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

Zenith Ltd redeems Rs 4,00,000 of fully paid preference shares at par out of its general reserve and no fresh issue is made. Which journal entry correctly records the transfer required by the Companies Act, 2013 after the redemption entries?

The company debits General Reserve and credits Capital Redemption Reserve with Rs 4,00,000. When preference shares are redeemed out of profits, an amount equal to their nominal value must be moved from those profits to the Capital Redemption Reserve Account.

  1. ADr General Reserve Rs 4,00,000; Cr Capital Redemption Reserve Rs 4,00,000Correct
  2. BDr Securities Premium Rs 4,00,000; Cr Capital Redemption Reserve Rs 4,00,000
  3. CDr Preference Share Capital Rs 4,00,000; Cr Capital Redemption Reserve Rs 4,00,000
  4. DDr Capital Redemption Reserve Rs 4,00,000; Cr General Reserve Rs 4,00,000

Explanation

Where shares are redeemed out of profits, a sum equal to the nominal amount redeemed must be transferred from profits to the Capital Redemption Reserve. General reserve is a profit reserve, so it is debited and CRR credited. Debiting securities premium is wrong because it is not a profit available for dividend, and preference capital is already cleared by the redemption entry.

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