Thus, Minimum Proceeds of Fresh Issue of shares : Nominal value of preference shares to be redeemed – Maximum amount of reserve and surplus available for redemption. (3) After computation of minimum proceeds, the minimum number of shares to be issued are determined by dividing minimum proceeds by the proceeds of one share. This is done as follows: Minimum Number of Shares = Minimum proceeds to comply with Section 55/ face value of one share Proceeds of one share mean the par value of a share issued, if it is issued at par or premium. However, in case of issue of share at a discount, it refers to the discounted value. (4) Minimum number of shares calculated as per (3) above, needs to be adjusted due to various reasons. Firstly, shares fractions cannot be issued. Thus, if minimum number of shares as per (3) above includes a fraction, it must be approximated to the next higher figure to ensure that provisions of Section 55 are not violated. Secondly, if the examination problem states that the proceeds/number of shares should be a multiple of say, 10 or 50 or 100, then again, the next higher multiple should be considered. Fresh Issue at a Premium and Minimum Fresh Issue 82 CU IDOL SELF LEARNING MATERIAL (SLM)

The calculation of minimum number of shares, when fresh issue is at a premium should be handled very carefully Minimum fresh issue cannot be calculated unless one knows the profits available for replacement of preference shares and profit available for replacement cannot be determined unless one knows the portion of profit available for redemption which is required for paying premium on redemption. To tackle this, assume that profits available for redemption is not required for paying premium on redemption of preference shares. In other words,it means that securities premium including premium on fresh issue is comparatively more than premium on redemption. If the above assumption holds good, minimum number of shares can be calculated in a simple manner without use of equation. But, if above condition does not hold good, then an equation is used to determine the minimum number of shares. Minimum Fresh Issue to Provide Funds for Redemption Besides, ensuring compliance with Section 55, the fresh issue of shares is made to provide funds for making payment to preference shareholders. To calculate minimum number of fresh shares to be issued to provide funds, amount payable to preference shareholders is compared with funds available for redemption and the balance of funds to be raised by fresh issue of shares are calculated. The amount to be raised is divided by the issue price of a share (amount payable by shareholder including premium, if any, on fresh issue) to compute the minimum number of shares to be issued. REDEMPTION OF PREFERENCE SHARES BY CAPITALISATION OF UNDISTRIBUTED DIVISIBLE PROFITS Another method for redemption of preference shares, as per the Companies Act, is to use the distributable profits in place of issuing new shares. When shares are redeemed by utilising distributable profit, an amount equal to the face value of shares redeemed is transferred to Capital Redemption Reserve Account by debiting the distributable profit. In other words, some of the distributable profits are kept aside to ensure that it can never be distributed to shareholders as dividend. Profit or a portion of profit that can be otherwise legally distributed as dividend to the shareholders is known as Divisible or Distributable Profit. In this connection, the provisions of the Companies Act state that ‘When any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall out of profits which would otherwise have been available for dividend (i.e., out of divisible profits), be transferred to a reserve to be called the Capital Redemption Reserve Account sum equal to the nominal amount of the shares redeemed’. Note: Only Divisible Profits can be used to create Capital Redemption Reserve, Non- Divisible Profits cannot be used for this purpose. 83 CU IDOL SELF LEARNING MATERIAL (SLM)

Advantages of redemption of preference shares by capitalisation of undistributed divisible profits The advantages of redemption of preference shares by capitalisation of undistributed divisible profits are: (1) No change in the percentage of equity shareholding of the company. (2) Surplus funds can be used Disadvantages of redemption of preference shares by capitalisation of undistributed divisible profits The disadvantage of redemption of preference shares by capitalisation of undistributed profits is that there may be a reduction in liquidity Accounting Entries 1. For transferring nominal amount of shares redeemed to Capital Redemption Reserve Account General Reserve Account Dr. Profit and Loss Account Dr. Or any other Divisible Profits Dr. To Capital Redemption Reserve Account (Being the amount transferred to Capital Redemption Reserve Account as per the requirement of the Act). 2. When shares are redeemed at par Redeemable Preference Share Capital Account Dr. To Preference Shareholders Account (Being the amount payable on redemption of preference shares transferred to Preference Shareholders Account) 3. When shares are redeemed at a premium Redeemable Preference Share Capital Account Dr. Premium on Redemptions of Preference Shares Account Dr. To Preference Shareholders Account (Being the amount payable on redemption transferred to Preference Shareholders Account) 4. When payment is made to preference shareholders Preference Shareholders Account Dr. To Bank Account 84 CU IDOL SELF LEARNING MATERIAL (SLM)

