In such cases the maximum amount of reserves and surplus available for

In such cases the maximum amount of reserves and

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In such cases, the maximum amount of reserves and surplus available for redemption is ascertained taking into account the balances appearing in the balance sheet before redemption and the additional information provided in the problem. For example, if balance of general reserve in the balance sheet is `1,00,000 and additional information provides that the Board of Directors have decided that the balance of general reserve should not be less than `40,000 under any circumstances, then, the maximum amount of general reserve available for redemption is `60,000.(2) After ascertaining the maximum amount of reserves and surplus available for redemption, adjustment for premium on redemption payable out of profits is made and then it is compared with the nominal value of shares to be redeemed. By comparison, one gets the minimum proceeds of fresh issue as Section 80 permits redemption either out of proceeds of fresh issue or out of divisible profits. Thus, Minimum Proceeds of Fresh Issue of shares :Nominal value of preference shares to be redeemed Maximum amount of reserve and surplus available for redemption.(3) After computation of minimum proceeds, the minimum number of shares to be issued are determined by dividing minimum proceeds by the proceeds of one share. This is done as follows:Minimum Number of Shares = Minimumproceeds to comply with Section 80Proceeds of oneshareProceeds of one share mean the par value of a share issued, if it is issued at par or premium. However, in case of issue of share at a discount, it refers to the discounted value.(4) Minimum number of shares calculated as per (3) above, needs to be adjusted due to various reasons. Firstly, shares fractions cannot be issued. Thus, if minimum number of shares as per (3) above includes a fraction, it must be approximated to the next higher figure to ensure that provisions of Section 80 are not violated. Secondly, if the examination problem states that the proceeds/number of shares should be a multiple of say, 10 or 50 or 100, then again the next higher multiple should be considered.Illustration 4The Board of Directors of a Company decide to issue minimum number of equity shares of `10 each at 10% discount to redeem `5,00,000 preference shares. The maximum amount of divisible profits available for redemption is `3,00,000. Calculate the number of shares to be issued by the company to ensure that provisions of Section 80 are not violated. Also determine the number of shares if the company decides to issue shares in multiples of `50 only.SolutionNominal value of preference shares `5,00,000 Maximum possible redemption out of profits `3,00,000Minimum proceeds of fresh issue `5,00,000 - 3,00,000 = `2,00,000© The Institute of Chartered Accountants of India
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FUNDAMENTALS OF ACCOUNTING9.73Proceed of one share = Nominal value - Discount = 10-1= `9Minimum number of shares = 2,00,0009= 22,222.22 sharesAs fractional shares are not permitted, the minimum number of shares to be issued is 22,223 shares.
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