Chapter 4: Redemption of Pref Share & Debentures Topic: Redemption of Pref Shares. Practice Questions

Chapter 4: Redemption of Pref Share & Debentures
Topic: Redemption of Pref Shares.
Practice Questions
Question 1.
The balance sheet of Nilakanta Limited is it the beginning of financial year, inter alia, include the
following:
₹
50,000 8% preference shares of ₹ 100 each ₹ 70 paid up 35,00,000
1,00,000 equity shares of ₹ 100 each fully paid up 1,00,00,000
Securities premium 5,00,00
Capital redemption reserve 20,00,000
General reserve 50,00,000
Under the terms of their issue, the preference shares are redeemable at the end of the year at a
premium of 5%. In order to finance the redemption, the company makes rights issue of 50,000
equity shares of ₹100 each at ₹ 110 per share, ₹ 20 Being payable on application, ₹ 35 (including
Premium) on allotment and the balance to be called in the next financial year. The issue was
fully subscribed and allotment made on 1st December. The moneys due on allotment were
promptly received by the end of the year.
The preference shares were redeemed after fulfilling the necessary conditions of the Companies
Act. The company decided to make the minimum utilisation of general reserve. Assume that
securities premium A/c is usable for providing the premium on redemption of preference
shares. You are asked to pass the necessary journal entries and show the relevant extracts from
the balance sheet as at the end of the year with corresponding figures of the previous year.
Solution:
1. Journal entries in the books of Nilakanta Limited (in ₹ 000’s)

Particulars Dr. Cr.
1. 8% preference shares final call A/c Dr. 15,00
To 8% preference share capital A/c 15,00
(Being final call made on 50,000 preference shares
at ₹ 30 each to make them fully paid up prior to
Redemption)
Contact - 9228446565 www.konceptca.com info@konceptca.com

2. Bank A/c Dr. 15,00
To 8% Preference share final call A/c 15,00
(Being final call amount received on 50,000
preference shares at ₹ 30 each)
3. Bank A/c Dr. 10,00

To Equity share application A/c 10,00
(Bring the application money received on 50,000
equity shares at ₹ 20 per share)
4. Equity share application A/c Dr. 10,00

To Equity share capital A/c 10,00
(Being the application money on 50,000 equity
shares transferred to equity share capital A/c vide
Board’s resolution no. ……. Dated …….)
5. Equity share allotment A/c Dr. 17,50

To Equity share capital A/c 12,50
To Securities premium A/c 5,00
(Being the amount due on allotment of 50,000
equity shares at ₹ 35 per share including premium ₹
10, vide Board’s resolution no. ……. Dated……)
6. Bank A/c Dr. 17,50

To Equity share allotment A/c 17,50
(Being allotment money received on 50,000 equity
shares at ₹ 35 per share)
7. 8% preference share capital A/c Dr. 50,00

Premium on redemption of preference shares A/c Dr. 2,50
To Preference shareholders A/c 52,50
(Being the amount payable to preference
shareholders on redemption at 5% premium)
8. Securities premium A/c 2,50

To premium on redemption of preference 2,50
shares A/c
(Being premium payable on redemption of
preference shares provided out of securities
premium A/c)
9. General reserve A/c Dr. 27,50

To Capital redemption reserve A/c 27,50
(Being amount transferred to CRR on redemption of
preference shares for the balance not covered by
proceeds of fresh issue of shares, that is face value
of PSC redeemed ₹ 50 lacs
Less face value of fresh issue ₹ 22.5 lacs, excluding
securities premium)

10. Preference shareholders A/c Dr. 52,50
To bank A/c 52,50
(Being payment made to preference shareholders)
2. Extract of B/sheet of Neelakanta Ltd as at …… (after redemption of preference shares)

(₹ in 000’s)
Particulars Note This Year Prev. Yr.

I EQUITY AND LIABILITIES:
1. Shareholders’ funds :
a. Share capital 1 122,50 1,35,00
b. Reserves and surplus 2 77,50 75,00
Note 1 :Share capital
Particulars This Year Prev. Yr.

Authorised :
. . . . . . . Equity shares of . . . . each
. . . . . . . Preference shares of . . . . . . each
Issued, subscribed and paid up :

1,00,000 equity shares of ₹ 100 each fully paid up 1,00,00 1,00,00
50,000 equity shares of ₹ 100 is ₹ 45 called up and paid up 22,50 -
8% 50,000 redeemable preference shares of ₹ 100 each - 35,00
₹ 70 called up and paid up ( redeemed during the year )
Total 1,22,50 1,35,00
Reconciliation of number and amount of shares (all figures for this year)
Particulars ESC ₹ 100 each ESC ₹ 100 ₹ 45 paid up Preference. Shares of ₹

100 each
Number Amt. ₹ 000’s Number Amt ₹ 000’s Number Amt ₹ 000’s
Opening balance 1,00,000 1,00,00 - - 50,000 @ ₹70 = 35,00
Add : fresh issue - - 50,000 @ 45 = 22,50 Final @ Rs 30 = 15,00

call
Less : redemption/ - - - - 50,000 (50,00)
buyback
Closing balance 1,00,000 1,00,00 50,000 @ 45 = 22,50 - -
Note 2: Reserves and surplus

Particulars This year Prev. Yr.
Capital redemption reserve 47,50 20,00
Security streaming A/c 7,50 5,00
Other reserves. - General reserve 22,50 50,00
Total 77,50 75,00

Reserves and surplus (showing appropriations and transfers) (all figures for this year)
Particulars Opg. Bal. Additions Deductions Clg. Bal.

Capital redemption 20,00 From gen res. - 47,50
reserve = 27,50
Securities premium A/c 5,00 Fresh issue = 5,00 Prem. on PSC 7,50
redemption = 2,50
Other Reserves (Gen. 50,00 - Tfr to CRR = 27,50 22,50

Res.)
Total 75,00 32,50 30,00 77,50
Question 2.
Following is the balance sheet of Ms Nataraja Limited as on 31st March
Equity and liabilities ₹ Assets ₹

80,000, 6% red. pref. shares of ₹ 10 7,20,000 Sundry assets 16,80,000
each ₹ 9 paid up
40,000 equity shares of ₹ 10 each 4,00,000 Cash 5,20,000
fully paid up
Profit and loss A/c 5,00,000
General reserve 60,000
Sundry creditors 4,20,000
Total 22,00,000 Total 22,00,000
By the terms of their issue, the preference shares were redeemable at a premium of ₹ 50 paise
per share on 1st April, and it was decided to arrange for this, out of the company's resources
subject to leaving a credit balance of ₹ 24,000 in the P&L A/c. It was also decided to raise the
balance of funds required by the issue of sufficient number of equity shares at a premium of
10%. Assume that securities premium A/c is usable for providing the premium on redemption
of preference shares.
Show the journal entries giving effect to the above transaction & balance sheet thereafter.
Solution:
1. Computation of Minimum Number of Equity shares to be issued
Particulars ₹
Face value of redeemable preference shares 8,00,000
Less: General reserve 60,000
Profit and loss A/c ( 5,00,000 - 24,000 to be retained) 4,76,000 (5,36,000)
Face value of equity shares to be issued 2,64,000

Number of equity shares be issued (Face value = ₹ 10 per share) 26,400 shares
2. Journal entries in the books of Nataraja Ltd.

