REDEMPTION OF

PREFERENCE SHARES
CA ANIL NAIK
ASSOCIATE PROF. V. G. VAZE COLLEGE, KELKAR EDUCATION TRUST,
MULUND, MUMBAI
Introduction to Company

 Difference between Company & Firms wrt Capital

 Types of Share capital- AISCP
 Classification of Shares- Equity & Preference
 Difference between Share capital & Borrowings
 Features of Share capital

V. G. VAZE COLLEGE, KET, MUMBAI 2

INTRODUCTION

 Redemption means Repayment

 Preference shares are always redeemable.
 Company cannot issue irredeemable preference shares
 For the purpose of redemption of preference shares the company has
to satisfy certain conditions laid down under the companies Act.
 In this topic only journal entries are asked which are based on the
conditions to be satisfied. So those conditions should be very clearly
understood.

V. G. VAZE COLLEGE, KET, MUMBAI 3

Conditions to be satisfied for
Redemption of Preference shares
1. Preference shares should be fully paid up before redemption. In
other words partly paid up preference shares cannot be redeemed.
2. If preference shares are partly paid up, company has to call up the
un called balance amount, recover the money , make it fully paid up
and then proceed for redemption. If in this process any shareholder
does not pay the call money then his shares are to be forfeited
( cancelled) and the balance shares therefore will be fully paid up
and those can be redeemed.
3. Preference shares can be redeemed at par or at premium. It cannot
be redeemed at discount.

V. G. VAZE COLLEGE, KET, MUMBAI 4

 Conditions…cont.d
4. There are two sources of funds permissible for redemption:
 Divisible profits….and/ or
 Fresh issue of equity shares or preference shares
Divisible profits means those profits that can be used for payment of dividend,
that means realized revenue profits examples- General Reserve, Profit & loss
credit balance etc
Examples of non divisible profits are Capital reserve, securities premium,
revaluation reserve, sinking fund etc
Fresh issue of shares , the amount that can be used is only to the extent of the
face value received, in other words if the fresh issue is at premium then the
premium collected cannot be used of repayment of face value of preference
share capital.

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 Conditions…cont.d
5. If Divisible profits are utilized for redemption of
preference shares then a special reserve to be created which
is called as CAPITAL REDEMPTION RESERVE. This reserve can
be used for issue of Bonus shares to the equity shareholders.
6. If preference shares are redeemed at premium then the
amount of premium to be paid on redemption can be used
from any of the following source:
 Securities premium
 Divisible profits
In this case capital redemption reserve is not be created

V. G. VAZE COLLEGE, KET, MUMBAI 6

 JOURNAL ENTRIES
1. FINAL CALL MADE ON PREFERNCE SHARES
Pref share Final call money A/C………DR.
To Pref share capital A/c………………….CR.
2. CALL MONEY RECD EXCEPT ON CERTAIN SHARES
Bank A/c………………………………………..DR.
Call – in – Arrears A/c …………………….DR.
To Pref share Final call money A/C ….CR.
3. SHARE FORFEITURE
Pref share capital A/c …………………..DR
To Call – in – Arrears A/c ……………..….CR.
To Share Forfeiture ……………………..….CR.

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 JOURNAL ENTRIES
4.TRANSFER OF SHARE FORFEITURE TO CAPITAL RESERVE
Share Forfeiture A/c ………………...Dr.
To Capital Reserve…………………....Cr.
5. REDEMPTION AT PREMIUM
Preference share capital A/c…………Dr.
Premium on Redemptionn A/c …….Dr.
To Pref. Shareholders A/c……………Cr.
6. SALE OF INVESTMENTS
Bank A/c………………….………………….Dr.
Profit & Loss A/c ( if loss )……….....Dr.
To Investments A/c………………………Cr.

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 JOURNAL ENTRIES
6. SALE OF INVESTMENTS
Bank A/c………………….………………….Dr.
To Profit & Loss A/c ( if profit )……Cr.
To Investments A/c………………………Cr.
7. UTILSATION OF DIVISIBLE PROFITS
General Reserve A/c…………………….Dr.
Profit & Loss A/c …………….……………Dr.
To Capital Redemption Reserve………Cr.
8. FRESH ISSUE OF SHARES FOR REDEMPTION
Bank A/c ……………………………………Dr
To Equity Share Capital…………………Cr.
To Securities Premium…………………Cr.

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 JOURNAL ENTRIES
9. Utilization of securities premium for premium on redemption
Securities Premium A/c………………Dr.
To Premium on Redemption……………Cr.
10. Payment to preference share holders
Preference share holders A/c ……….Dr.
To Bank ………………………………………….Cr.

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THANK YOU
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