Last Updated on: 5th July 2024, 01:47 pm
Company Preference Share Capital Accounts
Company Preference Shares
Company Preference Shares have priority in regard to payment of Dividend and Repayment of Capital before the payment to equity shareholders.
Types of Company Preference Shares
- As per Dividend Payment:
- Cumulative Preference Shares: These shares carry a fixed dividend and the dividend goes on accumulating till it is fully paid off. The arrears dividend are carried forward and charged on subsequent year’s profit. Preference shares are presumed cumulative preference share unless stated otherwise.
- Non-cumulative Preference Shares: These shares carry a fixed percentage of dividends but the dividend does not go accumulating. If there is no profit or inadequate profit in any year, the shareholders get no dividend. They can not make claim on unpaid dividend in any subsequent year.
b. As per Profit participation:
- Participating Preference Shares: These shares are not only entitled to a fixed rate of dividend but also a share in the surplus profits which remain after the claims of the equity shareholders have been met.
- Non- participating Preference Shares: These shares are only entitled to a fixed rate of dividend. They do not get any share in the surplus profits after paying dividends to equities shareholders.
c. As per Convertibility into Equity Shares:
- Convertible Preference Shares: These shares have right to convert into equity shares within a certain period.
- Non- convertible Preference Shares: These shares have no right to convert into equity shares.
d. As per Repayment of Capital:
- Redeemable Preference Shares:
- These shares are repaid on expiry of certain period or at option of the Company, as provided in the Articles.
- Maximum redemption period of preference share is 20 years from the date or its issue. Issue or redeemable preference shares must be authorized by Articles of Association.
ii. Irredeemable Preference Shares: Earlier companies could issue irredeemable preference shares also. After the amendment of the Companies Act, 1988, no company can issue irredeemable preference shares or redeemable preference shares which are redeemable after 20 years of its issue. Such preference shares cannot be redeemed unless the company is liquidated.
Redemption of Company Preference Share
Redemption of Preference Shares means repayment of Preference share capital to the shareholders.
Legal Provisions for Redemption
- A company limited by shares can redeem preference share within 20 years from the date of the issue of shares.
- Preference shares may be redeemed only out of Profits of the company available for dividends, or out of Proceeds of issue of shares made for such purpose.
- Shares must be fully paid before its redemption.
- If shares are redeemed at a premium, the premium must be paid either out of profits or share premium account. Any premium collected from new or fresh issue can not be utilized for redemption purpose (because it can not be taken as premium before the redemption of shares). Entries for the redemption, and also issue of new shares, are to be passed simultaneously
- When shares are redeemed out of profits of the company available for dividends, an amount equal to nominal value of shares, to be redeemed, will be transferred to the Capital Redemption Reserve Account. This reserve can be used only for the issue of fully paid Bonus share to the company’s members.
- In case of new issue of shares for the purpose of redemption of preference shares, it will be treated as replacement of capital instead of increase of capital.
- Sale proceeds of any fixed asset can not be utilized for redemption.
Utilisation of Redemption Reserve Fund
Preference Share redemption Reserve Fund may be utilised in certain conditions
Funds which may be utilized for redemption of preference shares.
These reserves are treated as Free Reserve and should be transferred to Capital redemption Reserve.
- Profit & Loss Account
- General Reserve
- Reserve Fund
- Dividend Equalization Reserves
- Insurance Fund
- Workmen’s Compensation Fund or Accident Fund
Funds which can not be utilized for redemption of preference shares.
- Capital Reserve
- Security Premium Account
- Profit prior to incorporation
- Revaluation Reserve
- Share Forfeiture Account
- Investment Allowance Reserve
- Development Rebate Reserve
Capital Redemption Reserve (CRR)
If the company has issued fresh shares to facilitate the redemption, then the amount to be transferred shall be reduced proportionately, by the amount of:
- Shares issued at par: The difference between the nominal value of shares redeemed and nominal value of shares issued.
- Shares issued at premium: The difference between the nominal value of shares redeemed and nominal value of shares issued. Securities premium shall not be considered.
- Shares issued at discount: The difference between the nominal value of shares redeemed and nominal value of shares issued less discount.
Redemption of Company Preference Share
Accounting entries for Redemption of Preference Shares
New Shares Issue for redemption of preference shares
a.New shares are issued at par
Bank A/c Dr
To Share Capital A/c
b.New shares are issued at discount
Bank A/c Dr
Discount on Share Issue A/c Dr
To Share Capital A/c
c.New shares issued at premium
Bank A/c Dr
To Share Capital A/c
To Securities Premium A/c
Creation of Capital Redemption Fund on redemption made out of profits
Profit & Loss A/c Dr
General Reserve A/c Dr
To Capital Redemption Reserve A/c
Payment made to Preference Shareholders
Preference Share capital A/c Dr
To Preference Shareholders A/c
(Transfer of Preference Share Capital to shareholders a/c)
Preference Shareholders A/c Dr
To Bank A/c
(Payment made to Preference Shareholders)
Redemption of Preference Shares at a Premium
Following are the additional entries for preference shares redeemed at premium, out of Company’s Security Premium Account or out of profits. Premium collected from new issue can not be utilized for redemption purpose.
Premium on redemption made out of Security Premium Account or out of profits
Profit & Loss A/c Dr.
Security Premium A/c Dr.
To Capital Redemption Reserve A/c
Payment made to Preference Shareholders at premium
Preference Share capital A/c Dr
Premium on Redemption A/c Dr
To Preference Shareholders A/c
(Adjustment of Premium on redemption)
Preference Shareholders A/c
To Bank A/c
(Payment made to Preference Shareholders)
Redemption of Preference Shares by Issue of Bonus shares
Capital Redemption Reserve can be utilized in issue of fully paid Bonus Shares.
