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

Rohan Ltd redeemed preference shares partly out of profits and created a Capital Redemption Reserve. Which statement about this reserve is correct under the Companies Act, 2013?

Capital Redemption Reserve may be used to pay up unissued shares issued to members as fully paid bonus shares. It is treated like paid-up share capital, so it cannot be distributed as dividend or used to write off losses or redemption premium.

  1. AIt may be applied in paying up unissued shares issued to members as fully paid bonus sharesCorrect
  2. BIt may be freely distributed as dividend to equity shareholders
  3. CIt may be used to write off the loss on sale of fixed assets
  4. DIt may be used to provide for the premium payable on redemption of debentures

Explanation

The Act allows the Capital Redemption Reserve to be applied in paying up unissued shares to be issued as fully paid bonus shares. It is treated as if it were paid-up share capital for reduction purposes, so it cannot be distributed as dividend or used to absorb losses or premium.

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