Company AccountsQ-2 | Redemption of Preference SharesQuestion 5258 of 112
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The following is the summarized Balance Sheet of Trinity Ltd. as at 31.3.2023: Liabilities ₹ Assets ₹ Share Capital Fixed Assets 3,00,000 Authorised Less: Dep. 1,00,000 2,00,000 10,000 10% Redeemable Preference Shares of 10 each 1,00,000 Investments 1,00,000 90,000 Equity Shares of 10 each 9,00,000 10,00,000 Issued, Subscribed and Paid- up Capital Current Assets and Loans and Advances Inventory 10,000 10% Redeemable Preference Shares of 10 each 1,00,000 Trade receivables 25,000 10,000 Equity Shares of 10 each 1,00,000 Cash and Bank Balances 50,000 (A) 2,00,000 Reserves and Surplus General Reserve 1,20,000 Securities Premium 70,000 Profit and Loss A/c 18,500 (B) 2,08,500 Current Liabilities and Provisions (C) 11,500 Total (A+B+C) 4,20,000 4,20,000 For the year ended 31.3.2024, the company made a net profit of ₹ 35,000 after providing 20,000 depreciation. The following additional information is available with regard to company's operation : 1. The preference dividend for the year ended 31.3.2024 was paid. 2. Except cash and bank balances other current assets and current liabilities as on 31.3.2024, was the same as on 31.3.2023. 3. The company redeemed the preference shares at a premium of 10%. 4. The company issued bonus shares in the ratio of two share for every equity share held as on 31.3.2024. 5. To meet the cash requirements of redemption, the company sold in- vestments. 6. Investments were sold at 90% of cost on 31.3.2024. You are required to prepare necessary journal entries to record redemption and issue of bonus shares. [RTP Jan. 2025]

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Detailed Solution & Explanation

Journal Entries in the Books of Trinity Ltd . Date Particulars L.F. Amount (Dr.) Amount (Cr.) Dividend A/ c Dr. To Bank A/c (Dividend on preference paid) 10,000 10,000 Profit & Loss A/ c Dr. To Dividend A/ c (Dividend on preference shares written off to profit and loss account) 10,000 10,000 10% Redeemable Preference Capital Dr. Premium on redemption of Preference Shares Dr. To Preference Shareholders (Amount payable to preference shareholders on redemption) 1,00,000 10,000 1,10,000 Profit & Loss A/ c Dr. To Premium on Redemption of Preference shares (Amount of premium payable on redemption of preference shares) 10,000 10,000 Bank A/c Dr. Profit and Loss A/ c Dr. To Investments A/ C (Amount realised on sale of Investments and loss thereon adjusted) 90,000 10,000 1,00,000 Preference shareholders A/ c Dr To Bank (Payment made to preference shareholders) 1,10,000 1,10,000 General Reserve A/ c Dr. To Capital Redemption Reserve A/ c (Transfer to the Capital redemption reserve account on redemption of shares) 1,00,000 1,00,000 Securities Premium A/ c Dr. Capital Reserve A/ c Dr. General Reserve A/ c Dr. Profit & Loss A/ c Dr. To Bonus to Equity Shareholder's A/ c (Amount adjusted by issuing bonus shares in the ratio of 2:1) 1,00,000 70,000 20,000 10,000 2,00,000 Bonus to Equity Shareholders A/ c Dr. To Equity Share Capital (Balance on former account transferred to latter) 2,00,000 2,00,000

About This Chapter: Partnership & Companies

Paper

Paper 1: Accounting

Weightage

15-20%

Key Topics

Admission, Retirement, Death, Shares, Debentures

This chapter covers Admission, Retirement, Death, Shares, Debentures and is part of Paper 1: Accounting in the CA Foundation exam.

View Official ICAI Syllabus

Exam Strategy Tip

This topic carries 15-20% weightage. Focus on understanding core concepts rather than memorizing.

Key Concepts to Understand

Depreciation

Allocation of the cost of a tangible fixed asset over its useful life due to wear and tear, efflux of time, or obsolescence.

Balance Sheet

A statement showing the financial position of a business at a particular date, listing all assets on one side and all liabilities and capital on the other side. It is not an account but a statement.

Net Profit

The final profit of a business after deducting all indirect operating expenses, non-operating expenses, and taxes from Gross Profit. It represents the actual earnings available to the owners.

Reserves and Surplus

Accumulated profits and specific provisions retained in the business rather than distributed to shareholders. Reserves are appropriations of profit (General Reserve, Capital Reserve), while Surplus is the undistributed balance in the P&L Account.

Related Comparison Tables

Revenue Expenditure vs Capital Expenditure: AccountsTrading Account vs P&L Account: Final Accounts ExplainedSLM vs WDV Depreciation: CA Foundation Accounts

More Questions from Company Accounts

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Reserve Capital and Capital Reserve carry the same meaning.

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Re-issue of forfeited shares is allotment of shares but not a sale. [May 2018, 2 Marks]

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