(Being the payment to preference shareholders as per terms) 5. For adjustment of premium of redemption Divisible Profit Account Dr. To Premium on Redemption of Preference Shares Account (Being the premium on redemption adjusted against Profit and Loss Account) REDEMPTION OF PREFERENCE SHARES BY COMBINATION OF FRESH ISSUE AND CAPITALISATION OF UNDISTRIBUTED DIVISIBLE PROFITS A company can redeem the preference shares partly from the proceeds from new issue and partly out of profits. In order to fill in the ‘gap’ between the face value of shares redeemed and the proceeds of new issue, a transfer should be made from distributable profits (Profit & Loss Account, General Reserve and other Free Reserves) to Capital Redemption Reserve Account. Formula: (i) Amount to be Transferred to Capital Redemption Reserve Rs Face value of shares redeemed *** Less: Proceeds from new issue *** *** (ii) Proceeds to be collected from New Issue Rs Face value of shares redeemed *** Less: Profits available for distribution as dividend *** *** SALE OF INVESTMENTS TO PROVIDE SUFFICIENT FUNDS FOR REDEMPTION Companies may have sufficient investments, which can be sold, in the market to arrange funds for redemption of preference shares. **One of the conditions of redemption is that only fully paid-up preference shares can be redeemed by a company If the problem states that it is decided to redeem preference shares which are partly called up, then it is assumed that the final call on these shares is demanded and received before proceeding with redemption of these shares IN CASE OF FORFEITED SHARES 85 CU IDOL SELF LEARNING MATERIAL (SLM)

If in spite of receiving 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 shares is due immediately or in near future. In this case, the journal entry for forfeiture is passed as usual, which will be as follows: Preference Share Capital A/c Dr (Called up share capital only relating to the shares to be forfeited) To Calls In Arrears A/c To Shares Forfeited A/c * (*Amount actually collected on shares forfeited. This will be equal to the balancing amount) NOTE: But it should be noted, in this case, that the number of shares to be redeemed will be reduced by the number of shares so forfeited. 5.2 PROBLEMS ON REDEMPTION OF PREFERENCE SHARES Illustration No.1 V Ltd. had an issue 1,000, 12% redeemable preference shares of Rs 100 each, repayable at a premium of 10%. These shares are to be redeemed now out of the accumulated reserves, which are more than the necessary sum required for redemption. Show the necessary entries in the books of the company, assuming that the premium on redemption of shares has to be written off against the company’s Securities Premium Account. In the books of V Ltd. Journal Entries Particulars Dr.(Rs) Cr.(Rs) 1.General Reserve Account Dr. 1,00,000 To Capital Redemption Reserve A/c 1,00,000 (Transfer of reserves to Capital Redemption Reserve Account on redemption of redeemable preference shares) 2.12% Redeemable Preference Share Capital A/c Dr. 1,00,000 Premium on Redemption of Preference Shares A/c Dr. 10,000 To 12% Preference Shareholders A/c 1,10,000 (Amount payable to 12% preference shareholders on 86 CU IDOL SELF LEARNING MATERIAL (SLM)

redemption of 12% preference shares at a premium of 10%) 3.Securities Premium A/c Dr. 10,000 To Premium on Redemption of Preference Share A/c 10,000 (Application of Securities Premium Account to write off premium on redemption of preference shares) 4.12% Preference Shareholders A/c Dr. 1,10,000 To Bank 1,10,000 (Amount due to 12% preference shareholders on redemption paid) Illustration No.2 XLtd. had 5,000, 8% Redeemable Preference Shares of Rs 100 each, fully paid up. The company decided to redeem these preference shares at par by the issue of sufficient number of equity shares of Rs 10 each fully paid up at par. You are required to pass necessary Journal Entries including cash transactions in the books of the company. DATE In the books of XLtd. DR CR Journal Entries PARTICULARS Bank 500000 To Equity share capital A/C 500000 (Being the issue of 50,000 Equity Shares of Rs10 each at par for the purpose of redemption of preference shares, as per Board Resolution No. …….dated…….) 8% Redeemable Preference Share capital A/c 500000 A/c To Preference Shareholder’s 500000 (Being the amount payable on redemption of preference shares transferred to Preference Shareholders Account) Preference Shareholder’s A/c 500000 87 CU IDOL SELF LEARNING MATERIAL (SLM)