Bonus shares issued to Equity Shareholders
Capital Redemption Reserve A/c Dr.
To Bonus to Shareholders A/c
Bonus to Shareholders A/c Dr.
To Share Capital A/c
Redemption of Preference Share – Practical Problems
Redemption of Preference Share – Practical Problems
Balance Sheet of N Ltd.
Liabilities : Equity shares (15,000 of Rs.10 each Issued & subscribed) – 1,50,000, 12% Preference Shares (1,500 of Rs.100 each Issued & subscribed) – 1,50,000, Profit & Loss Account 55,000, General Reserve -70,000, Current liabilities – 80,000, Provision for Tax – 30,000, Total 5,35,000
Assets : Fixed Assets – 1,35,000, Stock – 1,00,000, Debtors – 1,50,000, Bank – 1,50,000, Total 5,35,000
It was decided to issue further 5,000 equity shares at a premium of Rs.5 per share and to redeem the preference shares at par.
Show the necessary journal entries
Computation of amount to be transferred to CRR : Amount required for redemption – 1,50,000, cash received from fresh issue (excluding premium) – 50,000. So, Amount required to be transferred to CRR = 1,50,000 – 50,000= 1,00,000
Accounting Entries for Redemption of Preference Share
Bank A/c Dr. 75,000
To Share Capital A/c 50,000
To Securities Premium A/c 25,000
(Issue of 5,000 equity shares of Rs.10 each at premium of Rs.5 per share for redemption of preference shares)
Profit & Loss A/c Dr. 55,000
General Reserve A/c Dr. 45,000
To Capital Redemption Reserve A/c 1,00,000
(Creation of Capital Redemption Reserve to the extent of the amount of redemption is not covered by the issue of new shares.)
The balance of profit & Loss account of Rs.55,000 is first utilized, the balance(Rs.45,000) is utilized from General Reserve
12% Preference Share capital A/c Dr. 1,50,000
To Preference Shareholders A/c 1,50,000
(Transfer of Preference Share capital to Preference Shareholders)
Preference Shareholders A/c Dr. 1,50,000
To Bank A/c 1,50,000
(Payment made to Preference Shareholders)
Note: Premium collected from new issue can not be utilized for redemption.
Redemption of Preference Share – Practical Problems
Redemption of Preference Shares at premium and bonus issue – Practical Problems
Balance sheet of M Ltd.
Liabilities : 6% Redeemable Pref. Sh. (3,000, of Rs.10 each fully paid) – 30,000, Equity Shares ( 6,000 of Rs.10 each fully paid) – 60,000, General Reserve – 30,000, Profit & Loss account – 25,000, Securities Premium – 30,000, Creditors – 21,000, Total 1,96,000
Assets : Fixed Assets – 95,000, Investments – 21,000, Stock – 40,000, Debtors – 18,000, Bank – 22,000, Total 1,96,000
The company wants to redeem the Preference Share on July 1, 2015 at a premium of 5%. To assist in financing the redemption, all the investment were sold, realizing Rs.19,000. On September 1, 2015, the company made a bonus issue of 1 equity share fully paid for every 6 equity shares held on that date. Show journal entries
- Computation of Profit or Loss on sale of Investment : Book value of Investment – 21,000, Sale Proceeds – 19,000. Loss on sale =2,000 The amount of loss of Rs.2,000 will be debited to Profit & Loss account. Therefore, the balance of Profit & Loss account will be= Rs.(25,000 – 2,000) = Rs.23,000.
- Computation of Amount to be transferred to Capital Redemption Reserve : Required amount for redemption (30,000 + 5% premium on 30,000) = 31,500. Amount to be transferred From General Reserve – 30,000. So, Company must pay premium on redemption amount of Rs.1,500 out of the Security Premium Account. Premium on redemption amount is not transferred to CRR
- Computation of Bonus Issue : For every 1 equity share = 6 equity shares. So, for 6,000 equity share = 6,000 x 1/6 = 1,000 Bonus Share of value 1,000 x Rs.10 = Rs.10,000. CRR fund will be utilized for Bonus issue. So, CRR fund balance will be (30,000 – 10,000) = Rs.20,000.
Accounting Entries for Redemption of Preference Share
Bank A/c Dr 19,000
Profit & Loss A/c Dr 2,000
To Investment A/c 21,000
(Sale of Investment of Rs19,000, Loss debited to P & L A/c
General Reserve A/c Dr 30,000
To Capital Redemption Reserve A/c 30,000
(Creation of Capital Redemption Reserve fund to redeem preference shares.)
Securities Premium A/c Dr 1500
To Premium on Redemption of Preference Shares A/c 1500
(Premium payable on redemption adjusted against Securities Premium Account.)
6% Redeemable Pref Sh Capital A/c Dr 30000
Premium on Redemption of Pref Sh A/c Dr 1500
To Preference Shareholders A/c 31,500
(Transfer of Preference Share capital to Preference Shareholders)
Preference Shareholders A/c Dr 31500
To bank A/c 31,500
(Payment made to Preference Shareholders)
Accounting Entries on Bonus Issue
Capital Redemption Reserve A/c Dr 10,000
To Bonus to Equity Shareholders A/c 10,000
(Amount appropriated for issue of 1,000 bonus share of Rs.10 each.)
Bonus to Shareholders A/c 10,000
To Equity Share Capital A/c 10,000
(The utilization of bonus shares for issuing equity shares.)
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