Question

The following balances appear in the ledger of a company as on 30-6-2019.

Equity shares (fully paid up) Rs.6,00,000

Redeemable preference shares (fully paid up) Rs.3,00,000

General reserve Rs.2,00,000

Profit and loss A/c (Cr.balance) Rs.1,25,000

Securities premium account Rs.50,000

The company decided to redeem the preference shares at a premium of 10% out

of its general reserve and undistributed profits. Give journal relating to redemption of the

preference shares.​

Answer 1

Answer:

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.