To Bank 500000 (Being the amount paid on redemption of preference shares) Illustration No.3 A Ltd. has part of its share capital in 12% redeemable preference shares of Rs 100 each, repayable at a premium of 5%. The shares have now become due for redemption. It is decided that the whole amount will be redeemed out of a fresh issue of 20,000 equity shares of Rs 10 each at Rs 11 each. The whole amount is received in cash and the 12% preference shares are redeemed. Show the necessary journal entries in the books of the company. Journal Entries in the books of ALtd Particulars Dr.(Rs) Cr. (Rs) 1.Bank Dr. 2,20,000 To Equity Share Application and Allotment A/c 2,20,000 (Application money on 20,000 equity shares @ Rs 11 per share including a premium of Re. 1 per share) 2. Equity Share Application and Allotment A/c Dr. 2,20,000 To Equity Share Capital A/c 2,00,000 To Securities Premium A/c 20,000 (Allotment of 20,000 equity shares Rs 10 each issued at a premium of Rs 1 per share as per Board’s Resolution dated....) 3.12% Redeemable Preference Share Capital A/c Dr 200000. Premium on Redemption of Preference Share A/c Dr. 10000 To 12% Preference Shareholders A/c 210000 (Amount due to 12% preference shareholders on redemption of 8% preference shares at a premium of 5%) 4.Securities Premium A/c Dr. 10000 88 CU IDOL SELF LEARNING MATERIAL (SLM)

To Premium on Redemption of Preference Shares A/c 10000 (Application of Securities Premium Account to write off Premium on Redemption of Preference Shares) 5.12% Preference Shareholders A/c Dr. 210000 To Bank 210000 (Payment of amount due to 12% preference shareholders on redemption) Illustration No.4 AB Ltd. had 10,000, 10% Redeemable Preference Shares of Rs 100 each, fully paid up. The company decided to redeem these preference shares at par, by issue of sufficient number of equity shares of Rs 10 each at a premium of Rs 2 per share as fully paid up. You are required to pass necessary Journal Entries including cash transactions in the books of the company. In the books of AB Ltd. Journal Entries Date Particulars Dr. (Rs) Cr. (Rs) Bank A/c Dr. 12,00,000 To Equity Share Capital A/c 10,00,000 To Securities Premium A/c 2,00,000 (Being the issue of 1,00,000 Equity Shares of Rs10 each at a premium of Rs2 per share as per Board’s Resolution No…... dated……….) 10% Redeemable Preference Share Capital A/cDr.10,00,000 To Preference Shareholders A/c10,00,000 (Being the amount payable on redemption of preference shares transferred to Preference Shareholders A/c) Preference Shareholders A/c Dr. 10,00,000 To Bank A/c 10,00,000 (Being the amount paid on redemption of preference shares) 89 CU IDOL SELF LEARNING MATERIAL (SLM)

NOTE: Above problem is solved on the basis that the company referred in the question is governed by Section 133 of the Companies Act, 2013 and complies with the Accounting Standards prescribed for them Illustration No.5 The Board of Directors of ABC Company LTD decided to issue minimum number of equity shares of Rs 9.5 to redeem Rs 5,00,000 preference shares. The maximum amount of divisible profits available for redemption is Rs 3,00,000. Calculate the number of shares to be issued by the company to ensure that the provisions of Section 55 are not violated. Also determine the number of shares if the company decides to issue shares in multiples of Rs 50 only. Nominal value of preference shares Rs 5,00,000 Maximum possible redemption out of profits Rs 3,00,000 Minimum proceeds of fresh issue Rs 5,00,000 – 3,00,000 = Rs 2,00,000 Proceed of one share = Rs 9 .5 Minimum number of shares = 2,00,000/9.5 = 21.052.63 shares As fractional shares are not permitted, the minimum number of shares to be issued is 21,053 shares. If shares are to be issued in multiples of 50, then the next higher figure which is a multiple of 50 is 21,100. Hence, minimum number of shares to be issued in such a case is 21,100 shares. Illustration No.6 Neeraj Ltd.’s capital structure consists of 45,000 Equity Shares of Rs 10 each fully paid up and 3,000 9% Redeemable Preference Shares of Rs 100 each fully paid up as on 31.03.2021. The other particulars as at 31.03.2021 are as follows: Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption, the directors are empowered to make fresh issue of Equity Shares at par after utilizing the undistributed reserve & surplus, subject to the conditions that a sum of Rs 60,000 shall be retained in General Reserve and which should not be utilized. Company also sold investment 90 CU IDOL SELF LEARNING MATERIAL (SLM)