Particulars Dr.(₹) Cr.(₹)
1. Redeemable preference share final call A/c Dr. 80,000
To 6% redeemable preference share capital A/c 80,000
(Being final call due on 80,000 shares at ₹ 1 each, so that
preference shares can be made fully paid and eligible for
Redemption)
2. Bank A/c Dr. 80,000

To 6 % redeemable preference shares final call A/c 80,000
(Being call money received from all preference shareholders)
3. Bank A/c Dr. 2,90,400

To Equity share application and allotment A/c 2,90,400
(Being amount received on issue of 26400 shares × 10 + 10
premium)
4. Equity share application and allotment A/c Dr. 2,90,400

To equity share capital A/c (WN 1) 2,64,000
To securities premium A/c 26,400
( Being 26,400 equity shares of ₹ 10 each issued at a premium
of 10%)
5. 6% redeemable preference capital A/c Dr. 8,00,000

Premium on redemption of preference shares A/c 40,000
To preference shareholders A/c 8,40,000
(Being amount due to preference shareholders on redemption
incl. 5% premium)
6. Securities premium A/c Dr. 40,000

To premium on redemption of preference shares A/c 40,000
(Being Premium on PSC redemption at 5% provided out of
securities premium A/c)
7. Preference shareholders A/c Dr. 8,40,000

To bank A/c 8,40,000
(Being payment made to preference shareholders)
8. Profit and loss A/c Dr. 4,76,000

General reserve A/c Dr. 60,000
To Capital redemption reserve A/c 5,36,000
(Being revenue profit transferred to Capital redemption
reserve)

3. Cash Account
Receipts ₹ Payments ₹
To Balance b/d 5,20,000 By Preference Shareholders A/c 8,40,000
To 6 % Red. Pref. Shares final call 80,000 By Balance c/d 50,400
A/c
To Equity share appl. & Allot. A/c 2,90,400
(Fresh issue)
Total 8,90,400 Total 8,90,400
4. Balance sheet of Nataraja Limited as at 1st April (after Redemption)
Particulars Note This Year Prev. Yr.

I EQUITY AND LIABILITIES :
a. Share capital 1 6,64,000
b. Reserves and surplus 2 6,46,000
2. Current liabilities :
- trade payables(sundry creditors) 4,20,000
Total 17,30,400
II ASSETS
1. Non-current assets : 16,80,000
-sundry assets
2. Current assets : 50,400
- cash and cash equivalents(WN 3)
Total 17,30,400
Note 1: Share capital

Particulars This year Prev. Year.
Authorised:
. . . . . equity shares of. . . . . Each and . . . . . . Preference
shares of . . . . each
Issued, subscribed & paid up : 6,64,000
66,400 equity shares of ₹ 10 each fully paid up
Total 6,64,000

Reconciliation of number and the amount of shares (all figures for this year)
Particulars Equity shares of Preference shares of

₹ 10 each ₹ 10 each
Number Amt ₹ Number Amt ₹

Opening balance (assumed) 40,000 4,00,000 80,000 @ ₹ 9 = 7,20,000
Add: fresh issue 26,400 2,64,000 Final call @ ₹ 1 = 80,000

Less: redemption / buyback - - 80,000 (8,00,000)
Closing balance 66,400 6,64,000 - -
Note 2: Reserves and surplus (showing appropriations and transfers) (all figures of this year)
Capital redemption reserve From P&L - 5,36,000

= 4,76,000
From gen res
= 60,000
Securities premium A/c 1,00,000 Fresh issue Prem. On PSC 86,400
= 26,400 redemption = 40,000
Other Reserves (gen. Res.) 60,000 - Transfer to CRR Nil
= 60,000
Surplus ( P&L A/c ) 5,00,000 - Transfer to CRR 24,000
= 4,76,000
Total 6,60,000 5,62,400 5,76,000 6,46,400
Question 3.
The provisional balance sheet of Lavanya Limited as at 31st March was as under:

Share capital :
50,000 E.S of ₹ 10 each ,
₹ 7 per sh called up 3,50,000
Less: calls in arrears on
10,000 sh at ₹ 2 (20,000) Fixed assets (net block) 7,00,000
Add: calls in advance on
40,000 sh at ₹ 3 per sh 1,20,000 4,50,000
20,000 10% redeemable Pref
sh of ₹ 10 each 2,00,000
Reserves and surplus : Cash and Bank balances 2,00,000
General reserve 3,00,000 Other current assets 6,00,000

Current liabilities 2,80,000
Total 15,00,000 Total 15,00,000
Calls in arrears are outstanding for 6 months. Calls in advance were received 6 months back.
Interest at 10% per annum on calls in advance and 12% per annum on calls in arrears are
allowed / charged.
The Board of Directors have recommended that-

1. Dividend for the year be allowed at 20% on equity shares and paid immediately.
2. Calls in advance be refunded and partly paid equity shares be converted as fully paid up
by declaring bonus dividend to shareholders.
3. Preference shares, which are redeemable at a premium of 10%, may be redeemed by
issue of 10% debentures of ₹100 each. Preference dividend is paid immediately and
prior to Redemption.
Show journal entries to give effect to the above proposals including payment and receipt of cash
and redraft the profit and loss A/c and balance sheet of the company. (Ignore taxation)
Solution:
1. Journal entries in the books of Lavanya Ltd.

1. Interest on calls in arrears A/c Dr. 1,200
To profit and loss A/c 1,200
(Being interest charged on calls in arrears at 12% p.a ₹ 20,000
× 12% × 6/12 )
2. Bank A/c Dr. 21,200

To calls in arrears A/c 20,000
To interest on calls in arrears A/c 1,200
(Being calls in arrears and the interest due thereon received)
3. Profit and loss A/c Dr. 6,000

To Interest on calls in advance A/c 6,000
(Being interest payable at 10% on calls in advance ₹ 1,20,000 ×
10% × 6/12)

To preference dividend payable A/c 20,000
To equity dividend payable A/c (on equity capital before 70,000
bonus issue)
(Being dividend at 10% on preference share capital and 20% on
equity share capital proposed). Note : declaration of equity
dividend automatically means that preference dividend should
have been declared first. It is assumed that 20% dividend on
equity shares has been proposed before the equity shares are
made fully paid by way of Bonus dividend.
5. Equity share final call A/c Dr. 1,50,000

