Skip to content

Corporate Accounting and Auditing · Redemption of Preference Shares, Issue and Redemption of Debentures

Redemption of Preference Shares: Journal Entries and Balance Sheet

Updated 10 October 2026 · Fact-checked

Redemption means repaying preference shareholders. Fund it from profits available for dividend or a fresh issue of shares. Pass entries for the fresh issue, the amount due to shareholders, payment, and transfer to Capital Redemption Reserve for the part not covered by fresh issue. Then rewrite the balance sheet with the new figures.

Understand Journal Entries and Balance Sheet After Redemption

A company limited by shares cannot issue irredeemable preference shares. Under Section 55, redeemable preference shares must be redeemed within 20 years of issue (longer for infrastructure projects, as prescribed), and only if the articles authorise their issue.

Two rules protect creditors. First, shares can be redeemed only out of profits which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purpose. Second, only fully paid shares can be redeemed. If you redeem out of profits, cash leaves the business but the profits stay locked in the company. That is why a Capital Redemption Reserve (CRR) is created.

The Act says that where shares are redeemed out of profits, a sum equal to the nominal amount of the shares to be redeemed is transferred out of those profits to the CRR. In exam practice, when part of the redemption is funded by a fresh issue, you transfer to CRR only the nominal value of shares redeemed that is not covered by the fresh issue proceeds at face value. Use this approach unless the question says otherwise. Any premium collected on the fresh issue does not reduce the CRR.

If a premium is payable on redemption, it must be provided for before the shares are redeemed. The Act allows it to come from profits or the securities premium account. For a prescribed class of companies whose financial statements comply with the prescribed accounting standards, it must come from profits. Follow the instruction in the question. If none is given, use the securities premium account first, then profits.

The company must file a notice with the Registrar within 30 days of redemption (Section 64). The CRR can later be used only to issue fully paid bonus shares (Section 55(4)). It is treated like paid-up capital for reduction rules.

Key rules to remember

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.

How to solve Journal Entries and Balance Sheet After Redemption questions

Use this order for any redemption question. It keeps entries complete and the balance sheet balanced.

  1. 1Read the given balance sheet. Note the preference shares to be redeemed, the redemption premium, and the reserves and bank balance.
  2. 2Check the shares are fully paid. If some are partly paid, a call must be made first, or only the fully paid shares are redeemed.
  3. 3Work out profits available for dividend. Deduct premium on redemption if it must be met from profits.
  4. 4Compute the minimum fresh issue at face value: nominal value redeemed less available profits. If a premium is charged on the new issue, convert to the number of shares.
  5. 5Pass entries in order: fresh issue (bank, share capital, premium), premium on redemption from securities premium or profits, amount due to shareholders, payment, then the CRR transfer.
  6. 6Check bank. Opening bank + fresh issue cash − payment to shareholders must not be negative. If the question says shares are issued only to the extent needed, do not issue more.
  7. 7Redraw the balance sheet. Show share capital, CRR, remaining reserves, and the new bank balance. Make sure both sides total the same.
  8. 8Add working notes for profits available, fresh issue and CRR so you earn step marks.

Quickest way: Four-line working for the fast solver

When to use it: Use when the question asks for entries or the revised balance sheet and gives the reserves clearly.

  1. Line 1: Nominal value redeemed = number of shares × face value. Add premium to get cash payable.
  2. Line 2: Available profits = free reserves + P&L − premium if met from profits.
  3. Line 3: Fresh issue at face value = line 1 nominal − line 2. CRR = nominal value − fresh issue at face value.
  4. Line 4: New bank = old bank + fresh issue cash − cash payable. Then adjust only the lines that changed in the balance sheet: share capital, CRR, reserves, bank.

Common mistakes in Journal Entries and Balance Sheet After Redemption

  • Transferring the full nominal value to CRR even though shares were issued for redemption.

    Students remember that CRR equals the nominal value redeemed and forget that the fresh issue already protects creditors.

    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.

    All are shown under Reserves and Surplus, so they look the same.

    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.

  • Counting premium received on fresh issue to reduce the CRR or the minimum fresh issue.

