Redemption of preference share

Redemption of preference share

1. Accounting for Preference Shares Presented by: Harshit Garg Assistant Professor IBM (UG) BCCC0011: Company accounts and Practices 1

2. Preference Shares P reference share capital as that part of the share capital of a company which fulfills both the following conditions namely: (i) It carries a preferential right in respect of the dividend s; (ii) It carries preferential right in regard to the repayment of capital . The preference shareholders are entitled to receive the fixed rate of dividend out of the net profits of the company. The limitation of the preference shares is that it does not carry voting rights. BCCC0011: Company accounts and Practices 2

3. 1) Cumulative Preference Share In case where a company does not declare dividends for a particular year, they are carried to next year. They are treated as arrears . And a preference share is said to be cumulative in a case when the arrears pertaining to dividend are cumulative in nature and such arrears are cleared before any dividend payment to equity shareholders. BCCC0011: Company accounts and Practices 3

4. 2) Non- Cumulative Preference shares: As the name suggests, it does not accumulate dividends. Dividend skipped by the company are not paid, which means they have the right to avail dividend from the profits earned from that particular year . Notably , dividends are only payable from net profits of each year. So, in case where there are no profits for a particular year, the arrears of dividend cannot be claimed in subsequent years. BCCC0011: Company accounts and Practices 4

5. 3) Redeemable Preference shares: These are shares which can be redeemed or repaid after the fixed period as issued by the company or even before at the option of the company. BCCC0011: Company accounts and Practices 5

6. 4) Non-redeemable These shares cannot be redeemed during the life of the company. BCCC0011: Company accounts and Practices 6

7. 5) Convertible Shares Shares can be converted into equity at the option of the holder after the stated tenure. BCCC0011: Company accounts and Practices 7

8. 6) Non-convertible shares Shares which cannot be converted to equity are called non convertible BCCC0011: Company accounts and Practices 8

9. 7) Participating shares Such shares have the right to participate in surplus profits of the company at the time of liquidation after the company had paid to other holders. BCCC0011: Company accounts and Practices 9

10. 8) Non-participating Preference Shares Preference shares, which have no right to participate in the surplus profits or in any surplus on liquidation of the company, are called non-participating preference shares. BCCC0011: Company accounts and Practices 10

11. Redemption of Preference Shares Redemption of preference shares means returning the preference share capital to the preference shareholders either at a fixed date or after a certain time period during the life time of the company provided company must complied certain conditions . Preference shares cannot be redeemed unless they are fully paid up. In other words partly paid-up shares cannot be redeemed . BCCC0011: Company accounts and Practices 11

12. Preference shares can be redeemed either out of profits which would be available for dividend or out of the proceeds of a fresh issue of shares made with the object of redemption. These shares cannot be redeemed out of the proceeds of fresh issue of debentures or out of the sale proceeds of any property of the company When Preference shares are redeemed out of profits available for distribution as dividend, a sum equal to the nominal amount of the shares so redeemed must be transferred out of profits to a reserve account to be called ‘Capital Redemption Reserve Account’. Such reserve can be used for issuing fully paid bonus shares to the shareholders. Redemption of Preference Shares BCCC0011: Company accounts and Practices 12

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14. REDEMPTION OUT OF PROFITS OF THE COMPANY : The expression “ out of the profits of the company which would otherwise be available for dividend means”  that a company may use its accumulated profit for redemption of preference shares. So, any account in which profits earned by the company is kept may be used; but security premium account, capital redemption reserve, capital reserve and debenture redemption reserve, etc. which are not available for distribution by way of dividend cannot be used.  However the companies proposing to redeem out of its profits are required to keep a sum equal to the nominal amount of the share to be redeemed, to a reserve known as Capital Redemption Reserve Account. BCCC0011: Company accounts and Practices 14

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16. Redemption out of the profits When a company decides to redeem the redeemable preference shares out of the profits that are otherwise available for paying dividends, it needs to create the Capital Redemption Reserve A/c. The amount in the Capital Redemption Reserve is equal to the nominal value of the redeemable preference shares. The company has to transfer the profits available for dividends to the CRR. BCCC0011: Company accounts and Practices 16

17. 1. Transfer of profits to the CRR A/c General Reserve A/c Dr. Profit & Loss Appropriation A/c Dr. Dividend Equalization A/c Dr. To Capital Redemption Reserve A/c (Being transfer of profits from general reserve or P&L Appropriation A/c or Dividend Equalization A/c of an amount equal to the nominal value of the redeemable preference shares to the Capital Redemption Reserve A/c) BCCC0011: Company accounts and Practices 17