To Equity share capital A/c 1,50,000
(Being final call due at ₹ 3 on 50,000 shares)
6. Profit and loss A/c Dr. 1,50,000

To bonus to equity shareholders A/c 1,50,000
(Being bonus for converting ₹ 7 paid up into ₹ 10 shares for
50,000 shares)
7. Bonus to equity shareholders A/c Dr. 1,50,000

To Equity share final call A/c 1,50,000
(Being adjustment of Bonus dividend against final call)
8. Calls in advance A/c Dr. 1,20,000

Interest on calls in advance A/c Dr. 6,000
(Being amount of calls in advance along with interest refunded)
9. 10% preference share capital A/c Dr. 2,00,000

(Being amount due on redemption of preference shares,
including 10% premium)
10. Bank A/c Dr. 2,20,000

To 10% debentures A/c 2,20,000
(Being 2,200 debentures of ₹ 100 each issued in cash)

(Being premium payable on redemption of preference shares,
charge to P & L A/c)

12. Profit and loss A/c ( balance available in P&L A/c) (refer WN 2) Dr. 5,200
General reserve A/c ( balancing figure )
To Capital redemption reserve A/c Dr. 1,94,800
( Being transferred to Capital redemption Reserve upon 2,00,000
redemption of preference shares )
13. Preference dividend payable A/c Dr. 20,000

Equity dividend payable A/c Dr. 70,000
To bank A/c 90,000
( Being equity and preference dividend paid to shareholders )

( Being amount paid to preference shareholders final statement)
2. Profit and Loss Appropriation A/c of Lavanya Ltd for the year ended 31st March
Particulars ₹ Particulars ₹
To interest on calls in advance 6,000 By balance b/d (given) 2,70,000
To balance c/d 2,65,000 By interest on calls in arrears 1,200
Total 2,71,200 Total 2,71,200
To premium on redemption of 20,000 By balance b/d 2,65,200

preference shares
To Preference Dividend 20,000
To Equity Dividend 70,000
To Bonus to Eq. Sh. 1,50,000
To C.R.R. A/c ( bal. figure ) 5,200
2,65,200 2,65,200
Note:
1. It is assumed that the calls in arrears has been fully received, together with interest
thereon , and calls in advance has been duly repaid, along with interest thereon.
₹ 70,000
2. Dividend per share = = ₹ 1.40
50,000 shares
3. As per schedule III requirements, appropriations are to be shown in the notes i.e.
Schedule of reserves and surplus. However, in the above solution, these are shown in the
P& L A/c itself, for ease of computation.
3. Cash and Bank Balances as on 31st March

To balance b/d 2,00,000 By payment of calls in Adv. and 1,26,000
Int. thereon
To recovery of calls in arrears 21,200 By pref. share Redemption (incl. 2,20,000
and Int. thereon Premium)
To proceed from issue of 2,20,000 By preference dividend paid 20,000
debentures
By equity dividend paid 70,000
By balance c/d (balancing 5,200
figure)
Total 4,41,200 Total 4,41,200
4. Balance Sheet of Lavanya Ltd. As on 31st March (after above transactions)
Particulars Note This year Prev. Yr.

2. Non-current liabilities :
Long term borrowings
-secured loans - 10% debentures 2,20,000
3. Current liabilities:.
- other current liabilities 2,80,000
Total 13,05,200
II ASSETS
1. Non-current assets
- Fixed assets 7,00,000
2. Current Assets :
a. Cash and cash equivalents 5,200
b. Other current assets 6,00,000
Total 13,05,200
Particulars This Year Prev. Yr.

Authorised:
. . . . . equity shares of . . . . . Each and . . . . . . Preference
shares of . . . . each
Issued, subscribed & paid up :
50,000 equity shares of ₹ 10 each fully paid up 5,00,000
(of the above equity shares ₹ 3 per share has not been received in
cash, but has been capitalised by issuing bonus dividend out of
profits)
Total 5,00,000

Note 2: Reserves and surplus (showing appropriations and transfers) (all figures of this year)

Tfr from P&L = 5,200 - 2,00,000
Capital redemption - Tfr from gen res =
reserve 1,94,800
Other Reserves (gen. Res.) 3,00,000 - Tfr to CRR = 1,05,200
1,94,800
Surplus ( P&L A/c ) (note) 2,70,000 Details in WN 2 = 1,200 Details in WN 2 Nil
= 2,71,200
Total 5,70,000 2,01,200 4,66,000 3,05,200
Question 4.
The following is the balance sheet of Maheshwar Limited at the beginning of a financial year -

Share capital : Fixed assets
Authorised capital: Gross block 3,00,000
10,000 10% redeemable 1,00,000 Less : Depreciation (1,00,000)
preference shares of ₹ 10 each
90,000 equity shares of ₹ 10 each 9,00,000 Net block 2,00,000
10,00,000 Investments 1,00,000
Issued, subscribed and paid up Current assets , Loans
capital : and advances:
10,000 10% redeemable 1,00,000 Inventory 25,000
preference shares of ₹ 10 each
10,000 equity shares of ₹ 10 each 1,00,000 Debtors 25,000
2,00,000 Cash and bank 50,000
balances
Reserves and surplus : Misc. Exp. To the extent 20,000
not written off
Securities premium 70,000
Profit and loss A/c 18,500
Current liabilities & provisions 11,500
Total 4,20,000 Total 4,20,000
For the current financial year, the company made a net profit of ₹ 15,000 after providing ₹
20,000 depreciation and writing off miscellaneous expenditure of ₹ 20,000.
The following additional information is available with regard to company's operations-

1. Preference dividend for the current year ended 31st March was paid before the end of the
year.
2. Except cash and Bank, other current assets and current liabilities as at the end of the year
was the same as at the beginning of the Year.

3. The company redeemed the preference shares at a premium of 10%. Assume that securities
premium A/c is usable for providing the premium on redemption of preference shares.
4. The company issued bonus shares of one share for every equity share held as at the end of
the year.
5. To meet the cash requirements of redemption, the company sold a portion of the
Investments, so as to leave a minimum balance of ₹ 30,000 after such Redemption.
6. Investments was sold at 90% of cost as at the end of the year.
You are required to :

1. Prepare necessary journal entries to record redemption and issue of Bonus shares.
2. Prepare the cash & bank A/c.
3. Prepare the balance sheet as at the end of the year incorporating the above transactions.
Solution:
1. Cash and bank A/c
To balance b/d 50,000 By preference dividend 10,000
(opening balance) ( paid ) ( 1,00,000 × 10% )
To cash from operations: By preference shareholders 1,10,000
( redemption )
Profit for the year 15,000 By balance c/d 30,000
( required balance ) ( given )
Add: depreciation 20,000
Misc. Exp. written off 20,000 55,000
To investments 45,000
(balancing fig)
Total 1,50,000 Total 1,50,000
Note: To maintain a minimum balance of ₹ 30,000 , the company has to realise ₹ 45,000 from
sale of investments.
2. Computation of Investments
Particulars ₹
Book value of total investments ( before considering sale of Investments ) at year 1,00,000
beginning
Less : cost of investments sold ( sale proceeds = 90% of cost = to ₹ 45,000, hence cost = (50,000)
Cost of investments on hand at the end of the year 50,000
Market value ( 90% of 50,000 ) 45,000
3. Journal entries in the books of Maheshwar Ltd.

