# Redemption of Preference Shares Problems and Solutions 2023 Exam [BCOM 2nd Sem CBCS Pattern]

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## Redemption of Preference Shares Problems and Solutions

1. (2018) Following are the Ledger balances of X Ltd. As on 31st March, 2018:

Ledger balances as on 31st March, 2018

 Credit balances Rs. Debit balances Rs. Share Capital: 10000 Equity Shares of Rs. 100 each fully paid 4000, 6% Redeemable Preference Shares of Rs. 100 each fully paid Profit and Loss A/c General Reserve Securities Premium Creditors 10,00,000 4,00,000 20,000 4,40,000 20,000 1,00,000 Sundry Assets Bank Balance 12,20,000 7,60,000 19,80,000 19,80,000

On the above mentioned date, the company redeemed the preference shares at a premium of 5%. Show the Journal Entries and Prepare the Amended Balance Sheet.Â  Â  Â  Â  8+4=12

Journal Entries

In the Books of X Ltd.

 Date Particulars L/F Amount Dr. Amount Cr. 6% Redeemable Preference Share Capital A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Premium on redemption A/c (3,00,000 x 5%)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Dr. Â Â Â Â Â  To Preference Shareholders A/c (Being the Preference Share due for redemption at a premium of 5%.) 4,00,000 20,000 – – 4,20,000 Profit and Loss Account A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. General Reserve A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â  To Capital Redemption Reserve A/c (Being the amount of preference share capital redeemed out of profit is transferred to CRR.) 20,000 3,80,000 – – 4,00,000 Securities Premium Reserve A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Premium on redemption A/c (Being the premium on redemption adjusted with securities premium.) 20,000 – 20,000 Preference Shareholders A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â  To Bank A/c (Being the final payment made to Preference shareholders.) 4,20,000 – 4,20,000

Balance Sheet of X Ltd

 Particulars Amount (Rs.) I. Equity & Liabilities: A) Shareholderâ€™s Fund 1) Share Capital: 10,000 Equity shares of Rs.100 each 2) Reserve & Surplus: General Reserve (4,40,000 â€“ 3,80,000) Capital Redemption reserve B) Non-Current Liabilities C) Current Liabilities: Trade Payable (Creditors) – – 10,00,000 – 60,000 4,00,000 Nil – 1,00,000 Total (A+B+C) 15,60,000 II. Assets: A) Non-Current Assets Fixed Assets: Tangible (Sundry Assets) B) Current Assets: Cash and cash equivalents (7,60,000 â€“ 4,20,000) – – – 12,20,000 – 3,40000 Total (A+B) 15,40,000

2. (2017) Ledger balances of Kaveri Ltd. as at 31st March, 2016 were as follows:

 Credit Balances Rs. Debit Balances Rs. Share Capital: Equity Shares of Rs. 100 each, fully paid 7% Redeemable Preference Security Premium Reserve Capital Reserve Revenue Reserve 6% Debentures Creditors 5,00,000 3,00,000 50,000 1,00,000 2,00,000 3,00,000 1,50,000 Fixed Assets Investments Cash Other Current Assets 8,00,000 1,00,000 2,00,000 5,00,000 16,00,000 16,00,000

Both the redeemable preference shares and debentures were due for redemption on 1st April, 2016. Kaveri Ltd. took the following steps in this respect:

– It issued 2000 Equity shares of Rs. 100 each at a premium of 10%, the shares were fully subscribed and paid for.

– It sold the investments for Rs. 90,000.

– It arranged a bank loan to the extent necessary.

The redemption was fully carried out. Give Journal Entries to record the above and prepare the Balance Sheet of the company immediately afterwards.

Journal Entries

In the books of Kaveri Ltd.

 Date Particulars L/F Amount Dr. Amount Cr. (i) Bank A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Revenue Reserve A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â  To Investment A/c (Being the investments sold and loss debited to revenue reserve account) 90,000 10,000 – – 1,00,000 (ii) 7% Redeemable Preference Share Capital A/cÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Dr. Â Â Â Â Â  To Preference Shareholders A/c (Being the amount payable on redemption of preference share capital transferred to preference shareholders account) 3,00,000 – 3,00,000 (iii) 6% Debenture holders A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Debenture Holders A/c (Being the amount payable on redemption of debentures transferred to debenture holders account) 3,00,000 – 3,00,000 (iv) Bank A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Equity Share Capital A/c Â Â Â Â Â  To Securities Premium A/c (Being the 2,000 equity shares of Rs. 100 each issued at a premium of 10% for the purpose of redemption) 2,20,000 – 2,00,000 20,000 (v) Revenue reserve A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. To Capital Redemption Reserve A/c (Being the amount transferred out of profits to CRR equal to nominal value of shares redeemed otherwise than out of proceeds of fresh issue) 1,00,000 – 1,00,000 (vi) Bank A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â  To Bank Loan A/c (Being the loan raised from Bank for redemption.) 90,000 – 90,000 (vii) Preference Shareholders A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Debenture holders A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â  To Bank A/c (Being the final payment made to the preference shareholders and debenture holders) 3,00,000 3,00,000 – – 6,00,000