18. 2. When current assets are sold to provide cash for redemption Bank A/c Dr. To Asset A/c (Being sale proceeds of the  asset ) 3. Transfer of the redeemable preference share capital to shareholders A/c Redeemable Preference Share Capital A/c Dr. To Preference Shareholders A/c (Being the nominal value of the shares to be redeemed transferred to the shareholders A/c) BCCC0011: Company accounts and Practices 18

19. 4. On redemption at Premium Redeemable Preference Share Capital A/c Dr. Premium on Redemption of Preference Shares A/c (premium amt.) Dr. To Preference Shareholders A/c (Being the nominal value and redemption premium on the shares to be redeemed transferred to the shareholders A/c) 5. For providing Redemption Premium Securities Premium A/c Dr. Profit and Loss A/c Dr. To Premium on Redemption of Preference Shares A/c (Being premium on redemption provided for) 6. On redemption of preference shares Preference Shareholders A/c Dr. To Bank A/c (Being preference shares redeemed) BCCC0011: Company accounts and Practices 19

20. Redemption out of the proceeds from a fresh issue A company may redeem the redeemable preference shares out of the proceeds from a fresh issue of shares. In this case, firstly the company needs to pass the entries regarding the fresh issue and then that regarding the redemption. Thus, in this case, the new Equity or Preference Share Capital A/c shall be equal to the nominal value of the Redeemable Preference Shares. BCCC0011: Company accounts and Practices 20

21. Redemption partly out of the profits and partly out of the proceeds from a fresh issue In the above situation, the Redeemable Preference Share Capital is equal to the amount in Capital Redemption Reserve A/c and the new Share Capital A/c. BCCC0011: Company accounts and Practices 21

22. Question -1 Sony Ltd. Co. issued 10000, 8% redeemable preference shares of ₹100 each on 1 January 2008. The shares are redeemable at a premium of 10%.  The shares are now due for redemption. The company decides to redeem the preference shares out of the General Reserves and write off the premium payable on redemption out of the Securities Premium A/c. Show the necessary journal entries. BCCC0011: Company accounts and Practices 22

23. 1. General Reserve A/c Dr. 1000000 To Capital Redemption Reserve A/c 1000000 (Being transfer of profits from a general reserve of an amount equal to the nominal value of the 8% redeemable preference shares to the Capital Redemption Reserve A/c) 2. 8% Redeemable Preference Share Capital A/c Dr. 1000000 A premium on Redemption of Preference Shares A/c (premium amt.) Dr. 100000 To 8% Preference Shareholders A/c 1100000 (Being the nominal value and redemption premium @ 10% on the shares to be redeemed transferred to the shareholders A/c) 3. Securities Premium A/c Dr. 100000 To Premium on Redemption of Preference Shares A/c 100000 (Being premium on redemption written off) 4. 8% Preference Shareholders A/c Dr. 1100000 To Bank A/c 1100000 (Being preference shares redeemed BCCC0011: Company accounts and Practices 23

24. Hinduja Company Ltd. had 5,000 8%Redeemable Preference Shares of Rs . 100each, fully paid up. The company decided toredeem these preference shares at par by theissue of sufficient number of equity shares ofRs . 10 each fully up at par. You are required topass necessary Journal Entries including cashtransactions in the books of the company. BCCC0011: Company accounts and Practices 24

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27. Applications of Securities premium account (Section 52) a . Towards issue of fully paid bonus shares b . To write off preliminary expenses c . To write off the expenses or, or commission paid, or discount allowed on any of the securities or debentures d . To provide for premium on the redemption of redeemable preference shares or debentures of the company e . For the purchase of its own shares or other securities. BCCC0011: Company accounts and Practices 27

28. Capital Redemption Reserve Account     When the company proposes to redeem the preference shares out of the profits, it transfers an amount equal to the nominal value of the redeemable preference shares to the Capital Redemption Reserve A/c out of the profits of the company. BCCC0011: Company accounts and Practices 28

29. Premium on Redemption of Preference Shares it shall provide the premium on redemption out of the profits or out of the securities premium account of the company . BCCC0011: Company accounts and Practices 29

30. Note: 1 . Only fully paid up preference shared can be redeemed . 2. Redemption does not result in reduction in capital. 3 . Capital Redemption Reserve shall be created from the profits of the company to the extent of nominal value of the preference shares redeemed 4. Capital Redemption Reserve can be utilized to issuance of fully paid up bonus shares only. BCCC0011: Company accounts and Practices 30