40000 equity shares of Rs. 10 each are outstanding and the company has free reserves of Rs. 20 lakhs. Long Term debts - NIL. Shares bought @ Rs. 60 per share. What amount of Capital Redemption Reserve required to be created?
Answers
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.