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CA Foundation · Accounting · Company Accounts

When preference shares are redeemed out of profits, which journal entry correctly records the transfer to Capital Redemption Reserve?

The correct entry debits Free Reserves or the Statement of Profit and Loss and credits Capital Redemption Reserve. CRR is created by appropriating distributable profits equal to the required amount; no cash moves and preference share capital is not credited or debited in this transfer.

  1. ABank A/c Dr. to CRR A/c
  2. BFree Reserves / Statement of Profit and Loss Dr. to CRR A/cCorrect
  3. CCRR A/c Dr. to Preference Share Capital A/c
  4. DPreference Share Capital A/c Dr. to CRR A/c

Explanation

CRR is created by appropriating profits, so the profit or reserve account is debited and CRR is credited. Bank is not involved in this transfer, and the share capital account is closed through the redemption payment entry, not through CRR.

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