c When the liquidity position of the company is not good enough 512 Advantages

C when the liquidity position of the company is not

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(c) When the liquidity position of the company is not good enough.5.1.2 Advantages of redemption of preference shares by issue of fresh equity sharesFollowing are the advantages of redemption of preference shares by the issue of fresh equity shares:(1) No cash outflow of money – now or later.(2) New equity shares may be valued at a premium.(3) No capital gains tax for shareholders.(4) Shareholders retain their equity interest.5.1.3 Disadvantages of redemption of preference shares by issue of fresh equity sharesThe disadvantages are:(1) There is a possibility of dilution of further earnings;(2) Share holdings in the company are changed.5.1.4 Accounting Entries1. When new shares are issued at par Bank Account Dr.To Share Capital Account(Being the issue of …….shares of `……each for thepurpose of redemption of preference shares, as per Board’s Resolution No…… dated……. ) .2. When new shares are issued at a premiumBank Account Dr.To Share Capital AccountTo Securities Premium Account(Being the issue of ……..shares of `……each at a premium of `……each for the purpose of redemption of preference shares as per Board’s Resolution No….. dated……) © The Institute of Chartered Accountants of India
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FUNDAMENTALS OF ACCOUNTING9.693. When new shares are issued at a discountBank Account Dr.Discount on Issue of Shares Account Dr.To Share Capital Account(Being the issue of ……..shares of `…….each at a discount of `……..each for the purpose of redemption of preferenceshares, as per Board’s Resolution No…….dated…….) 4. When preference shares are redeemed at parRedeemable Preference Share Capital Account Dr.To Preference Shareholders Account 5. When preference shares are redeemed at a premiumRedeemable Preference Share Capital Account Dr.Premium on Redemption of Preference Shares Account Dr.To Preference Shareholders Account 6. When payment is made to preference shareholdersPreference Shareholders Account Dr.To Bank Account 7. For adjustment of premium on redemptionProfit and Loss Account Dr.Securities Premium Account Dr.To Premium on Redemption of Preference Shares Account Illustration 1Hinduja Company Ltd. had 5,000, 8% Redeemable Preference Shares of `100 each, fully paid up. The company decided to redeem these preference shares at par by the issue of sufficient number of equity shares of `10 each fully paid up at par. You are required to pass necessary Journal Entries including cash transactions in the books of the company.SolutionIn the books of Hinduja Company Ltd.Journal EntriesDateParticularsDr. (`)Cr. (`) Bank A/cDr.5,00,000To Equity Share Capital A/c5,00,000(Being the issue of 50,000 Equity Shares of `10 each at par for the purpose of redemption of preference shares, as per Board Resolution No ……..dated……..)© The Institute of Chartered Accountants of India
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REDEMPTION OF PREFERENCE SHARES9.70COMMON PROFICIENCY TEST8% Redeemable Preference Share Capital A/cDr.5,00,000To Preference Shareholders A/c5,00,000(Being the amount payable on redemption of preference shares transferred to Preference Shareholders Account)
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