1. 10% redeemable preference share capital A/c Dr. 1,00,000

(Being the balance outstanding in 10% preference share
capital and 10% premium on redemption transferred to
preference shareholders A/c)
2. General reserve A/c Dr. 1,00,000

To Capital redemption reserve A/c 1,00,000
( Being capital redemption reserve created , to the extent of
redemption not financed through proceeds of equity issue )
3. Bank A/c Dr. 45,000

Profit and loss A/c Dr. 5,000
To investments A/c 50,000
( Being amount realised on sale of investments and loss
thereon adjusted. Loss = Sale of value ₹ 45,000 less cost of
investments sold ₹ 50,000) (refer WN 1,2)

To preference dividend A/c 10,000
( Being preference dividend payable of the Year )
5. Preference dividend A/c Dr. 10,000

To bank A/c 10,000
(Being preference dividend paid to preference shareholders )
6. Securities premium A/c Dr. 10,000

(Being premium on redemption of preference shares, provided
out of securities premium )

(Being payment made to preference shareholders, on
redemption )
8. Capital redemption reserve A/c Dr. 1,00,000

(Being amount appropriated for issuing bonus shares in the
ratio 1: 1 )
9. Bonus to equity shareholders A/c Dr. 1,00,000

To equity share capital A/c 1,00,000
(Being allotment of 10,000 equity shares of ₹ 10 each, by way
of Bonus shares )
4. Profit and loss A/c of Maheshwar Ltd for the year ended 31st March

Particulars ₹ Particulars ₹
To loss on sale of Investments 5,000 By balance b/d (Operating 18,500
balance)
To preference dividend paid 10,000 By profit for the year 15,500
To balance c/d (balancing figure) 18,500
Total 33,500 Total 33,500
Note: as per schedule III requirements, appropriations are to be shown in the notes , i.e.
schedule of reserves and surplus. However , in the above situation , these are shown in the P&L
A/c itself, for ease of computation.
5. Balance sheet of Maheshwar Limited as at the end of the year (after Redemption)
Note This year Prev. Yr.

b. Reserves and surplus 2 98,500
2. Current liabilities : - Trade payables 11,500
Total 3,10,000
II ASSETS
a. Fixed assets 3 1,80,000
b. Non-current investments ( Market value ₹ 50,000
45,000)
2. Current Assets :
a. Inventories (same as at beginning) 25,000
b. Trade receivables (same as at beginning) 25,000
c. Cash and cash equivalents 30,000
Total 3,10,000

Authorised: . . . . . . . . Equity shares of . . . . . . . each & . . . . . . . . References
of . . . . . . . . . each
Issued, subscribed and paid up : 20000 equity shares of ₹ 10 each 2,00,000
( incl. 10,000 shares allotted as bonus shares by capitalising Capital
redemption reserve )
Total 2,00,000
Reconciliation of number and amount of shares (all figures for this year)

Particulars Equity shares of ₹ 10 each Pref. Shares of ₹ 10 each

Opening balance 10,000 2,00,000 10,000 1,00,000
Add : fresh issue 10,000 2,00,000
Less : - - (10,000) (1,00,000)
redemption /
buyback
Closing balance 20,000 4,00,000 - -
Note 2: Reserves and surplus (showing appropriations and transfers)( all figures for this year )

Capital redemption reserve - Tfr from Gen. Res Bonus to shareholders = Nil
= 1,00,000 1,00,000
Securities premium A/c 70,000 PSC Redemption premium 60,000
= 10,000
Other reserves (gen. res.) 1,20,000 Tfr to CRR = 1,00,000 20,000
Surplus (P&L A/c) 18,500 Details in WN 4 = Details in WN 4 = 15,000 18,500

15,000
Total 2,08,500 1,15,000 2,25,000 98,500
Note 3 : Fixed assets
Item Gross block / Cost Depreciation Net block / WDV
Opg. Addns/ Clg Bal Opg. Curre Clg. Bal. As at Yr As at Yr

Bal. (dedns) Bal. nt beginning end
year
dep.
Column 1. 2. 3 = 1±2 4. 5 6 = 4±5 7 = 1-4 8 = 3-6
Fixed 3,00,000 - 3,00,000 1,00,000 20,000 1,20,000 2,00,000 1,80,000

assets
Question 5.

The following is the balance sheet of Mrida Limited as at 31st March:

Authorised capital: Fixed assets ( net ) 7,80,000
50,000 equity shares of ₹ 10 each 5,00,000 Investments ( market value ₹ 4,90,000
5,80,000)
10,000 preference shares of ₹ 100 10,00,000 Deferred tax assets 3,40,000
each
Issued subscribed and paid up : 15,00,000 Sundry debtors 6,20,000
30,000 equity shares of ₹ 10 each 3,00,000 Cash and Bank balances 2,80,000
5,000 redeemable 8%preference 5,00,000 Preliminary expenses 1,40,000
shares of ₹ 100 each
Reserves and surplus :
2,500 9 % debentures of ₹ 100 each 2,50,000
Sundry creditors 1,70,000
Total 26,50,000 Total 26,50,000
In the Annual General Meeting held on 20th June, the company was the following resolution:
1. To split equity shares of ₹ 10 each into 5 equity shares of ₹ 2 each from 1st July.
2. To redeem 8 % preference shares at a premium of 5%.
3. To redeem 9% debentures by making offer to debenture holders to convert their Holdings
into equity shares at ₹ 10 per share or accept cash on Redemption.
4. To issue fully paid bonus shares in the ratio of one equity share for every three shares held
on record date.
On 10th July, investments were sold for ₹ for 55,000 and preference shares were redeemed.
40% of debenture holders exercise their option to accept cash and their claims for settled on 1st
August. The company fixed 5th September as record date and bonus issue was concluded by
12th September. You are requested to journalise the above transactions including cash
transactions and prepare a summary balance sheet as a 30th September. Assume that securities
premium A/c is usable for providing the premium on redemption of preference shares.
Solution:
1. Journal entries in the books of Mrida Limited
Date Particulars Dr.(₹) Cr.(₹)

1st July Equity share capital A/c ( ₹ 10 ) Dr. 3,00,000
To equity share capital A/c ( ₹ 2 ) 3,00,000
(Being existing 30,000 equity shares of ₹ 10 is split
into 30,000 × 5 = 1,50,000 Equity shares of ₹ 2
each )
10th July Cash and bank A/c Dr. 5,55,000