of 6,750 Equity Shares in Kumar Ltd., costing Rs67,500 at Rs 9 per share. Pass Journal entries to give effect to the above arrangements and also show how the relevant items will appear in the Balance Sheet as at 31.03.2021 of Neeraj Ltd. after the redemption is carried out. Date Particulars Dr. (Rs) Cr. (Rs) Bank A/c Dr. 1,26,750 To Equity Share Capital A/c 1,26,750 (Being the issue of 12,675 Equity Shares of Rs 10 each as per Board’s Resolution No....dated….) 9% Redeemable Preference Share Capital A/c Dr. 3,00,000 Premium on Redemption of Preference Shares A/c Dr. 30,000 To Preference Shareholders A/c 3,30,000 (Being the amount paid on redemption transferred to Preference Shareholders Account) Bank A/c Dr. 60,750 Profit and Loss A/c (loss on sale) A/c Dr. 6,750 To Investment A/c 67,500 (Being investment sold at loss of Rs 6,750) Preference Shareholders A/c Dr. 3,30,000 To Bank A/c 3,30,000 (Being the amount paid on redemption of preference shares) Profit & Loss A/c Dr. 30,000 To Premium on Redemption of Preference Shares A/c 30,000 (Being the premium payable on redemption is 1,20,000 adjusted against Profit & Loss Account) 53,250 General Reserve A/c Dr. Profit & Loss A/c Dr. 91 CU IDOL SELF LEARNING MATERIAL (SLM)

To Capital Redemption Reserve A/c 1,73,250 (Being the amount transferred to Capital Redemption Reserve Account) Working Note: Number of Shares to be issued for redemption of Preference Shares: Face value of shares redeemed Rs 3,00,000 Less: Profit available for distribution as dividend: General Reserve: Rs (1,80,000-60,000) Rs 1,20,000 Profit and Loss (90,000 less 30,000 set aside for 92 CU IDOL SELF LEARNING MATERIAL (SLM)

adjusting premium payable on redemption of Pref. shares less 6,750 loss on sale of investments) Rs 53,250 Rs (1,73,250) Rs 1,26,750 Therefore, No. of shares to be issued = Rs 1,26,750/Rs10 = 12,675 shares. Illustration No.7 Find out in each case what amount shall be transferred to capital redemption reserve account: Redeemable preference shares redeemed Fresh issue of share capital a. Rs 10,00,000 at par Rs 10,00,000 at par b. Rs 10,00,000 at 5% premium Rs 800,000 at par c. Rs 10,00,000 at par Rs 800,000 at 10% premium d. Rs 10,00,000 at 5% premium Rs 800,000 at 10% premium Solution: For (a) Nil. For (b), (c) and (d) Rs 2,00,000 Explanation: Amount utilized from the existing sources towards the nominal value of the preference shares redeemed, should be transferred to Capital Redemption Reserve Account. So, in the above case, the difference of nominal value of shares redeemed and amount received from nominal value of fresh issue is the transferable amount. In case of (a) the total requirement is met up by fresh issue. In cases of (b), (c) and (d): Rs10,00,000 – Rs 8,00,000 (from nominal value of fresh issue) i.e., Rs 2,00,000. Illustration No.8 Books of M Limited show the following balances on 31st December 2018 15 present equity shares of Rs 10 each fully paid Rs 1,50,000 2500 10% preference shares of Rs 100 each fully paid Rs 2,50,000 500 8% redeemable preference shares pop ups Rs 108, what is Rs 70 paid up Rs 35,000 General Reserve Rs 75,000 Profit and Loss Account Rs 1,60,000 93 CU IDOL SELF LEARNING MATERIAL (SLM)

