Skip to content

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

Tara Ltd redeems 5,000 preference shares of Rs 100 each, fully paid, at a premium of 8%. Its securities premium account has a balance of Rs 25,000 and it has ample free reserves. No fresh issue is made. For shares issued after the Act's commencement by a company whose statements follow section 133 standards, what is the amount provided for premium out of profits (as per the text provided under section 55)?

The premium is Rs 40,000 (Rs 5,00,000 x 8%), and for a company following standards under section 133 the whole premium must be provided out of profits before redemption. Using the securities premium balance, which would give Rs 15,000 from profits, is not permitted for such companies.

  1. ARs 40,000Correct
  2. BRs 15,000
  3. CRs 25,000
  4. DRs 3,00,000

Explanation

Premium = 5,000 x 100 x 8% = Rs 40,000. For companies complying with accounting standards under section 133, the premium payable on redemption must be provided for out of profits before the shares are redeemed. Using securities premium (Rs 25,000, leaving Rs 15,000) is the treatment for other cases, so it is wrong here.

Did you get it right without looking?

One question tells you little. A timed set on Redemption of Preference Shares, Issue and Redemption of Debentures shows your real accuracy, how long you take and where you lose marks.

Practise Redemption of Preference Shares, Issue and Redemption of DebenturesFree diagnostic mock

More Redemption of Preference Shares, Issue and Redemption of Debentures questions