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MODULE – 3

PROBLEMS ON REDEMPTION OF PREFERENCE SHARES

1. Hinduja Company Ltd. 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 in the books of the company.
2. C 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 in the books of the company.
3. G India Ltd. had 9,000 10% Redeemable Preference Shares of Rs. 10 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 a discount of 10%. You
are required to pass necessary Journal Entries in the books of the company.
4. The Board of Directors of a Company decided to issue minimum number of equity
shares of Rs. 10 each at 10% discount 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 provisions of the
companies act is not violated. Also determine the number of shares if the company
decides to issue shares in multiple of 50 only.

5. The following are the Extract from the Balance Sheet of a Company as at 30th June
2016:

Rs.
Sundry Asset 10,00,000

Equity and Liabilities:

Equity Share Capital (Rs.10 each) 5,00,000
Preference Share Capital (Rs. 100 each) 2,00,000
Securities Premium 10,000
Profit and Loss A/c 90,000
Other Current Liabilities 2,00,000
Total 10,00,000

Compute the minimum number of equity shares of Rs. 10 each that the company must
issue at par to redeem preference shares at a premium of 10%.

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6. The following is the summarized Balance Sheet of X Ltd. as at 31st March, 2016:
Rs.
Assets Rs.
Property, Plant and Equipment 3,45,000
Non-current Financial Investments 18,500
Bank balance 31,000

Total 3,94,500

Equity and Liabilities Rs.

Preference Share Capital (Rs. 100 each) 65,000
Equity Share Capital (Rs.50 each) 2,25,000
Profit and Loss A/c 48,000
Trade Payables 56,500
Total 3,94,500

In order to facilitate the redemption of preference shares at a premium of 10%, the

company decided:
a) To sell the investments for Rs. 15,000;
b) To finance part of redemption from company funds, subject to, leaving a bank
balance of Rs. 12,000;
c) To issue minimum of equity shares of Rs. 50 each to a premium of Rs. 10 per share
to raise the balance of funds required.
d) The company issued bonus shares from the CRR Account.

You are required to pass necessary Journal Entries to record the above transactions and
prepare the balance sheet as on completion of the above transactions.

7. The following are extracts from the Balance Sheet of ABC Ltd. as at 31st December, 2016.
Share Capital: 40,000 Equity Shares of Rs. 10 each fully paid = Rs. 4,00,000;
1,000 10% Redeemable Preference shares of Rs. 100 each fully paid = Rs. 1,00,000.
Reserves and Surplus: Capital Reserve = Rs. 50,000; Securities Premium = Rs. 50,000;
General Reserve = Rs. 75,000 and Profit and Loss Account = Rs. 35,000.
On 1st January 2017, the Board of Directors decided to redeem the preference shares at
par by utilization of reserves.
You are required to pass necessary Journal Entries in the books of the company.
8. C Ltd. had 3,000 12% Redeemable Preference Shares of Rs. 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 Rs. 10 each at par;

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(ii) 1,000 14% Debentures of Rs. 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.

Determining the amount of Fresh Issue using Algebraic Equation:

9. Determine the amount of fresh issue of shares from the following information relating
to a company:
Particulars Rs.
Redeemable Preference Share Capital 4,00,00,000
Profit and Loss Account 1,20,00,000
General Reserve 80,00,000
Securities Premium Account 30,00,000
Premium on Redemption of Preference Shares 10%
Fresh issue (F. Value Rs. 10 each) to be made at a discount of 10% to the extent
desirable for redemption of preference shares which could not otherwise be redeemed.

Preference Share Capital Redemption, Fresh Equity Issue and Balance Sheet abstract:

10. The Balance Sheet of Nilakanta Ltd. as at 1st January (beginning of a year) inter alia
includes the following:
Particulars Rs.
50,000 8% Preference shares of Rs. 100 each, Rs. 70 paid up. 35,00,000
1,00,000 Equity Shares of Rs. 100 each fully paid up 1,00,00,000
Securities Premium 5,00,000
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 a
Right Issue of 50,000 Equity Shares of Rs. 100 each at Rs. 110 per share, Rs. 20 being
payable on Application, Rs. 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 31 st Dec. (end
of the year).
The Preference Shares were redeemed after fulfilling the necessary conditions of the
Companies Act 2013. The Company decided to make the minimum utilization of
General Reserve.

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You are required to pass the necessary Journal Entries and show the relevant extracts
from the Balance Sheet as at the end of the year with the corresponding figures for the
previous year.

11. The following is the summarized Balance Sheet of Ms Nataraja Ltd. as at 31st March.
Assets Rs.
Property, Plant and Equipment 16,80,000
Cash 5,20,000

Total 22,00,000

Equity and Liabilities Rs.

80,000 8% Redeemable Preference Shares of Rs. 10 each Rs. 9 paid up 7,20,000
40,000 Equity Shares of Rs. 10 each fully paid 4,00,000
Securities Premium 1,00,000
Profit and Loss A/c 5,00,000
General Reserve 60,000
Trade Payables 4,20,000

Total 22,00,000
By the terms of their issue, the preference shares were redeemable at a premium of Re.
0.50 per share on 1st April, and it was decided to arrange for this, as far as possible, out
of the Company’s resources subject to leaving a credit balance of Rs. 24,000 in the Profit
and Loss 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%.
Show the necessary Journal Entries giving effect to the above transactions and the
Balance Sheet thereafter.

