Redemption of preference shares
Redemption of preference shares
Meaning
Preference shares: priority in payment of dividend and capital at the time of liquidation.
Redemption means repayment of capital
Provisions of companies Act (section 55 ) for redemption of preference shares:
Only fully paid up preference shares can be redeemed
Redemption is possible out of free reserve or new issue of shares.
If redemption is made with premium, premium on redemption of preference shares will be written off against free reserves or security premium.
If redemption is made from free reserves, amount equivalent to face value of redemption will be transferred to Capital redemption reserve.
CRR can be used for fully paid up bonus shares only.
- New issue is considered as below if reserve is short.
If bank is short while considering new issue only bank will be considered.
Journal entries:
Preference share capital a/c Dr.
To preference share holder
Preference share holder a/c Dr.
To Bank
Profit and loss account Dr.
General Reserve Account Dr.
To CRR
Bank a/c Dr.
To Equity share capital
To preference share capital
While solving above question always prepare following chart:
