Page 47 - IC26 LIFE INSURANCE FINANCE

UNIT 3 : REDEMPTION OF PREFERENCE SHARES

Meaning : Redemption is the process of the repaying an obligation, at prearranged amounts and timing
According to the Articles of Association, the company cannot issue irredeemable preference shares.

Methods of redemption

Redemption of preference shares by fresh issue of share: A Company can issue new (equity share or
preference shares) and the proceeds from such new shares can be used for redemption preference
shares. The proceeds from issue of debentures cannot be utilised for redemption of preference shares.

Journal Entries -
(i) When preference shares are redeemed at par
Redeemable preference share capital A/c Dr.
To Preference Shareholders A/c

(ii) When preference shares are redeemed at premium
Redeemable Preference Shares Capital A/c Dr.
Premium on Redeemable Preference `Bares A/c Dr.
To Preference Shareholder A/c

(iii) For adjustment of premium on redemption
Profit and Loss A/c Dr.
Securities premium A/c Dr.
To Premium on Redeemable preference share A/c

(2) Redemption of preference shares by capitalisation of undistributed profits : Another method for
redemption of preference shares, is to use the distributable profits in place of issuing new shares.
Journal entries -► Redemption entries will be same as stated in I Method

(i) For adjustment of premium of redemption
Profit and Loss Ale Dr. Securities Premium A/c Dr.
To Premium on Redemption of Preference Share A/c

(ii) For transferring nominal amount of shares redeemed to Capital Redemption Reserve

General Reserve A/c Dr.
Profit and Loss A/c Dr.

To Capital Redemption Reserve A/c

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