To Investments A/c 4,90,000

To profit on sale of investments A/c 65,000
(Being investment sold at a profit )
10th July Redeemable 8% preference share capital A/c Dr. 5,00,000

(Being share value and 5% premium on
redemption transferred to shareholders )
10th July Securities premium A/c Dr. 25,000

To premium on redemption of preference 25,000
shares A/c
(Being premium on redemption provided out of
securities premium A/c )
10th July Preference shareholders A/c Dr. 5,25,000

(Being preference shareholders paid )
10th July Profit and loss A/c Dr. 1,80,000

General reserve A/c Dr. 3,20,000
To capital redemption reserve A/c 5,00,000
( Being transferred to CRR out of profits, an
amount equal to the nominal value of preference
shares redeemed )
1st Aug 9% debentures A/c Dr. 2,50,000

To debenture holders A/c 2,50,000
( Being amount payable transfer to debenture
holders )
1st Aug Debenture holders A/c Dr. 2,50,000

To cash and bank A/c (₹ 2,50,000 × 40%) 1,00,000
To equity share capital A/c ( ₹ 2 ) 30,000
To securities premium A/c 1,20,000
( Being settlement made to debenture holders by
way of cash 40% and allotment of equity shares for
balance 60% ) [Note: number of shares allotted = ₹
1,50,000 ÷ ₹ 10 per share (issue price) = 15,000
equity shares of face value of ₹ 2 . The split of
equity shares is applicable for all the potential
equity shares]
12th Sept Capital redemption reserve A/c Dr. 1,50,000

(Being amount appropriated for issue of Bonus
shares )
12th Sept Bonus to equity shareholders A/c. ( 75,000 × 2) Dr. 1,50,000

To equity share capital A/c ( ₹ 2 ) 1,50,000

(Being 75,000 bonus shares allotted in the ratio of
1:3 )(2,25,000 shares ÷ 3)
30th Sept Profit and loss A/c Dr. 1,40,000

To preliminary expenses 1,40,000
(Being preliminary expenses written off )
Note: Alternatively, the balance in preliminary expenses A/c can be retained without Being
written off , and shown on the assets side, but it is not recommended since it does not constitute
an “Asset” as such. So, it is fully written off in the above solution.
2. Summary balance sheet of Mrida Ltd. as at 30th September (after above transactions)
Particulars Note This year Prev. Yr.

2. Current liabilities :
Trade payables. - sundry creditors 1,70,000
Total 19,50,000
II ASSETS
a. Fixed assets 7,80,000
b. Deferred tax asset ( net ) 3,40,000
2. Current assets :
a. Trade receivables 6,20,000
b. Cash and cash equivalents (₹ 2,80,000 + ₹ 2,10,000
5,55,000 - ₹ 5,25,000 - ₹ 1,00,000)
Total 19,50,000
Note 1 : Share capital

Authorised
2,50,000 equity shares of ₹ 2 each 5,00,000
…….preference shares of …… each
Issued ,subscribed & paid up :
2,40,000 equity shares of Rs 2 each 4,80,000
(Of the above 7,500 shares of ₹ 2 are issued as bonus shares for
non-cash consideration )
Total 4,80,000
Reconciliation of Number and Amount of Shares (all figures for this year)

Particulars Equity shares of ₹ 2 each Pref. Shares of ₹ 100 each
Opening balance (Note) 1,50,000 3,00,000 5,000 5,00,000
Add: fresh issue (bonus) 15,000 30,000
Conversion of debentures 75,000 1,50,000
Less: Redemption/buyback - - (5,000) (5,00,000)
Closing balance 2,40,000 4,80,000 - -
Note: During the, equity shares of ₹ 10 split have been into 5 equity shares of ₹ to each ( 30,000
shares × 5 )
Note 2: Reserves and Surplus (showing appropriations and transfers) (all figures for this year )
Particulars Opg. Bal. Additions Deductions Clg.Bal.

Tfr to P&L = Bonus to 3,50,000
Capital Redemption - 1,80,000 shareholders =
reserve 1,50,000
Tfr to GR =
3,20,000
Securities premium 6,00,000 1,20,000 PSC Redemption 6,95,000
A/c premium = 25,000
General reserve 6,50,000 - Tfr to CRR = 3,30,000
3,20,000
Surplus (P&L A/c) 1,80,000 Invts sold at Pft = Tfr to CRR =
65,000 1,80,000 (75,000)
Prelim. Exps w/off
= 1,40,000
Total 14,30,000 6,85,00 8,15,000 13,00,000
Question 6.
Hinduja Company Ltd. had 5,000, 8% Redeemable Preference Shares of `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 `10 each fully paid up at par. You are required to pass necessary
Journal Entries including cash transactions in the books of the company.
Solution:
In the books of Hinduja Company Ltd.
Journal Entries
Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 5,00,000
To Equity Share Capital A/c 5,00,000
(Being the issue of 50,000 Equity Shares of `10 each at par for the
purpose of redemption of preference shares, as per Board
Resolution No ……..dated……..)
8% Redeemable Preference Share Capital A/c Dr. 5,00,000
To Preference Shareholders A/c 5,00,000

(Being the amount payable on redemption of preference shares
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 5,00,000
To Bank A/c 5,00,000
(Being the amount paid on redemption of preference shares)
Question 7.
C Ltd. had 10,000, 10% Redeemable Preference Shares of `100 each, fully paid up. The company
decided to redeem these preference shares at par, by issue of sufficient number of equity shares
of `10 each at a premium of `2 per share as fully paid up. You are required to pass necessary
Journal Entries including cash transactions in the books of the company.
Solution:
In the books of C Ltd.
Journal Entries
Bank A/c Dr. 12,00,000
To Securities Premium A/c 2,00,000
(Being the issue of 1,00,000 Equity Shares of `10 each at a
premium of ` 2 per share as per Board’s Resolution No…..
dated……….)
(Being the amount payable on redemption of preference

shares transferred to Preference Shareholders A/c)

To Bank A/c 10,00,000
(Being the amount paid on redemption )
Note: Amount required for redemption is `10,00,000. Therefore, face value of equity shares to
be issued for this purpose must be equal to `10,00,000. Premium received on new issue cannot be
used to finance the redemption.
Question 8.
The Board of Directors of a Company decide to issue minimum number of equity shares of `9 to
redeem `5,00,000 preference shares. The maximum amount of divisible profits available for
redemption is `3,00,000. Calculate the number of shares to be issued by the company to ensure
that provisions of Section 55 are not violated. Also determine the number of shares if the
company decides to issue shares in multiples of `50 only.
Solution:
Nominal value of preference shares = `5,00,000
Maximum possible redemption out of profits = `3,00,000
Minimum proceeds of fresh issue = `5,00,000 - 3,00,000 =`2,00,000
Proceed of one share = `9
2,00,000
Minimum Number of Shares = 9
= 22,222.22 shares
As fractional shares are not permitted, the minimum number of shares to be issued is 22,223
shares.
If shares are to be issued in multiples of 50, then the next higher figure which is a multiple of 50
is 22,250. Hence, minimum number of shares to be issued in such a case is 22,250 shares.
Question 9.
The Balance Sheet of X Ltd. as on 31st March, 20X3 is as follows:

Particulars Amount
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 2,90,000
b Reserves and Surplus 48,000

2. Current liabilities
Trade Payables 56,500
3,94,500
Total
ASSETS
1. Fixed Assets
Tangible asset 3,45,000

Non-current investments 18,500
2. Current Assets
Cash and cash equivalents (bank) 31,000
3,94,500
Total
The share capital of the company consists of `50 each equity shares of `2,25,000 and `100 each
Preference shares of `65,000(issued on 1.4.20X1). Reserves and Surplus comprises Profit and
Loss Account only.
In order to facilitate the redemption of preference shares at a premium of 10%, the Company
decided:
(a) to sell all the investments for `15,000.
(b) to finance part of redemption from company funds, subject to, leaving a bank balance
of `12,000.
(c) to issue minimum equity share of `50 each at a premium of `10 per share to raise the
balance of funds required.
You are required to pass:
The necessary Journal Entries to record the above transactions and prepare the balance sheet as
on completion of the above transactions.
Solution:

Bank A/c Dr. 37,500
To Share Application A/c 37,500
(For application money received on 625 shares @ ` 60 per share)
Share Application A/c Dr. 37,500

To Equity Share Capital A/c 31,250
To Securities Premium A/c 6,250

(For disposition of application money received)
Preference Share Capital A/c Dr. 65,000
Premium on Redemption of Preference Shares A/c Dr. 6,500
To Preference Shareholders A/c 71,500
(For amount payable on redemption of preference shares)
Profit and Loss A/c Dr. 6,500
To Premium on Redemption of Preference Shares A/c 6,500
(For writing off premium on redemption out of profits)

Bank A/c Dr. 15,000
Profit and Loss A/c (loss on sale) A/c Dr. 3,500
To Investment A/c 18,500
(For sale of investments at a loss of `3,500)
Profit and Loss A/c Dr. 33,750
To Capital Redemption Reserve A/c 33,750
(For transfer to CRR out of divisible profits an amount equivalent
to excess of nominal value of preference shares over proceeds (face
value of equity shares) i.e., ` 65,000 - ` 31,250)
Preference Shareholders A/c Dr. 71,500
To Bank A/c 71,500
(For payment of preference shareholders)
Balance Sheet (after redemption)

Da Particulars Notes (`)
te No.
a) Share capital 1 2,56,250
b) Reserves and Surplus 2 44,250
Current liabilities
2. Trade Payables 56,500
Total 3,57,000
ASSETS

1. Fixed Assets
Tangible asset 3,45,000
2. Current Assets
Cash and cash equivalents (bank) 3 12,000

Total 3,57,000
Notes to accounts
Particulars Amount
1. Share Capital
Equity share capital (2,25,000 + 31,250) 2,56,250
2. Reserves and Surplus
Capital Redemption Reserve 33,750
Profit and Loss Account (48,000 – 6,500 – 3,500 – 33,750) 4,250
Security Premium 6,250
44,250
3. Cash and cash equivalents
Balances with banks (31,000 + 37,500 +15,000 – 71,500) 12,000
Working Note:
Calculation of number of shares:

Amount payable on redemption 71,500
Less: Sale price of investment (15,000)
56,500
Less: Available bank balance (31,000 – 12,000) 19,000
Funds from fresh issue 37,500
No. of shares = 37,500 / 60 = 625 shares
Question 10.
The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 20X1.
Share capital:
40,000 Equity shares of `10 each fully paid – `4,00,000;
1,000 10% Redeemable preference shares of `100 each fully paid – `1,00,000.
Reserve & Surplus:

Capital reserve – `50,000;
Securities premium – `50,000;
General reserve –`75,000;
Profit and Loss Account – `35,000
On 1st January 20X2, the Board of Directors decided to redeem the preference shares at par by
utilisation of reserve.
You are required to pass necessary Journal Entries including cash transactions in the books of
the company.
Solution:
In the books of ABC Limited Journal Entries
Date Particulars Dr. (`) Cr. (`)
20X2
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 1,00,000
(Being the amount payable on redemption transferred to
Preference Shareholders Account)
(Being the amount paid on redemption of preference
shares)
General Reserve A/c Dr. 75,000
Profit & Loss A/c Dr. 25,000
To Capital Redemption Reserve A/c 1,00,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)
Note: Securities premium and capital reserve cannot be utilised for transfer to Capital
Redemption Reserve.
Question 11.
C Limited had 3,000, 12% Redeemable Preference Shares of `100 each, fully paid up. The company
had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 25,000 Equity Shares of `10 each at par,
(ii) 1,000 14% Debentures of `100 each.
The issue was fully subscribed and all amounts were received in full .The payment was duly
made. The company had sufficient profits. Show Journal Entries in the books of the company.

Solution:
In the books of C Limited
Journal Entries
Bank A/c Dr. 2,50,000
(Being the issue of 25,000 equity shares of `10 each at par as
per Board’s resolution No……dated…..)
Bank A/c Dr. 1,00,000
To 14% Debenture A/c 1,00,000
(Being the issue of 1,000 Debentures of ` 100 each as per
Board’s Resolution No…..dated……)
(Being the amount payable on redemption transferred to
Preference Shareholders Account)
(Being the amount paid on redemption of preference
shares)
(Being the adjustment of premium on redemption against

Profits & Loss Account)
Profit & Loss Dr. 50,000
(Being the amount transferred to Capital Redemption Reserve
Account as per the requirement of the Act)
Question 12.
The capital structure of a company consists of 20,000 Equity Shares of `10 each fully paid up
and 1,000 8% Redeemable Preference Shares of `100 each fully paid up (issued on 1.4.20X1).
Undistributed reserve and surplus stood as: General Reserve `80,000; Profit and Loss Account
`20,000; Investment Allowance Reserve out of which `5,000, (not free for distribution as
dividend) `10,000; Securities Premium `2,000, Cash at bank amounted to `98,000. Preference
shares are to be redeemed at a Premium of 10% and for the purpose of redemption, the
directors are empowered to make fresh issue of Equity Shares at par after utilising the
undistributed reserve and surplus, subject to the conditions that a sum of `20,000 shall be
retained in general reserve and which should not be utilised.