Securities Premium Rs 25,000 Investment Rs 1,20,000 Cash at Bank Rs 39,600 On 1st January 2019 the board of directors decided to redeem the preference shares at a premium of 8%. In order to pay of preference shareholders, the company also decided to sell the Investments and use companies fund and to raise the balance by issue of sufficient number of equity shares of Rs 10 each at a premium of rupee 1 per share subject to leaving a minimum bank balance of Rs 9,000 after search Redemption. Investments were sold at Rs 1,08,000 Show the necessary journal entries to record the transactions. ParticularsDr. Cr. 1.Bank A/c Dr 1,32,000 To Equity Share Capital A/c 1,20,000 To Securities Premium A/c12,000 2. Bank A/c Dr 1,08,000 Profit and Loss A/c12,000 To Investment A/c1,20,000 3.14% Preference Share Capital A/c 2,50,000 Premium on Redemption A/c20,000 To Preference Shareholders A/c2,70,000 4.Securities Premium A/c 20,000 To Premium on Redemption A/c 20,000 5.General Reserve A/c 75,000 1,30,000 2,70,000 Profit and Loss A/c 55,000 To Capital Redemption Reserve A/c 6.Preference Shareholders A/c 2,70,000 To Bank A/c Note: 94 Amount to be transferred to CRR: CU IDOL SELF LEARNING MATERIAL (SLM)

Nominal value of shares to be redeemed Rs 2,50,000 Less : fresh issue of equity shares Rs 1,20,000 CRR Rs 1,30,000 Note : Amount of cash to be collected from new issue of equity shares = amount payable in redemption + minimum closing cash balance – (opening bank balance + sale of investment) = Rs [2,70,000 + 9,600 - (39,600 + 1,08,000)] = Rs (2,79,600 - 1,47,600) = Rs 1,32,000. Therefore, number of shares to be issued will be = 132000/ (10+1) = 1200 Value per share = 10 +1 (including premium of Re.1) Illustration 9 On 30th June 2016, the Board of Directors decided to redeem the preference shares at a premium of 10% and to sell the investments at its market price of Rs. 40,000. They also decided to issue sufficient number of equity shares of Rs. 10 each at a premium of Re. 1 per share, required after utilizing the profit and loss account leaving a balance of Rs. 50,000. Premium on redemption is required to be set off against securities premium account. Repayments on redemption were made in full except to one shareholder holding 50 shares only due to his leaving India for good. You are required to show the journal entries and the balance sheet of the company after redemption. Assumption made should be shown in the working. In the books of Oscar Ltd. Journal Entries Particulars Dr.(Rs.) Cr. (Rs.) Bank Dr. 40,000 50,000 Profit and Loss A/c Dr. 10,000 1,50,000 15,000 To Investments 95 (Being the sale of investments at a loss of Rs. 10,000) Bank Dr. 1,65,000 To Share Capital A/c To Securities Premium A/c CU IDOL SELF LEARNING MATERIAL (SLM)

(Being the issue of required number of equity shares at a premium of 10%) Preference Share Capital A/c Dr. 2,40,000 Premium on Redemption A/c Dr. 24,000 To Preference Shareholders A/c 2,64,000 (Being the transfer of the amount due to preference shareholders on redemption) Securities Premium A/c Dr. 24,000 To Premium on Redemption A/c 24,000 90,000 (Being the transfer of securities premium account to Bank write off premium on redemption of preference shares account) 2,58,500 Profit and Loss A/c Dr. 90,000 To Capital Redemption Reserve A/c (Being the transfer of profit used for redemption of preference shares to capital redemption reserve account) Preference Shareholders A/c Dr. 2,58,500 To 2,58,500 (Being the payment to preference shareholders except to a holder of 50 shares) Balance Sheet of Oscar India Ltd. as on 1st July 2011 (After redemption) Particulars Note No. Amount (Rs.) 96 I Equity and Liabilities CU IDOL SELF LEARNING MATERIAL (SLM)