Balance Sheet of KAVERI Ltd

 Particulars Amount (Rs.) I. Equity & Liabilities: A) Shareholderâ€™s Fund 1) Share Capital: 7,000 Equity shares of Rs.100 each 2) Reserve & Surplus: Capital Reserve Revenue Reserve (2,00,000 â€“ 1,00,000 â€“ 10,000) Capital Redemption reserve Securities Premium Reserve B) Non-Current Liabilities Long Term Borrowings (Bank Loan) C) Current Liabilities: Trade Payable (Creditors) – – 7,00,000 – 1,00,000 90,000 1,00,000 70,000 – 90,000 – 1,50,000 Total (A+B+C) 13,00,000 II. Assets: A) Non-Current Assets Fixed Assets: Tangible Investment B) Current Assets: Cash and cash equivalents (Refer working note) Other Current Assets – – 8,00,000 Nil – Nil 5,00,000 Total (A+B) 13,00,000

Cash A/c

 Particulars Amount Particulars Amount To Balance b/d To Equity Share Capital To Securities Premium To Investment A/c To Bank Loan A/c 2,00,000 2,00,000 20,000 90,000 90,000 By Preference Shareholders By Debenture Holders A/c 3,00,000 3,00,000 6,00,000 6,00,000

3. (2016) The Balance Sheet of J. K. Ltd. as on 31st March, 2016 is given below:

 Liabilities Amount Assets Amount 9% Redeemable Preference Shares of Rs. 100each fully paid-up Equity Shares of Rs. 5 each fully paid-up General Reserve Profit & Loss A/c Sundry Creditors Â  6,50,000 2,25,000 1,00,000 2,60,000 57,500 Sundry Assets Investments Cash at Bank 9,50,000 2,75,000 67,500 Â Â 12,92,500 Â 12,92,500

The Preference Shares are to be redeemed on 1st April, 2016 at a premium of 7 Â½ %. In order to facilitate redemption, the company had decided the following:

– To sell the investments for Rs. 2,60,000.

– To finance a part of the redemption from the companyâ€™s Reserve Fund.

– To issue sufficient equity shares at a premium of Rs. 1 per share to raise the balance of the fund required.

– Minimum bank balance to be retained at Rs. 10,500. The investments were sold, the equity shares were fully subscribed and the preference shares were dully redeemed. Show the Journal Entries and prepare the balance sheet after redemption.Â  Â  Â  Â  7+5=12

Journal Entries

In the Books of J.K. Ltd

 Date Particulars L/F Amount Amount Â Bank A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Surplus A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Investment A/c (Being the investment sold at Rs. 2,60,000 and loss debited to P/L A/c.) Â 2,60,000 15,000 Â  Â  2,75,000 Â 9% Redeemable preference Share Capital A/cÂ  Â  Â  Â  Â  Dr. Premium on redemption A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Preference Shareholders A/c (Being the preference share capital due for redemption at a premium of 7.5%) Â 6,50,000 48,750 Â  Â  6,98,750 Â Bank A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Equity share capital A/c Â Â Â Â Â  To Securities Premium A/c (Being the 63,625 shares issued @ Rs. 6 including securities premium of Rs. 1 per share) Â 3,81,750 Â  3,18,125 63,625 Â General Reserve A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Surplus A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â  To Capital Redemption Reserve A/c (Being the amount of preference share capital redeemed out of profit transferred to Capital Redemption Reserve.) Â 1,00,000 2,31,875 Â  Â  3,31,875 Â Securities Premium A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â  To Premium on redemption A/c (Being the premium payable on redemption of Preference share charged to securities premium.) Â 48,750 Â  48,750 Â Preference shareholders A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â  To Bank A/c (Being the final payment made to preference shareholders.) Â 9,45,000 Â  9,45,000

Balance Sheet of JK Ltd

 Particulars Amount I. Equity & Liabilities: A) Shareholderâ€™s Fund 1) Share Capital: Equity shares of Rs.5 each 2) Reserve & Surplus: Surplus Capital Redemption reserve Securities Premium Reserve B) Non-Current Liabilities C) Current Liabilities: Trade Payable (Creditors) – – 5,43,125 – 13,125 3,31,875 14,875 Nil – 57,500 Total (A+B+C) 9,60,500 II. Assets: A) Non-Current Assets Fixed Assets: Tangible (Sundry Assets) B) Current Assets: Cash and cash equivalents (7,60,000 â€“ 4,20,000) – – – 9,50,000 – 10,500 Total (A+B) 9,60,500

Cash A/c

 Particulars Amount Particulars Amount To Balance b/d To Investment A/c To Equity Share Capital To Securities Premium 67,500 2,60,000 3,18,125 63,625 By preference shareholders A/c Â Â Â Â  (6,50,000 + 48,750) By balance c/d 6,98,750 Â  10,500 Â 7,09,250 Â 7,09,250

4. (2016) A limited company has an accumulated reserve of Rs.500000. It was decided to declare bonus of Rs. 300000 out of its reserve. The bonus is too utilized as:

(1)100000 to make the existing 25000 shares of Rs. 10 each fully paid of which Rs. 6 per share called and paid.

