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

Vihaan Ltd has 10,000 12% preference shares of Rs 100 each, fully paid, redeemable at a 10% premium. It issues 5,000 equity shares of Rs 100 each at a 10% premium to fund the redemption. Profit and Loss balance is Rs 9,00,000 and General Reserve is Rs 3,00,000. The company is covered by the profit-provision rule for premium. What is the total amount debited to profit reserves (CRR transfer plus premium provided from profits), assuming securities premium from the new issue is not used for the premium?

The total charged to profits is Rs 6,00,000. CRR is Rs 5,00,000 (nominal Rs 10,00,000 less fresh issue at face value Rs 5,00,000) and the Rs 1,00,000 redemption premium is separately provided out of profits. The securities premium on the new issue is not used.

  1. ARs 6,00,000Correct
  2. BRs 5,00,000
  3. CRs 5,50,000
  4. DRs 1,00,000

Explanation

Nominal redeemed = Rs 10,00,000; fresh issue at face value = 5,000 x 100 = Rs 5,00,000, so CRR = Rs 5,00,000. Premium on redemption = 10,00,000 x 10% = Rs 1,00,000, provided out of profits. Total from profits = 5,00,000 + 1,00,000 = Rs 6,00,000. Rs 5,00,000 omits the premium, and Rs 5,50,000 wrongly uses issue proceeds including premium to reduce CRR.

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