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

Aarav Ltd redeems 5,000 preference shares of Rs 100 each, fully paid, at a premium of 10%. It issues 3,000 equity shares of Rs 100 each at par for the purpose. Existing balances: General Reserve Rs 4,00,000 and Securities Premium Rs 1,00,000. Premium on redemption is first charged to securities premium. What is the minimum amount to be transferred to Capital Redemption Reserve (CRR)?

The CRR transfer is Rs 2,00,000. Face value redeemed is Rs 5,00,000, of which Rs 3,00,000 is covered by the fresh equity issue. The balance of Rs 2,00,000 is effectively redeemed out of profits, so that amount must be transferred to Capital Redemption Reserve.

  1. ARs 2,00,000Correct
  2. BRs 2,50,000
  3. CRs 5,00,000
  4. DRs 50,000

Explanation

Nominal value redeemed = 5,000 x 100 = Rs 5,00,000. Fresh issue proceeds = 3,000 x 100 = Rs 3,00,000. Shortfall funded from profits = Rs 2,00,000, which must be transferred to CRR. Rs 5,00,000 wrongly ignores the fresh issue; Rs 50,000 is just the premium.

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