Pass Journal Entries to give effect to the above arrangements and also show how the relevant
items will appear in the Balance Sheet of the company after the redemption carried out.
Solution:
In the books of ……….
Journal Entries
Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of ` 10 each at a premium of
Re. 1 per share as per Board’s Resolution No….. dated…….)
(Being the amount paid on redemption transferred to Preference
Shareholders Account)
(Being the amount paid on redemption of preference shares)

(Being the premium payable on redemption is adjusted against

Profit & Loss Account)
General Reserve A/c Dr. 60,000
Investment Allowance Reserve A/c Dr. 5,000
(Being the amount transferred to Capital Redemption Reserve
Account as per the requirement of the Act)
Balance sheet as on….[extracts]
Date Particular Notes No. (₹)

(a) Share Capital 1 2,25,000
(b) Reserve and surplus 2 1,02,000
Total ?
Assets
2. Current assets
Cash and Cash equivalanets 13,000

(98,000+25,000-1,10,000)
Total ?
Notes to accounts:
1. Share Capital
22,500 Equity shares (20,000+25,000) of ₹ 10 each fully paid up 2,25,000
2. Reserves and Surplus 20,000
General reserve 2,000
Securities Premium 75,000
Capital redemption reserve 5,000
Investment allowance reserve 1,02,000
Working Note:
No. of Shares to be issued for redemption of preference Shares :

Face value of share redeemed ₹1,00,000
Less: Profit available for Distribution as dividend:
General reserve: ₹ (80,000-20,000) ₹60,000
Profit & Loss (20,000-10,000 set aside for adjusting Premium ₹10,000
payable on redemption of preference shares)
Investment allowance reserve: (₹ 10,000-5,000) ₹ 5,000 (₹ 75,000)

₹ 25,000
Therefore, no. of shares to be issued = 25,000/ 10 =2,500 shares
Question 13.
The books of B Ltd. showed the following balance on 31st December, 20X3:
30,000 Equity shares of ₹ 10 each fully paid; 18,000 12% redeemable preference shares of ₹ 10
each fully paid, ; 4,000 10% redeemable Preference shares of ₹ 10 each, ₹ 8 paid up (all shares
issued on 1st April 20X2)
Undistributed reserve and surplus stood as: profit and Loss account ₹ 80,000; General Reserve ₹
1,20,000; securities Premium account ₹ 15,000 and Capital Reserve ₹ 21,000.
Preference shares are redeemed on 1st January, 20X1 at a Premium of ₹ 2 per share. The
whereabouts of the holders of 100 shares of 10 each fully paid are not known.
For redemption, 3000 equity shares of ₹ 10 each are issued at 10% Premium. At the same time,
a bonus issue of equity shares was made at par, two shares being issued for the every five held
on that date out of the capital redemption reserve Account.
Show the necessary journal entries to record the transactions.

Solution:
In The Books of B Limited Journal Entries
Date Particulars Dr. (₹) Cr. (₹)
20X1
Jan
12% redeemable Preference share capital A/c Dr. 1,80,000
To Preference Share Holder A/c 2,16,000
(Being the amount payable on redemption of 18,000
12% Redeemable preference shares transferred to
shareholders account)
Preference shareholders A/c Dr. 2,14,800

(Being the amount paid on redemption of 17,900
preference share)
Bank a/c Dr. 33,000

To Equity share Capital A/c 30,000
To Securities Premium A/c 3,000
(Being the issue of 3,000 equity shares of ₹ 10 each at a
premium of 10% as per board’s Resolution No. ….Dates)
General reserve A/c Dr. 1,20,000

To capital redemption Reserve A/c 1,50,000
(Being the amount transferred to capital redemption
Reserve A/c as per the requirement off the act.)
Capital redemption Reserve A/c Dr. 1,20,000

To Bonus to shareholders A/c 1,20,000
(Being the amount appropriated for issue of bonus
share in the ratio of 5:2 as per shareholders Resolution
No….dated…)
Bonus to shareholders A/c Dr. 1,20,000

1,20,000
To Equity share Capital A/c
(Being the utilization of bonus dividend for issue of
12,000 equity shares of ₹ 10 each fully paid)

To Premium on Redemption of Preference shares 36,000
(Being premium on redemption of preference shares
adjusted against to profit & Loss account)
Working Note:
(1) Partly paid-up preference shares cannot be redeemed.
(2) Amount to be transferred to capital redemption Reserve Account.

Face Value of share to be redeemed ₹ 1,80,000
Less: Proceeds from fresh issue (excluding premium) (₹ 30,000)
₹ 1,50,000
(3) No bonus shares on 3,000 equity shares issued for redemption.
Question 14.
The following is the summarized Balance sheet of Bumbum Limited as at 31st March, 20X1:
₹
Source of Fund
Authorized capital
50,000 equity shares of ₹ 10 each 5,00,000
10,000 preference shares of ₹ 100 each (8% redeemable) 10,00,000
15,00,000
Issued, Subscribed and paid up
30,000 equity shares of ₹ 10 each 3,00,000
5,000, 8% Redeemable Preference shares of ₹ 100 each 5,00,000
Reserve & surplus
Securities Premium 6,00,000
General Reserve 6,50,000
Profit and Loss A/c 40,000
2,500, 9% Debentures of ₹ 100 each 2,50,000
Trade payables 1,70,000
25,10,000
Application of Funds
Fixed assets (net) 7,80,000
Investments (Market Value ₹ 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Trade receivables 6,20,000
Cash & bank balance 2,80,000
25,10,000
In annual General Meeting held on 20th June, 20X1 the company passed the following
resolutions:
(i) To split Equity share of ₹ 10 each into 5 equity shares of ₹ 2 each from 1st July.
(ii) To redeem 8% preference shares at a Premium of 5%
(iii) To redeem 9% debentures by making offer to debenture Holders to convert their
holdings into equity shares at ₹ 10 per share or accept cash on redemption.
(iv) To issue fully paid Bonus shares in the ratio of one equity share for every 3 shares
held on record date.
On 10th July, 20X1 investments were sold for ₹ 5,55,000 and preference shares were
redeemed.
40% of Debenture Holders exercised their option to accept cash and their claims were
settled on 1st august, 20X1.
You are requested to journalize the above transactions including cash transactions and
prepare Balance sheet as at 30th September, 20X1. All working notes should form part of
your answer.

