CMA Intermediate · Corporate Accounting and Auditing

Redemption of Preference Shares, Issue and Redemption of Debentures: formula sheet

Full chapter guide

Key formulas

Sources of redemption: Redemption only out of (a) profits available for dividend, or (b) proceeds of a fresh issue of shares made for the purpose; Section 55(2), further proviso, clause (a). Not out of capital, revaluation reserve or CRR.
Fully paid condition: Redeem only fully paid shares; Partly paid shares must first have the calls made and paid up.
Maximum period: Redemption within 20 years from the date of issue; Longer period allowed only for infrastructure projects, with prescribed annual redemption at the holders' option.
CRR transfer: CRR = Nominal value of shares redeemed out of profits = Nominal value redeemed − Proceeds of fresh issue applied to the redemption (taken at nominal value of shares issued); Section 55(2)(c) requires a transfer out of profits equal to the nominal amount of shares redeemed out of profits. Problems take the fresh issue at nominal value, so any premium on the fresh issue is not netted off. The premium payable on redemption is provided separately under Section 55(2)(d). If the result is zero or negative, no CRR is needed.
Premium on redemption: Premium payable = (Redemption price − Nominal value) × Number of shares; Provide for it before the shares are redeemed. A company under Section 55(2)(d)(i) must use profits. A company under Section 55(2)(d)(ii) may use profits or securities premium.
Use of CRR: CRR may be applied in paying up unissued shares as fully paid bonus shares. Otherwise it is treated like paid-up share capital under the reduction provisions.; Sections 55(4), 63(1)(iii), 69(2) and 55(2)(c). It cannot be used to pay dividend or the redemption premium.
CRR on redemption out of profits: CRR = Nominal value of shares redeemed − Nominal value of fresh shares issued for redemption; Only the profit-funded part needs CRR. If fresh issue is equal to or more than the nominal value redeemed, CRR is nil. The fresh issue is counted at face value, not including any premium received.
Premium payable on redemption: Premium = Redemption price − Nominal value, per share × number of shares; Provide for it before redemption, from profits or securities premium as the question or law permits.
Source rule (section 55): Redemption only out of profits available for dividend OR proceeds of fresh issue; shares must be fully paid; Partly paid preference shares must be called up first. Make them fully paid before redeeming.
Use of CRR: CRR can be applied only to pay up unissued shares as fully paid bonus shares; Sections 55(4), 63(1)(iii) and 69(2).
Application of securities premium: Securities premium may be used for premium payable on redemption of redeemable preference shares or debentures; Section 52(2)(d). Also for bonus shares, preliminary expenses, issue expenses and buy-back.
Amount payable to preference shareholders: Nominal value redeemed + premium on redemption (if any); This is the cash outflow. Credit it to Preference Shareholders A/c, then pay it from bank.
Profits available for redemption: General reserve + Profit and Loss balance + other free reserves − premium on redemption charged to profits; Do not count the securities premium account, CRR or any capital reserve as profits available for dividend. Securities premium may fund only the premium on redemption.
Minimum fresh issue (face value): Nominal value of shares to be redeemed − profits available for redemption; If the answer is zero or negative, no fresh issue is needed. If shares are issued at a premium, the number of shares is based on face value, not on cash received.
Transfer to CRR: Nominal value of shares redeemed − face value of fresh issue proceeds; Equals the nominal amount redeemed out of profits. No transfer if redemption is wholly from fresh issue.
Conditions for redemption: Fully paid + from divisible profits or fresh issue + CRR for the profit-funded part; Premium on redemption is provided for before redemption. Notice to Registrar within 30 days.
Issue at par: Bank A/c Dr (cash received) To Debentures A/c (face value); Use the two-stage entries when the question has application and allotment: Debenture Application and Allotment A/c collects the money, then is transferred to Debentures A/c.
Issue at premium: Premium = Issue price − Face value; credit Securities Premium A/c; Premium is a credit, never income. Cash received = Face value + Premium.
Issue at discount: Discount = Face value − Issue price; debit Discount on Issue of Debentures A/c; Debentures A/c is still credited at full face value.
Issue at discount, redeemable at premium: Loss on Issue = Discount on issue + Premium on redemption; Debit Loss on Issue of Debentures A/c. Credit Debentures A/c at face value and Premium Payable on Redemption A/c.
Issue for consideration other than cash: Asset A/c Dr (agreed price) To Vendor A/c; Vendor A/c Dr To Debentures A/c (face value) and Securities Premium A/c (if any); Number of debentures = Purchase price ÷ Issue price. Face value credited = number × face value.
Collateral security: Debenture Suspense A/c Dr To Debentures issued as Collateral Security A/c (optional entry); or only a note; No cash entry. If the optional entry is passed, deduct the suspense balance from the debentures so that only the loan is shown as borrowing. Disclose the collateral debentures in the notes.
Where premium may be applied: Section 52(2): bonus shares, preliminary expenses, issue expenses/commission/discount, premium on redemption, buy-back under section 68; Section 52(1) covers premium on shares. For debentures, the premium is credited to Securities Premium by accounting practice, and these uses are available for the account. Section 52(3) gives a prescribed class of companies certain uses for equity shares.
Interest and redemption duty: Pay interest and redeem as per terms of issue (Section 71(8)); The terms of issue fix the method, date and any premium.
DRR source: DRR is created out of profits available for payment of dividend (Section 71(4)); Debit Statement of Profit and Loss or General Reserve, credit DRR. Use only for redemption.
DRR percentage (as commonly taught under the Rules): Public issue of listed NBFCs and others: as per Rules; check ICMAI material for the percentage of outstanding debentures; The Act does not fix the percentage. Use the figure given in the question or your study material.
Investment requirement (rule commonly taught): Invest or deposit in prescribed securities at least 15% of the debentures maturing in the year, before 30 April of that year; This is a Rules requirement, not in Section 71 text. Keep it in specified investments until redemption.
Own debentures cancelled: Profit on cancellation = Nominal value − Cost of purchase (ex-interest); Credit the gain to Capital Reserve. A loss goes to Statement of Profit and Loss.
Conversion: Shares issued = Debentures converted ÷ Issue price per share; Share capital is credited at nominal value, and any excess to Securities Premium.
Voting rights: No debentures carrying voting rights (Section 71(2)); Useful for theory questions.
Accrued interest: Accrued interest = Nominal value × Rate of interest × Months since last interest date ÷ 12; Count from the last interest payment date to the date of purchase.
Cost of own debentures (cum-interest price): Cost = Price paid − Accrued interest; Price paid = Nominal value × quoted price ÷ 100. The accrued interest part is debited to Debenture Interest account.
Cost of own debentures (ex-interest price): Cost = Price paid; Cash paid = Price paid + Accrued interest; Accrued interest is paid separately and debited to Debenture Interest account.
Profit or loss on cancellation: Profit = Nominal value − Cost (ex-interest); Loss = Cost − Nominal value; Profit goes to Capital Reserve. Loss goes to Profit and Loss statement.
Sinking fund instalment: Annual instalment = Amount to be redeemed ÷ Annuity factor, where factor = [(1 + i)ⁿ − 1] ÷ i; Use the factor given in the question. Instalment is paid at the end of each year.
Interest on sinking fund investments: Interest for a year = Investments held at start of year × Rate of interest; No interest in year 1. Interest is credited to Sinking Fund account, not to Profit and Loss.
Sinking fund balance: Closing balance = Opening balance + Instalment + Interest; At the last year-end the balance should equal the debenture amount, apart from rounding.
Amount payable to debenture holders: Amount due = Face value of debentures + Premium payable on redemption (if any) ± Accrued interest only if the question says it is settled in shares; Interest is normally paid in cash. Convert only the principal amount unless told otherwise.
Number of shares issued (price given): Number of shares = Amount due ÷ Issue price per share; Issue price = face value of share + premium (if any). It cannot be below face value.
Number of shares issued (ratio given): Number of shares = Number of debentures × shares per debenture; Use when the question gives a ratio such as 5 shares for every 2 debentures.
Securities premium on conversion: Securities premium = Number of shares × premium per share; Credit to Securities Premium Account as required by Section 52(1).
Core entry: Debentures A/c Dr. (face value); Premium on redemption payable Dr. (if any) | To Equity Share Capital (face value of shares) | To Securities Premium (if premium); Total debits must equal total credits.