(2)200000 by issuing 5000 bonus shares at Rs. 25 each at a premium of Rs. 15 per shares to the existing shareholders. Pass the Journal Entries in the book of the company recording the above transactions.

Journal Entries

In the books of the company

 Particulars L/F Amount Amount Equity share 1st& final call A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. To Equity Share Capital A/c (Being the equity share 1st& final call money due on 25,000 equity shares @ Rs. 4 each.) 1,00,000 – 1,00,000 Accumulated Reserves A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â Â Â Â Â  To Bonus to Shareholders A/c (Being the bonus dividend payable on 25,000 shares @ Rs.4 each to make partly paid share fully paid) 1,00,000 – 1,00,000 Bonus to shareholders A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â Â Â Â Â Â  To Equity share 1st& final call A/c (Being the bonus utilised towards payment of final call on 25,000 shares @ Rs.4 each) 1,00,000 – 1,00,000 Accumulated Reserve A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Bonus to Shareholders A/c (Being the 5000 bonus share issued to equity shareholders @ Rs.25 per share) 1,25,000 – 1,25,000 Bonus to Shareholders A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Equity share capital A/c Â Â Â Â Â Â  To Securities Premium Reserve A/cÂ  (Being the bonus share transferred to equity share capital A/c) 1,25,000 – 50,000 75,000

5. (2007) A Limited company has authorized equity capital of Rs. 20 Lakhs divided into shares of Rs. 100 each. The paid-up capital was Rs. 1250000. Besides, the company had 9% Redeemable cumulative shares of Rs. 10 each for Rs. 250000, the balance on the other account were

Securities premium Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Rs. 18,00,000

Profit and loss account Â Â Â Â Â Â Â Â Â Â Â  Rs. 72,000Â Â Â Â Â Â

General reserveÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Rs. 3,40,000

Included in sundry assets were investments of the face value of Rs. 30000 carried in the books at a cost of Rs. 34000. The company decided to redeem cumulative preference shares at a premium of 10% partly by the issue of equity shares of the face value of Rs. 120000 at a premium of 10%. Investments were sold 105% of the face value. All preference share-holders were paid off except 3 shareholders holding 250 shares. After redemption of cumulative pref. shares, fully paid bonus shares were issued in the ratio of 1:4. Pass the journal entries for the above transaction.

Journal Entries.

 Date Particulars L/F Amount Dr. Amount Cr. Bonus A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Surplus A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Investment A/c (Being the investment sold at Rs. 31,500 and loss debited to surplus A/c.) 31,500 2,500 – – 34,000 9% Redeemable Cumulative Preference Share Capital a/cÂ  Â  Â Dr. Premium on redemption A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. Â Â Â Â Â  To Preference Share Capital A/c (Being the preference share capital due for redemption at a premium of 10%) 2,50,000 25,000 – – 2,75,000 Bank A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Equity Share Capital A/c Â Â Â Â Â  To Securities Premium A/c (Being the shares issued @ Rs. 10 including securities premium of 10%) 1,32,000 – 1,20,000 12,000 Surplus A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â Dr. General Reserve A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Capital Redemption Reserve A/c (Being the amount of preference share capital redeemed out of profit transferred to Capital Redemption Reserve.) 69,500 60,500 – – 1,30,000 Securities Premium A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Premium on redemption A/c (Being the premium payable on redemption of Preference share charged to securities premium.) 25,000 – 25,000 Preference Shareholders A/c (2,75,000 â€“ 2,750)Â  Â  Â  Dr. Â Â Â Â Â  To Bank A/c (Being the final payment made to all preference shareholders except 3 shareholders holding 250 shares) 2,72,250 – 2,72,250 Capital Redemption Reserve A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Securities Premium A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. General Reserve A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Bonus to Shareholders a/c (Being the fully paid bonus share issued to the existing equity shareholders @ Rs.10 per share) 1,30,000 5,000 2,07,500 – – – 3,42,500 Bonus to Shareholders A/cÂ  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Â  Dr. Â Â Â Â Â  To Equity Share Capital A/c (Being the bonus share transferred to equity share capital A/c) 3,42,500 – 3,42,500

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