Shareholders’ Funds 1 4,58,000 Share Capital 2 1,46,000 Reserves and Surplus Current Liabilities 3 Trade Payable 5,500 1,27,000 Preference shareholders 4 26,500 Total 7,36,500 II Assets Non-Current Assets Fixed Assets 6,00,000 Current Assets Inventories 1,10,000 Cash and Cash Equivalents Total 7,36,500 Notes: 1. Share Capital Authorised Issued, subscribed and paid-up: ………. 45,000 Equity Shares of Rs. 10 each fully paid-up 4,50,000 In preference share of Rs. 100 each fully called up 10,000 Less: Final Call @ Rs.20 per share unpaid2,000 8,000 4,58,000 2. Reserves and Surplus Capital Redemption Reserve 90,000 Securities Premium 6,000 Surplus 50,000 1,46,000 3. Trade Payable 97 CU IDOL SELF LEARNING MATERIAL (SLM)

Trade Creditors 1,10,000 Outstanding Expenses 17,000 127000 4. Cash and Cash Equivalent Balance with Bank 26,500 Working Notes: Calculation of required number of fresh issue of equity shares: Balance of Profit and Loss A/c 1,50,000 Less: Loss on Sale of Investment 10,000 Balance required 50,000 60,000 Profit available for redemption 90,000 Amount required for redemption 2,40,000 Amount available from Profit and Loss A/c 90,000 New issue required 15,000 shares 1,50,000 Illustration No.10 The Books of Arpit Ltd. shows the following Balances as on 31st December 2019: Under the terms of issue, the Preference Shares are redeemable on 31st March 2020 at a premium of 10%. In order to finance the redemption, the Board of Directors decided to make 98 CU IDOL SELF LEARNING MATERIAL (SLM)

a fresh issue of 1,50,000 Equity shares of Rs.10 each at a premium of 20%, Rs. 2 being payable on application, Rs. 7 (including premium) on allotment and the balance on 1 st January 2021. The issue was fully subscribed, and allotment made on 1st March 2020. The money due on allotment was received by 20 th March 2020. The preference shares were redeemed after fulfilling the necessary conditions of Section 55 of the Companies Act, 2013. You are required to pass the necessary Journal Entries and also show how the relevant items will appear in the Balance Sheet of the company after the redemption carried out on 31st March 2020 Journal Entries 1 10% Preference Share Final Call A/c Dr. 6,00,000 To 10% Preference Share Capital A/c 6,00,000 (For final call made on preference shares @ Rs. 20 each to make them fully paid up) 2 Bank A/c Dr. 6,00,000 To 10% Preference Share Final Call A/c 6,00,000 3,00,000 (For receipt of final call money on preference shares) 99 3 Bank A/c Dr. 3,00,000 To Equity Share Application A/c (For receipt of application money on 1,50,000 equity shares @ Rs. 2 per share) 4 Equity Share Application A/c Dr. 3,00,000 To Equity Share Capital A/c 3,00,000 (For capitalization of application money received) 5 Equity Share Allotment A/c Dr. 10,50,000 To Equity Share Capital A/c 7,50,000 To Securities Premium A/c 3,00,000 (For allotment money due on 1,50,000 equity shares @ Rs. 7 per share including a premium of Rs. 2 per share) 6 Bank A/c Dr. 10,50,000 CU IDOL SELF LEARNING MATERIAL (SLM)

To Equity Share Allotment A/c 10,50,000 (For receipt of allotment money on equity shares) 7 10% Preference Share Capital A/c Dr. 30,00,000 Premium on Redemption of Preference Shares A/c Dr. 3,00,000 To Preference Shareholders A/c 33,00,000 (For amount payable to preference shareholders on redemption at 10 % premium) 8 General Reserve A/c Dr. 3,00,000 To Premium on Redemption A/c 3,00,000 (Writing off premium on redemption of preference shares) 9 General Reserve A/c Dr. 19,50,000 To Capital Redemption Reserve A/c 19,50,000 (For transfer of CRR the amount not covered by the proceeds of fresh issue of equity shares i.e., 30,00,000 - 3,00,000 - 7,50,000) 10 Preference Shareholders A/c Dr. 33,00,000 To Bank A/c 33,00,000 (For amount paid to preference shareholders) 100 CU IDOL SELF LEARNING MATERIAL (SLM)