Quick revision

Irredeemable preference shares cannot be issued by a company limited by shares (Section 55(1)).
Preference shares can be redeemed within a period not exceeding twenty years, if authorised by the articles. For infrastructure projects a period exceeding twenty years is permitted, subject to redemption of a prescribed percentage each year at the option of the preference shareholders (Section 55(2), first proviso).
Only fully paid shares can be redeemed.
Redemption is out of profits otherwise available for dividend, or the proceeds of a fresh issue made for the purpose.
If profits are used, transfer an amount equal to the nominal value redeemed to Capital Redemption Reserve.
Premium on redemption is provided for before redemption; the permitted source depends on the class of company and the date of issue.
CRR can be used to pay up unissued shares as fully paid bonus shares.
Bonus shares cannot be issued by capitalising revaluation reserves, and cannot be issued in lieu of dividend (Section 63).
Securities premium can be used to provide for premium payable on redemption (Section 52(2)(d)).
Do the workings first: redemption amount, fresh issue, profits used, CRR.
Debenture entries: always check the issue price, redemption price and any discount or loss on issue.
Show the Balance Sheet after each transaction using Schedule III headings.

Common mistakes

Redeeming partly paid shares without making them fully paid first. Fix: Check the paid-up amount first. If calls are unpaid, record the call money before redemption, as the facts allow.
Including the premium received on the fresh issue when computing CRR. Fix: Use the nominal value of the fresh shares issued only. Premium on that issue goes to securities premium.
Transferring the redemption amount including premium to CRR. Fix: CRR is based on nominal value only. Premium is handled separately.
Deducting fresh issue proceeds including securities premium when finding CRR. Fix: Deduct only the face value of the fresh shares. The premium received on a fresh issue goes to securities premium.
Transferring the full nominal value to CRR even though shares were issued for redemption. Fix: Transfer to CRR only nominal value redeemed less face value of the fresh issue. If the fresh issue covers the full amount, there is no CRR transfer.
Using securities premium or CRR as profits available for redemption. Fix: Only profits available for dividend (general reserve, P&L balance, other free reserves) can fund redemption. Securities premium can be used only for the premium payable on redemption.
Crediting Debentures A/c with the cash received instead of the face value Fix: Debentures A/c always carries the full face value. Cash is shown in Bank and the difference sits in Premium or Discount.
Leaving the discount or loss on issue of debentures unwritten, or treating it as capital Fix: Debit Discount or Loss on Issue, then write it off from Securities Premium (section 52(2)(c) allows this) or from profit, as the question directs.
Treating DRR as a cash fund Fix: DRR only restricts profits from distribution. Cash is protected through the investment entry.
Applying Capital Redemption Reserve rules to debentures Fix: Section 55 deals with preference shares and CRR. Section 71(4) deals with debentures and DRR.

Exam tips

Read the facts for source words such as fresh issue, profits and securities premium, then fix the CRR figure before any entry.
In the MCQ, remember the conditions: fully paid, redeemable, within 20 years, and a source of profits or fresh issue. Options that say 'out of capital' are wrong.
For written answers, show the working for nominal value, premium, fresh issue and CRR in a small statement. Step marks follow this working.
State the legal basis in one line, for example, Section 55 with CRR, so the examiner sees the rule behind your numbers.
Check whether the fresh issue is at par or at a premium, since only the nominal value counts for CRR.
In the MCQ, check whether the fresh issue is at par or premium. Only its face value reduces CRR.
Always write the working note for CRR and premium. Step marks are given even if one figure goes wrong.
State your source for premium (securities premium or profits) clearly. If the question is silent, state your assumption.