Redemption of Preference Share Capital, Fresh Issue and Transfer to CRR.

12. The following is the summarized Balance Sheet of M/S Ojaswi Ltd. as at 1st January:
Assets Rs.
Property, Plant and Equipment 8,40,000
Cash and Bank 3,00,000

Total 11,40,000

Equity and Liabilities Rs.

4,000 5% Redeemable Preference Share Capital of Rs. 10 each 4,00,000
20,000 Equity Shares of Rs. 10 each fully paid 2,00,000

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Securities Premium 50,000

Profit and Loss A/c 2,80,000
Sundry Liabilities 2,10,000
Total 11,40,000
As per the terms of issue of the Preference Shares, these were redeemable at a
premium of 5% on 1st February, and it was decided to arrange this as far as possible out
of the Company’s resources subject to leaving a balance of Rs. 50,000 in the credit of
the profit and loss account. It was also decided to raise the balance amount by issue of
17,000 Equity Shares of Rs. 10 each at a premium of Rs. 2.50 per share.

You are required to pass necessary Journal Entries and draft the balance sheet after
redemption.

13. Iswara Ltd. has an Issued Share Capital of 650 7% Redeemable Preference Shares of Rs.
100 each fully paid and 4,500 Equity Shares of Rs. 50 each fully paid. The Preference
Shares are redeemable at a premium of 7.5% on 1st April.
The following is the summarized Balance Sheet of the Company as at 31st March (i.e.
one day before redemption date):

Assets Rs.
Property, Plant and Equipment 3,45,000
Non-current Financial Investments 18,500
Balance at Bank 31,000

Total 3,94,500

Equity and Liabilities Rs.

650 7% Redeemable Preference Share Capital of Rs. 100 each fully paid 65,000
4,500 Equity Shares of Rs. 50 each fully paid 2,25,000
Profit and Loss A/c 48,000
Trade Payables 56,500

Total 3,94,500

In order to facilitate the redemption of the Preference shares, the company decided:
a) To sell all the investments for Rs. 16,000.
b) To finance part of the redemption from Company Funds, subject to leaving a balance
of Rs. 12,000 in the Profit and Loss A/c.
c) To issue sufficient Equity shares of Rs. 50 each at a premium of Rs. 13 per share, to
raise the balance of funds required.

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The preference shares were redeemed on the due date and the issue of Equity
Shares was fully subscribed.

Required:

A) Pass the necessary Journal Entries to record the above transactions, and
B) Prepare the balance sheet after completion of the above transactions.

Bonus Issue:

14. The following is the summarized Balance Sheet of Jadadhara Ltd. as at 30th June:
Assets Rs.
Property, Plant and Equipment 1,00,000
Non-current Financial Investments 21,000
Inventories 44,000
Trade Receivables 16,000
Balance at Bank 22,000

Total 2,03,000

Equity and Liabilities Rs.

3,000 6% Redeemable Preference Share Capital of Rs. 100 each fully 30,000
paid
6,000 Equity Shares of Rs. 10 each fully paid 60,000
Securities Premium 29,000
General Reserve 40,000
Profit and Loss A/c 24,500
Trade Payables 19,500

Total 2,03,000

The Company exercised its option to redeem, on 1st July, the whole of the Preference
Share Capital at a premium of 5%. To assist in financing the redemption, all the
investments were sold, realizing Rs. 19,500. On 1st July, the Company made a Bonus
Issue of seven Equity Shares fully paid up for every six Equity Shares as fully paid up held
on that date. The appropriate resolutions having been passed, the above transactions
were duly completed.
You are required to show the Journal Entries to record the transactions in the books of
the Company and the Balance Sheet, as it would appear after the completion of the
transactions.

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15. Kapali Ltd. has Equity Share Capital of Rs. 2,00,000 divided into shares of Rs. 100 each.
It also had 11% Cumulative Redeemable Preference Shares of Rs. 100 each for Rs.
1,00,000 and Rs. 50,000 and Rs. 40,000 respectively to the credit of Profit and Loss A/c
and General Reserve as on 31st March. It had also Rs. 8,000 to the credit of Securities
Premium A/c.
As per the agreement with the Preference Shareholders, the Directors decided to
redeem the shares on 1st April, at a premium of 10%. It was also decided to sell certain
investments whose book and market values on 31st March were Rs. 40,000 and Rs.
50,000 respectively, to enable the redemption.
For purposes of redemption, the board decided to utilize free reserves to the minimum
extent possible. It was decided to issue Rights Equity Shares at a premium of 20% to
finance the redemption.
After redemption, the Board decided to issue Bonus Shares to Equity Shareholders in
the ratio of 2 for 5. Holders of 100 preference shares were not traceable.
Show the necessary Journal Entries to record the above transactions in the books of the
company. Also show how the items will appear in the Balance Sheet.

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