Journal Entries for Redemption of Preference Shares
Comprehensive Guide to Recording Redemption and Equity Issuance Transactions
Highlights
- Redemption Transaction: Recognition of the preference share capital and redemption premium to determine the total liability.
- Equity Share Issuance: Issuance of fully subscribed equity shares to raise funds for the redemption process.
- Reserves and Adjustments: Appropriate transfers to Capital Redemption Reserve and the treatment of premium on redemption.
Background and Key Details
Bombay Ltd had 4,000 fully paid-up 8% redeemable preference shares of ₹100 each, amounting to ₹4,00,000 in Preference Share Capital as of 30th June 2020. In addition, the Profit and Loss Account held a balance of ₹1,00,000 and the Capital Reserve had ₹20,000.
On 1st July 2020, these preference shares were redeemed at a premium of ₹5 per share. To fund this redemption, the company issued equity shares of ₹10 each, which were fully subscribed and allotted. Therefore, the total cash required for redemption is computed as follows:
Total Redemption Amount = Preference Share Capital + Redemption Premium, where:
- Preference Share Capital = 4,000 × ₹100 = ₹4,00,000
- Premium on Redemption = 4,000 × ₹5 = ₹20,000
- Total Amount = ₹4,00,000 + ₹20,000 = ₹4,20,000
Given that each equity share is issued at ₹10 each, the number of equity shares required is:
Number of Equity Shares = ₹4,20,000 / ₹10 = 42,000 Shares
Step-by-Step Journal Entries
The accounting treatment involves a series of journal entries that capture the redemption transaction, the issue of equity shares, and subsequent reserve adjustments. Below are the essential journal entries integrated into a comprehensive framework:
I. Recording the Redemption of Preference Shares
Journal Entry for Redemption
The redemption transaction involves writing off the liability of the preference shares by debiting the appropriate capital accounts and charging the premium on redemption. This entry specifically recognizes:
| Account | Debit (₹) | Credit (₹) | Description |
|---|---|---|---|
| Preference Share Capital A/c | 4,00,000 | To remove the nominal value of the redeemed preference shares | |
| Premium on Redemption A/c | 20,000 | To record the premium of ₹5 per share on 4,000 shares | |
| Preference Shareholders A/c | 4,20,000 | Total redemption liability (Capital + Premium) |
Narration: Being the redemption of 4,000, 8% preference shares at a premium of ₹5 per share.
II. Recording the Issue of Equity Shares
Journal Entry for Equity Issuance
To raise the requisite funds for redemption, the company issued 42,000 equity shares of ₹10 each. The following entry records the receipt of cash and recognizes the increase in Equity Share Capital.
| Account | Debit (₹) | Credit (₹) | Description |
|---|---|---|---|
| Bank A/c | 4,20,000 | Amount received from issuance of 42,000 equity shares | |
| Equity Share Capital A/c | 4,20,000 | To record issuance of fully subscribed equity shares at ₹10 each |
Narration: Being the receipt of cash against the issue of 42,000 fully subscribed equity shares of ₹10 each, issued for redeeming preference shares.
III. Adjustments for Creating Capital Redemption Reserve
Transfer from Profit and Loss Account to Capital Redemption Reserve
As per the Companies Act, when redeeming preference shares out of profits, it is necessary to transfer an amount equivalent to the face value of the redeemed shares from the Profit and Loss Account into the Capital Redemption Reserve. Given the available balance of ₹1,00,000 in the Profit and Loss Account, the required entry is:
| Account | Debit (₹) | Credit (₹) | Description |
|---|---|---|---|
| Profit and Loss A/c | 4,00,000 | To transfer the face value of redeemed shares | |
| Capital Redemption Reserve A/c | 4,00,000 | Amount transferred as per statutory requirements |
Narration: Being the transfer of an equivalent amount of the preference share capital from the Profit and Loss A/c to the Capital Redemption Reserve.
Transfer from Capital Reserve to Capital Redemption Reserve
Additionally, the Capital Reserve balance of ₹20,000 is also transferred to the Capital Redemption Reserve, since it forms part of the equity that cannot be distributed as dividends after redemption:
| Account | Debit (₹) | Credit (₹) | Description |
|---|---|---|---|
| Capital Reserve A/c | 20,000 | Reduction in Capital Reserve due to transfer | |
| Capital Redemption Reserve A/c | 20,000 | Transfer of available Capital Reserve to CRR |
Narration: Being the transfer of the existing Capital Reserve to the Capital Redemption Reserve.
Integrated Overview Table
The following table offers an at-a-glance overview of the transactions and corresponding journal entries:
| Transaction | Debit (₹) | Credit (₹) | Key Accounts Involved |
|---|---|---|---|
| Redemption of Preference Shares | Preference Share Capital: 4,00,000 Premium on Redemption: 20,000 |
Preference Shareholders: 4,20,000 | Preference Share Capital, Premium on Redemption, Preference Shareholders |
| Issuance of Equity Shares | Bank: 4,20,000 | Equity Share Capital: 4,20,000 | Bank, Equity Share Capital |
| Transfer from Profit and Loss to CRR | Profit and Loss: 4,00,000 | Capital Redemption Reserve: 4,00,000 | Profit and Loss, Capital Redemption Reserve |
| Transfer from Capital Reserve to CRR | Capital Reserve: 20,000 | Capital Redemption Reserve: 20,000 | Capital Reserve, Capital Redemption Reserve |
References
- Journal Entries of Redemption - SV Tuition
-
Redemption of Preference Shares - Your Article Library
- Redemption of Preference Shares Problem and Solutions - Finance Strategists
- Redemption Liability Transaction Explained - Gridlex
- Redemption of Preference Share - SlideShare
Recommended Further Queries
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Last updated March 21, 2025