Corporate Accounting and Financial Management · Related Aspects of Company Accounts

Redemption of Preference Shares: Section 55 and Journal Entries

Updated 11 October 2026 · Fact-checked

Redemption of preference shares means repaying preference shareholders as per the terms of issue. Under Section 55, shares must be fully paid and redeemed only from divisible profits or a fresh issue. Profits used require a Capital Redemption Reserve equal to the nominal value redeemed. Premium is provided for before redemption.

Understand Redemption of Preference Shares

A company limited by shares cannot issue irredeemable preference shares. It may issue redeemable preference shares only if its articles authorise it, and they must be redeemable within 20 years of issue. A longer period is allowed for infrastructure projects, on prescribed conditions.

Redemption is a repayment of capital to a class of shareholders. Creditors rely on the capital base, so the law protects it. The company must replace the capital it pays out. It does so either by a fresh issue of shares or by locking up profits in the Capital Redemption Reserve (CRR).

The rules in Section 55 are: shares must be fully paid; redemption is out of profits otherwise available for dividend, or out of the proceeds of a fresh issue made for this purpose. If profits are used, a sum equal to the nominal value of shares redeemed is transferred to CRR. The CRR is treated like paid-up share capital for reduction purposes, but it can be used to issue fully paid bonus shares.

If shares are redeemed at a premium, the premium must be provided for before redemption. It comes out of profits or the securities premium account. For a prescribed class of companies that follow the notified accounting standards, premium on redemption of shares issued after the Act began is provided only out of profits. Check which rule your question expects. Section 52 also permits the securities premium account to be used to provide for the premium payable on redemption.

The fresh issue is made at par or at a premium. Proceeds from a fresh issue only replace the nominal value of the shares redeemed. Only the shortfall in capital is moved from profits to CRR. Redemption is not a reduction of share capital, and the issue of new shares is not an increase of it, as the Explanation to Section 55(3) states.

Key rules to remember

CRR required: CRR = Nominal value of shares redeemed − Nominal value of fresh shares issued (proceeds used for redemption); The CRR applies only to the part redeemed out of profits. If the fresh issue is at a premium, count only the face value of the new shares, not the premium.
Fresh issue needed for full redemption without CRR: Fresh issue proceeds = Amount payable on redemption (nominal value, excluding premium if premium is met from profits); If the premium is paid from profits or securities premium, the proceeds of the fresh issue need only equal the nominal value redeemed.
Number of new shares: Number of shares = Proceeds to be raised ÷ Issue price per share; Round up when the answer is not a whole number. The issue price includes any premium.
Proceeds needed under a stated profit limit: Minimum fresh issue (face value) = Nominal value redeemed − Profits available for CRR; Use when profits available for dividend are limited.
Premium on redemption: Premium = (Redemption price − Nominal value) × Number of shares; Provide for it before redemption, out of profits or securities premium as the law and question allow.

How to solve Redemption of Preference Shares questions

Follow the same order in every question. It keeps the entries and the CRR figure correct.

1Check that the shares being redeemed are fully paid. If partly paid, make the final call first.
2Compute the nominal value to be redeemed and the premium on redemption, if any.
3Decide the source: fresh issue, profits, or both. Note any limit given on profits available for dividend.
4Work out the fresh issue: proceeds needed, issue price, and number of shares. Use the face value of new shares to measure replacement of capital.
5Compute CRR = nominal value redeemed − face value of fresh shares issued. If all is out of fresh issue, CRR is nil.
6Write entries in order: fresh issue, provide for premium, transfer to CRR, then redemption payment.
7Prepare the revised balance sheet extract or ledger if asked. Check that total assets fall by the cash paid and liabilities and equity fall equally.

Quickest way: Four-line redemption check

When to use it: Use when time is short or the question asks only for CRR or the journal entries.

Write: Nominal value redeemed = X; Premium = Y.
Write: Fresh shares issued at face value = Z.
Compute CRR = X − Z (if positive).
Entries: bank on fresh issue; premium from profits or securities premium; profits to CRR; Preference Share Capital and premium to Preference Shareholders, then pay cash.

Common mistakes in Redemption of Preference Shares

Computing CRR on the premium or on the total amount paid
Students link CRR with cash paid to shareholders.
Fix: CRR equals only the nominal value redeemed out of profits, less the face value of the fresh issue. Premium never goes into CRR.
Subtracting the fresh issue proceeds including premium when finding CRR
The whole bank receipt looks like replacement capital.
Fix: Use the face value of new shares only. The premium received goes to securities premium.
Redeeming partly paid shares
Students ignore the condition in the question.
Fix: Section 55 allows redemption only if shares are fully paid. Call up the balance first.
Providing for premium after redemption or skipping the provision
Entries are written in the order of cash flow.
Fix: Provide for premium before redemption. Debit securities premium or Profit and Loss, credit Premium Payable on Redemption.
Using the securities premium from the fresh issue to pay the premium without checking the rule
Students assume all premium sources are allowed in all cases.
Fix: Read the question. If it says the company's accounting follows the prescribed standards for the class, use profits for the premium on shares issued after the Act. Otherwise profits or securities premium may be used.
Confusing redemption with buy-back
Both return money to shareholders and both use CRR.
Fix: Redemption is under Section 55 and is of preference shares as per terms of issue. Buy-back is under Section 68 and needs a resolution, and for buy-back the CRR is for the nominal value of shares purchased out of free reserves.

