# Redemption of Preference Shares: Practical Problems and Solutions

### Reviewed by Subject Matter Experts

Updated on April 23, 2023

## Problem 1: Redemption of Preference Shares at Premium

On 1 July 2000, a limited company issued 10,000 redeemable preference shares valued at \$10 per share. The shares were redeemable at a premium of 10%.

Two-fifths of the company's issue was redeemed out of profits on 10 January 2004. On 20 January 2004, the company issued 20,000 equity shares at \$10 each at a premium of \$4 per share. Out of the proceeds of the issue, the balance of redeemable preference shares was redeemed.

Required: Make journal entries to record these transactions in the company's books.

Journal Entries

## Problem 2: Redemption of Shares at Premium, Partly Out of Profits and Partly Out of Fresh Issue

A company issued 50,000 equity shares at \$10 per share and 3,000 redemption preference shares at \$100 each. All shares were fully called and paid up.

On 31 March 2004, the profit and loss account showed an undistributed profit of \$50,000. The general reserve account stood at \$120,000.

On 2 April 2004, the directors decided to issue 1,500 6% preference shares at \$100 per share for cash. They also redeemed the existing preference shares at \$105, utilizing as much profits as required for the purpose.

Required:

• Show the journal entries to record these transactions
• Prepare a summarized balance sheet showing the company's position on completion of the redemption

On 31 March 2004, the cash balance amounted to \$185,000 and Sundry Creditors stood at \$87,000.

Journal Entries

## Problem 3: Where Minimum Number of Equity Shares Is to Be Issued for Redemptions

The summarized balance sheet of a company is given as follows:

The redeemable preference shares will be redeemed at a premium of 10%.

The company's directors wish that only the minimum number of fresh equity shares of \$10 each at a premium of 5% be issued to provide for the redemption of such preference shares, as could not otherwise be redeemed.

Required: Give the journal entries and prepare the balance sheet after redemption.

### Solution

Journal Entries

To calculate the minimum number of fresh shares to be issued, first let the dollar value of shares to be issued equal X.

Alternatively,

Balance Sheet