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Q1. Tinka Ltd issued 1,60,000 10% preference shares of Rs. 10/- each in 2013. These shares are redeemable on 31st March, 2023 at par. On this date, company’s profit and loss account showed a credit balance of Rs. 8,00,000/- and General reserve Rs. 12,00,000/-. The shares were duly redeemed. Pass journal entries.
Solution:
This is one of the easiest problem on Redemption of Preference Shares where the said shares are redeemed at par without any need of Fresh Issue of equity. Here, CRR will have to be created equal to the nominal value (Face Value X No. of Shares) of redemption, that too out of Divisible Profits only.
Q2. Luca Ltd. has 4,000 - 6% Preference Share Capital of Rs. 100/- each fully paid up which is due for redemption. The company has the following accompaniments:
a. Profit and Loss a/c Rs. 20,000
b. General Reserves Rs. 3,80,000
c. Securities Premium Rs. 20,000
d. Bank Balance Rs. 3,60,000
The company decided to redeem its preference shares at par. Pass journal entries with necessary comments.
Solution: The first thing to be done while solving a problem on RPS is determine and arrange the sources of fund. One thing to be kept in mind is whether the company is issuing any equity shares for financing the redemption. If the company is issuing fresh equity for financing redemption, the requirement of Divisible Profits like P/L a/c, General Reserves and even Securities Premium (as per Sec 52) tend to come down.
In this case, the company is not issuing any equity, that means for the complete nominal value of redemption, we will have to create a Capital Redemption Reserve out of the existing Divisible Profits.
Q3. Ajax Ltd had 10,000, 12% Preference Share Capital of Rs. 100/- each, fully paid up. The company decided to redeem these preference shares at par, by issuing sufficient number of equity shares of Rs. 10/- each at a premium of Rs. 2/- per share fully paid up. Pass necessary journal entries in the books of the company. It is to be noted that the preference shares were issued in 2015. The Company has General Reserves and Securities Premium worth Rs. 5,00,000/- and Rs. 7,00,000/- respectively.
Solution: As there is no mention about usage of Divisible Reserves, we will carry out the redemption completely out of capital. However, it is also mentioned in the question that fresh equity is to be issued for the purpose of redemption. The question isn't clear with respect to the amount of equity shares to be issued as it has asked us to calculate the same. One thing to remember is that the fresh issue of equity (excluding premium) shall be made only to the extent of the nominal value of redemption of preference shares. As preference shares are being redeemed at par, the whole amount of Rs. 10,00,000/- becomes the nominal value and hence, the amount of fresh issue excluding premium shall be of Rs. 10,00,000/-. This is because premium charged on issue of equity cannot be used to finance redemption.
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