In this article we will discuss about the accounting entries for capital redemption reserve, explained with the help of suitable illustrations.
Accounting Entries for Capital Redemption Reserve:
Minimum Fresh Issue of Shares:
Sometimes, the use of mathematical equation becomes necessary to find out the number of new shares to be issued. At the time of redemption of preference shares, some companies may decide to utilize all the permissible reserves for the redemption and make minimum new shares for any deficit amount needed. The intention is to minimise the new issue of shares.
Such minimum new issue may be made:
(a) At par or
(b) At a premium or
(c) At a discount.
Illustration 1 (Redemption partly out of fresh issue):
Oswal Ltd. show the following Balances of its ledger accounts:
The company Redeems its Redeemable preference shares by issue of equity shares of Rs. 10 each. Fresh issue of shares is made in lots of 100 shares for such amount as is necessary after utilizing the available source to the maximum extent.
(i) Number of fresh shares issued.
(ii) Amount transferred to Capital Redemption Reserve and pass Journal Entry for Transfer.
As shares can be issued only in lots of 100 only so the total number of shares to be issued must be 36,300 with the total proceeds of Rs. 3,63,000
Illustration 2 (Redemption, partly out of profit and partly out of fresh issue):
A Limited Company issued on 1st July 2000, 10,000 redeemable preference shares of Rs 10 each. Such shares were redeemable at a premium of 10%. Two fifths of this issue was redeemed out of profits on 10th January 2004.
On 20th January 2004, the Company issued 20,000 equity shares of Rs 10 each at a premium of Rs 4 per share. Out of the proceeds of such issue, the balance of Redeemable Preference Shares were redeemed.
Make journal entries to record these transactions in the books of the company.
Illustration 3 (Redemption out of profits at a premium):
The following is the Balance Sheet of a Limited Co. as on 31-3-2006:
The company resolved to redeem its preference shares at a premium of 2% out of profits. Pass the necessary journal entries, show important ledger accounts and the company’s Balance Sheet after redemption.
Illustration 4 (Redemption of shares at premium, partly out of profits and partly out of fresh issue):
X and Company issued 50,000 Equity Shares of Rs 10 each and 3,000 Redeemable Preference Shares of Rs 100 each, all shares being fully called and paid up. On 31st March 2004, Profit and Loss Account showed an undistributed profit of Rs 50,000 and General Reserve Account stood at Rs 1,20,000.
On 2nd April 2004 the directors decided to issue 1,500 6% Preference Shares of Rs 100 each for cash and to redeem the existing Preference Shares at Rs 105 utilising as much profits as would be required for the purpose.
Show the journal entries to record these transactions. Prepare also a summarised Balance Sheet showing the position of the Company on completion of the redemption. On 31st March 2004 the cash balance amounted to Rs 1,85,000 and Sundry Creditors stood at Rs 87,000.
Illustration 5 (Redemption by fresh issue of shares at a discount):
The Balance Sheet of a company showed the following position:
The company decided to redeem its fully paid 8% Redeemable Preference at a premium of 10%. For purposes of redemption, the company issued 1,000 Equity Shares of Rs. 100 each at a discount of 10%, and sold Investments for Rs. 4,90,000. The Capital Redemption appearing in the Balance Sheet pertains to redemption of redeemable preference shares in the past. Assuming that the company’s decision is given effects, journalise the transactions in the books of the company and prepare its Balance Sheet immediately after redemption.