Worked examples

Example 1

X Ltd has 5,000 8% redeemable preference shares of ₹100 each, fully paid. The shares are redeemed at par. The company has a general reserve of ₹3,00,000 and a Profit and Loss balance of ₹2,00,000 that are available for dividend. It issues 2,000 equity shares of ₹100 each at par for redemption. Pass the entries.

Show the solution

Nominal value redeemed = 5,000 × ₹100 = ₹5,00,000. Premium = nil.
Fresh issue proceeds = 2,000 × ₹100 = ₹2,00,000.
CRR = ₹5,00,000 − ₹2,00,000 = ₹3,00,000.
Entry 1: Bank A/c Dr ₹2,00,000; to Equity Share Capital ₹2,00,000 (shares issued at par).
Entry 2: General Reserve A/c Dr ₹3,00,000; to Capital Redemption Reserve A/c ₹3,00,000.
Entry 3: 8% Preference Share Capital A/c Dr ₹5,00,000; to Preference Shareholders A/c ₹5,00,000.
Entry 4: Preference Shareholders A/c Dr ₹5,00,000; to Bank A/c ₹5,00,000.

Answer: CRR of ₹3,00,000 is created from the general reserve. Total payment to shareholders is ₹5,00,000.

Example 2

Y Ltd has 4,000 9% redeemable preference shares of ₹100 each, fully paid, redeemable at a premium of 10%. It issues 2,500 equity shares of ₹100 each at a premium of 10% for the purpose. The company has securities premium of ₹60,000 from earlier issues and a Profit and Loss balance of ₹2,50,000. Assume the premium on redemption may be provided out of securities premium, and that securities premium from the new issue is also available. Pass the entries.

Show the solution

Nominal value redeemed = 4,000 × ₹100 = ₹4,00,000. Premium on redemption = 4,000 × ₹10 = ₹40,000. Total payable = ₹4,40,000.
Fresh issue: 2,500 × ₹110 = ₹2,75,000. Face value = ₹2,50,000. Premium received = ₹25,000.
CRR = ₹4,00,000 − ₹2,50,000 = ₹1,50,000.
Entry 1: Bank A/c Dr ₹2,75,000; to Equity Share Capital ₹2,50,000; to Securities Premium ₹25,000.
Securities premium available = ₹60,000 + ₹25,000 = ₹85,000, which exceeds ₹40,000.
Entry 2: Securities Premium A/c Dr ₹40,000; to Premium Payable on Redemption A/c ₹40,000.
Entry 3: Profit and Loss A/c Dr ₹1,50,000; to Capital Redemption Reserve A/c ₹1,50,000.
Entry 4: 9% Preference Share Capital A/c Dr ₹4,00,000; Premium Payable on Redemption A/c Dr ₹40,000; to Preference Shareholders A/c ₹4,40,000.
Entry 5: Preference Shareholders A/c Dr ₹4,40,000; to Bank A/c ₹4,40,000.
Check: Profit and Loss ₹2,50,000 covers the ₹1,50,000 transfer.

Answer: CRR is ₹1,50,000 and total cash paid on redemption is ₹4,40,000. Securities premium of ₹40,000 is used for the premium on redemption.

Exam tips

Write the source of redemption first. Examiners give marks for stating that shares are fully paid and redeemed out of profits or fresh issue.
Show the CRR calculation as a separate working note. Marks are given for method even if a figure slips.
Cite Section 55 for redemption and CRR, Section 52 for use of securities premium and Section 68 for buy-back in any theory part.
For the difference between redemption and buy-back, give a short comparison in points: provision, securities covered, authority needed, source of funds and timing.
Keep the journal order: fresh issue, premium provision, CRR transfer, due to shareholders, payment.

Practice questions from Related Aspects of Company Accounts

Redemption of Preference Shares in other exams

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

Redemption of Preference Shares: frequently asked questions

What is the maximum period for redemption of preference shares?

A company may issue redeemable preference shares liable to be redeemed within 20 years from the date of issue, if its articles allow. For infrastructure projects, a longer period is allowed on prescribed terms.

Why is Capital Redemption Reserve created?

When shares are redeemed out of profits, the company's capital falls. CRR keeps an amount equal to the nominal value redeemed locked up so that creditors are protected. It can be used only for issue of fully paid bonus shares, or treated as share capital for reduction purposes.

How do I calculate the fresh issue for redemption?

Find the amount to be paid on redemption and the profits you may use. The shortfall must come from fresh shares. Divide the proceeds needed by the issue price to get the number of shares, rounding up where necessary.

What is the difference between redemption of preference shares and buy-back?

Redemption is under Section 55 and applies only to redeemable preference shares repaid as per their terms. Buy-back is under Section 68 and applies to shares or other specified securities and has limits such as special resolution or board approval, a 25% limit, and a debt-equity ratio of 2:1. The Section 70 prohibitions apply to buy-back.