Question

1 The preference shares are to be redeemed at 10% premium. Fresh issue of equity shares of 10 each at per is to be made to the extent required under the Companies Act for the purpose of redemption. The investments are sold for 3,00,000 itself inorder to raise cash for financing the payment. Holders of 1,000 preference shares could not be traced for payment till date. Show journal entries and also prepare the new Balance Sheet after redemption.​

Answer 1

Answer:

Explanation: As per section 80 of the Companies Act 1956, company can redeem preference shares only out of fresh issue or profits that are available for distribution as dividends. In case, there is premium to be paid on redemption it should be paid out of profit available for paying dividends or out of securities premium account.  

Amount to be paid on redemption = 2,00,000 + 20,000 ( 10% of 2,00,000)  

                                                         = 2,20,000

Amount of fresh issue = Amount to be paid on redemption - (Free reserves +                                                                                    securities premium reserve)

                                    = 2,20,000 - ( 30,000 + 20,000 + 8,000 + 50,000)

                                    = Rs-1,12,000.