    Students count total cash received from the fresh issue.

    Fix: Use face value of the fresh issue for the CRR and minimum-issue calculation. The premium goes to securities premium and increases cash.

  • Forgetting to provide for premium on redemption before redeeming, or charging it to the wrong account.

    The premium is paid at the same time as the capital, so students merge the two entries.

    Fix: Debit securities premium or Profit and Loss with the premium, credit Preference Shareholders A/c along with the nominal value.

  • Ignoring the bank balance, so the revised balance sheet shows a negative bank figure.

    Students focus on reserves and do not recompute cash.

    Fix: Always compute closing bank. A negative bank balance usually means a calculation error or that the question expects a larger fresh issue.

  • Redeeming partly paid shares.

    The question may give called-up and paid-up capital separately.

    Fix: Only fully paid shares can be redeemed. Make the call first if the question allows, or redeem only the fully paid shares.

Worked examples

Example 1

The balance sheet of Kaveri Industries Ltd shows: Equity share capital ₹10,00,000; 5,000 10% redeemable preference shares of ₹100 each, fully paid, ₹5,00,000; General reserve ₹2,00,000; Profit and Loss balance ₹1,00,000; Trade payables ₹1,50,000. Assets: Fixed assets ₹10,00,000; Inventory ₹3,00,000; Trade receivables ₹2,50,000; Bank ₹4,00,000. The preference shares are redeemed at par. The company issues the minimum number of equity shares of ₹100 each at par for the purpose. Pass journal entries and prepare the revised balance sheet.

Show the solution
  1. Nominal value redeemed = 5,000 × ₹100 = ₹5,00,000. No premium, so cash payable is ₹5,00,000.
  2. Profits available = general reserve ₹2,00,000 + P&L ₹1,00,000 = ₹3,00,000.
  3. Minimum fresh issue at face value = ₹5,00,000 − ₹3,00,000 = ₹2,00,000. So issue 2,000 equity shares of ₹100 at par.
  4. CRR = ₹5,00,000 − ₹2,00,000 = ₹3,00,000.
  5. Entry 1: Bank A/c Dr ₹2,00,000 to Equity Share Capital A/c ₹2,00,000 (issue of 2,000 shares).
  6. Entry 2: 10% Preference Share Capital A/c Dr ₹5,00,000 to Preference Shareholders A/c ₹5,00,000 (amount due on redemption).
  7. Entry 3: Preference Shareholders A/c Dr ₹5,00,000 to Bank A/c ₹5,00,000 (payment).
  8. Entry 4: General Reserve A/c Dr ₹2,00,000 and Profit and Loss A/c Dr ₹1,00,000 to Capital Redemption Reserve A/c ₹3,00,000.
  9. Bank after = ₹4,00,000 + ₹2,00,000 − ₹5,00,000 = ₹1,00,000.
  10. Revised balance sheet, Equity and Liabilities: Equity share capital ₹12,00,000; CRR ₹3,00,000; General reserve nil; P&L nil; Trade payables ₹1,50,000. Total ₹16,50,000.
  11. Assets: Fixed assets ₹10,00,000; Inventory ₹3,00,000; Trade receivables ₹2,50,000; Bank ₹1,00,000. Total ₹16,50,000.

Answer: Minimum fresh issue is 2,000 equity shares of ₹100 (₹2,00,000). CRR is ₹3,00,000. Revised balance sheet total is ₹16,50,000, with bank ₹1,00,000.

Example 2

Narmada Ltd has 3,000 12% redeemable preference shares of ₹100 each, fully paid, redeemable at a premium of 10%. Balance sheet: Equity share capital ₹6,00,000; Preference share capital ₹3,00,000; Securities premium ₹50,000; General reserve ₹1,50,000; Profit and Loss balance ₹50,000; Trade payables ₹1,00,000. Assets: Fixed assets ₹5,50,000; Inventory ₹2,00,000; Trade receivables ₹1,50,000; Bank ₹3,50,000. The company issues 1,000 equity shares of ₹100 each at par for the redemption. The premium on redemption is paid out of securities premium. All profits available are used and the rest is met by the fresh issue. Pass entries and prepare the revised balance sheet.