Solution:
Bumbum Limited
Journal Entries
Date Particulars Dr. (₹) Cr. (₹)
20X1
June 1 Equity Share Capital A/c (₹ 10 each) Dr. 3,00,000
To Equity share Capital A/c (₹ 2 each) 3,00,000
(Being equity share of ₹ 10 each splitted into 5 equity
shares of ₹ 2 each) {1,50,000×2}
July 10 Cash & Bank balance A/c Dr. 5,55,000

To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(being investment sold out and profit on sale credited to
profit & Loss A/c)
July 10 8% redeemable Preference share capital A/c Dr. 5,00,000

Premium on redemption of preference share A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(being amount payable to preference shareholders on
redemption) (Refer W.N. 1)
July 10 Preference shareholders A/c Dr. 5,25,000

To Cash & Bank A/c 5,25,000
(Being amount paid to preference shareholders on
redemption)(refer w.n. 1)
July 10 General reserve A/c Dr. 5,00,000

To capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to capital Redemption Reserve A/c on
its redemption as per the law)
Aug 1 9% debentures a/c Dr. 2,50,000

Interest on Debentures A/c (2,50,000 × 9% × 4/12) Dr. 7,500
To Debenture holders A/c 2,57,500
(being claims of debenture holders along with interest
payable)
Aug 1 Debenture holders A/c Dr. 2,57,500

To cash & Bank A/c (1,00,000 + 7,500) 1,07,500
To Equity share capital A/c (15,000×2) 30,000
To Security Premium A/c (15,000×8) 1,20,000
(Being claims of debenture holders satisfied) refer W.N.2)
Sep. 5 Capital Redemption Reserve A/c Dr. 1,10,000

To bonus to shareholders A/c 1,10,000
(Being balance in capital redemption reserve capitalized
to issue bonus shares)(refer W.N.3)shares of ₹

Sep.12 Bonus to shareholders a/c Dr. 1,10,000
To equity share capital A/c 1,10,000
(being 55,000 fully paid equity shares of ₹ 2 each issued
as bonus in ratio of 1 share for every 3 shares held)
Sep. General reserve a/c Dr. 25,000

30
To Premium on redemption of preference shares A/c 25,000
(being premium on preference shares adjusted from
general reserve)
Sep. Profit & Loss A/c Dr. 7,500

30
To interest on debentures A/c 7,500
(Being interest on debentures transferred to profit and
loss account)
Balance sheet as at 30th September, 20X1

Particulars Notes ₹
Equity & Liabilities
1 Shareholders’ funds
a Share Capital 1 4,40,000
b Reserves and Surplus 2 13,32,500
2 Current Liabilities
Trade payable 1,70,000
Total 19,42,500
Assets
1 Non-current assets
a Fixed assets
Tangible assets 7,80,000
b Deferred tax assets 3,40,000
2 Current assets -
Trade receivables 6,20,000
Cash and Bank balances (W.N. 4) 2,02,500
Total 19,42,500
Notes to accounts
1. Share capital ₹ ₹
Authorised share capital
2,50,000 Equity shares of ₹ 2 each 5,00,000
10,000 Preference shares of ₹ 100 each 10,00,000 15,00,000
Issued, subscribed and paid up
2,20,000 Equity shares of ₹ 2 each 4,00,000
[(30,000×5)+15,000+55,000]
2. Reserves and surplus
Securities premium a/c
Balance as per balance sheet 6,00,000
Add: Premium on equity shares issued on conversion of 1,20,000 7,20,000
debentures (15,000×8)

Capital Redemption Reserve (5,00,000-1,10,000) 3,90,000
General Reserve (6,50,000-5,00,000-25,000) 1,25,000
Profit & Loss A/c 40,000
Add: Profit on sale of investment 65,000
Less: Interest on debentures (7,500) 94,500
Total 13,32,500
Working Note:
Particulars ₹
1. Redemption of preference share:
5,000 preference shares of ₹ 100 each 5,00,000
Premium on redemption @5% 25,000
Amount payable 5,25,000
2. Redemption of debentures
2,500 debentures of ₹ 100 each 2,50,000
Less: cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000
Equity shares issued on conversion = 1,50,000/10=15,000 shares
3. Issue of Bonus shares

Existing Equity shares after split (30,000×5) 1,50,000
shares
Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000
shares
Bonus shares (1 share for every 3 shares held) to be issued 55,000 shares
4. Cash and Bank Balance

Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Paid to Debenture holders (7,500+1,00,000) (1,07,500)
Balance 2,02,500
5. Interest of ₹ 7,500 paid to debenture holders have been debited to

profit & Loss Account.

Chapter 4: Redemption of Pref Share & Debentures Topic: Redemption of Pref Shares. Practice Questions

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Chapter 4: Redemption of Pref Share & Debentures

Topic: Redemption of Pref Shares.

1. Journal entries in the books of Nilakanta Limited (in ₹ 000’s)

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3. Bank A/c Dr. 10,00

4. Equity share application A/c Dr. 10,00

5. Equity share allotment A/c Dr. 17,50

6. Bank A/c Dr. 17,50

7. 8% preference share capital A/c Dr. 50,00

8. Securities premium A/c 2,50

9. General reserve A/c Dr. 27,50

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2. Extract of B/sheet of Neelakanta Ltd as at …… (after redemption of preference shares)

Particulars Note This Year Prev. Yr.

Note 1 :Share capital

Particulars This Year Prev. Yr.

Issued, subscribed and paid up :

Particulars ESC ₹ 100 each ESC ₹ 100 ₹ 45 paid up Preference. Shares of ₹

Number Amt. ₹ 000’s Number Amt ₹ 000’s Number Amt ₹ 000’s

Opening balance 1,00,000 1,00,00 - - 50,000 @ ₹70 = 35,00

Add : fresh issue - - 50,000 @ 45 = 22,50 Final @ Rs 30 = 15,00

Note 2: Reserves and surplus

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Particulars Opg. Bal. Additions Deductions Clg. Bal.

Other Reserves (Gen. 50,00 - Tfr to CRR = 27,50 22,50

Equity and liabilities ₹ Assets ₹

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2. Journal entries in the books of Nataraja Ltd.

2. Bank A/c Dr. 80,000

3. Bank A/c Dr. 2,90,400

4. Equity share application and allotment A/c Dr. 2,90,400

5. 6% redeemable preference capital A/c Dr. 8,00,000

6. Securities premium A/c Dr. 40,000

7. Preference shareholders A/c Dr. 8,40,000

8. Profit and loss A/c Dr. 4,76,000

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Total 8,90,400 Total 8,90,400

4. Balance sheet of Nataraja Limited as at 1st April (after Redemption)

Particulars Note This Year Prev. Yr.

Note 1: Share capital

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Particulars Equity shares of Preference shares of

Number Amt ₹ Number Amt ₹

Add: fresh issue 26,400 2,64,000 Final call @ ₹ 1 = 80,000

Closing balance 66,400 6,64,000 - -

Particulars Opg. Bal. Additions Deductions Clg. Bal.

Capital redemption reserve From P&L - 5,36,000

Equity and liabilities ₹ Assets ₹

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The Board of Directors have recommended that-

1. Journal entries in the books of Lavanya Ltd.

Particulars Dr.(₹) Cr.(₹)

2. Bank A/c Dr. 21,200

3. Profit and loss A/c Dr. 6,000

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5. Equity share final call A/c Dr. 1,50,000

6. Profit and loss A/c Dr. 1,50,000

7. Bonus to equity shareholders A/c Dr. 1,50,000

8. Calls in advance A/c Dr. 1,20,000

9. 10% preference share capital A/c Dr. 2,00,000

10. Bank A/c Dr. 2,20,000

11. Profit and loss A/c Dr. 20,000

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