Show the solution
  1. Nominal value = 3,000 × ₹100 = ₹3,00,000. Premium = 10% × ₹3,00,000 = ₹30,000. Cash payable = ₹3,30,000.
  2. Fresh issue at face value = 1,000 × ₹100 = ₹1,00,000.
  3. Shares redeemed out of profits = ₹3,00,000 − ₹1,00,000 = ₹2,00,000. This equals general reserve ₹1,50,000 + P&L ₹50,000, so the profits are enough. CRR = ₹2,00,000.
  4. Entry 1: Bank A/c Dr ₹1,00,000 to Equity Share Capital A/c ₹1,00,000.
  5. Entry 2: Preference Share Capital A/c Dr ₹3,00,000 and Securities Premium A/c Dr ₹30,000 to Preference Shareholders A/c ₹3,30,000.
  6. Entry 3: Preference Shareholders A/c Dr ₹3,30,000 to Bank A/c ₹3,30,000.
  7. Entry 4: General Reserve A/c Dr ₹1,50,000 and Profit and Loss A/c Dr ₹50,000 to Capital Redemption Reserve A/c ₹2,00,000.
  8. Bank after = ₹3,50,000 + ₹1,00,000 − ₹3,30,000 = ₹1,20,000.
  9. Revised balance sheet, Equity and Liabilities: Equity share capital ₹7,00,000; CRR ₹2,00,000; Securities premium ₹20,000; General reserve nil; P&L nil; Trade payables ₹1,00,000. Total ₹10,20,000.
  10. Assets: Fixed assets ₹5,50,000; Inventory ₹2,00,000; Trade receivables ₹1,50,000; Bank ₹1,20,000. Total ₹10,20,000.

Answer: Cash paid to preference shareholders is ₹3,30,000. CRR is ₹2,00,000. Securities premium falls to ₹20,000. Bank is ₹1,20,000 and the balance sheet total is ₹10,20,000.

Exam tips

  • Write a working note for profits available, fresh issue and CRR. Many questions give marks for each of these even if the final balance sheet has an error.
  • Read the question for how the premium on redemption must be funded, and whether the fresh issue is at par or at a premium. These two details change the answer.
  • Check the bank balance before finalising. If it goes negative, recheck your premium and fresh issue figures.
  • In the MCQ section, expect questions on the source of redemption, the CRR amount, or the minimum fresh issue. Do the three-line calculation. There is no negative marking, so always attempt every MCQ.
  • Show the entries in sequence with narrations, then the balance sheet in Schedule III style headings: Shareholders' funds, Reserves and Surplus, Current liabilities, and so on.

Practice questions from Redemption of Preference Shares, Issue and Redemption of Debentures

Journal Entries and Balance Sheet After Redemption in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Journal Entries and Balance Sheet After Redemption: frequently asked questions

What is the minimum fresh issue of shares for redeeming preference shares?

It is the nominal value of shares to be redeemed less the profits available for dividend, after providing for any premium on redemption that must be met from profits. This figure is at face value. If the new shares carry a premium, divide by the face value per share to find the number of shares.

Why is the Capital Redemption Reserve created?

When shares are redeemed out of profits, cash leaves the company and creditors lose that cushion. The Act requires a sum equal to the nominal amount redeemed out of profits to be moved to CRR, which is treated like paid-up capital for reduction purposes. It can later be used only to issue fully paid bonus shares.

Can securities premium be used to pay the premium on redemption?

Yes, under Section 52(2)(d) and Section 55(2)(d)(ii), it can be used. For a prescribed class of companies whose financial statements comply with the prescribed accounting standards, the premium must be provided for out of profits. Follow the instruction in the question.

Can partly paid preference shares be redeemed?

No. Only fully paid shares can be redeemed. If shares are partly paid, the company must first collect the unpaid amount through a call, or redeem only the fully paid ones.

Does the company have to inform the Registrar after redemption?

Yes. Section 64 requires a notice in the prescribed form to the Registrar within 30 days of the redemption. Default attracts a daily penalty, subject to the maximum amounts stated in the section.