Redemption of Shares

Redemption of Shares and the Double entry system

The redemption/purchase of share represents an OUTFLOW of cash from the business. In as
much as the business is actually repossessing the shares. Shareholders are therefore expected
to surrender any relevant documents showing the number and type of shares to be redeemed
(the Prospectus).
To the extend that a redemption creates an outflow of cash, the business should have a source
of financing the redemption which can either be from the:
- Profit and Loss (Retained Earning) A/c which is reflected in the
creation of a CAPITAL REDEMPTION RESERVE a/c, or
- Issue/sale of NEW shares
Steps to consider
1. Calculate/Ascertain the value of the Redemption;
2. Ascertain what is the SOURCE of financing/funding the Value of the Redemption;
a. Retained Earnings/Profit and loss
b. Issue of shares; or
c. A combination of BOTH a & b above.
3. Do the journal Entries
4. Post the entries into ledger accounts:

Scenario 1
- Shares are to be Redeemed at Par
- Was there a new issue of shares? YES
- Was the issue sufficient to cover the redemption YES
Double Entry:
To show the issue of the NEW shares
DR: Bank a/c
CR: Ord./Pref. shares a/c
To show the redemption:
Dr: % Pref. share capital a/c
CR: Preference share redemption a/c
DR: Preference share Redemption a/c
CR: Bank
Scenario 2
- Shares are to be Redeemed at Par
- Was there a new issue of shares? YES
- Was the issue sufficient to cover the redemption NO
- Calculate/ascertain the DIFFERENCE (Redemption Value – value
of NEW issue)
- Difference comes from the profit and Loss (Retained Earnings)
a/c and the creation of a “Capital Redemption Reserve”
Double Entry:
To show the issue of the NEW shares at par
DR: Bank a/c
CR: Ord./Pref. shares a/c
To show the redemption:
Dr: % Pref. share capital a/c
CR: Preference share redemption a/c
DR: Preference share Redemption a/c
CR: Bank a/c

DR: Profit and Loss (retained Earnings) with the DIFFERENCE

CR: Capital Redemption Reserve a/c CRR: with the DIFFERENCE

Scenario 3
- Shares are to be Redeemed at PAR
- Calculate the value of the Redemption
- Was there a new issue of shares? NO
Therefore, the Redemption is totally financed from the profit and loss a/c
To show the redemption:
Dr: % Pref. share capital a/c with PAR VALUE
CR: Preference share redemption a/c
DR: Preference share Redemption a/c
CR: Bank

DR: Profit and Loss (Retained Earnings) a/c with the “Total value of
Redemption”
CR: CRR with the Total Value Redemption
Scenario 4
Shares are to be Redeemed at a PREMIUM
Calculate the value of Redemption
Was there a new issue of shares? YES
Was the issue sufficient to cover the redemption YES
Double Entry:
To show the issue of the NEW shares
DR: Bank a/c
CR: Ord./Pref. shares a/c
To show the redemption: Ask!
- were those shares issued at a Premium? YES
- Is this premium sufficient to cover the premium on Redemption?
YES
Dr: % Pref. share capital a/c: with PAR VALUE
CR: Preference share Redemption a/c: with PAR VALUE
DR: Share premium: with amount for premium on redemption
CR: Preference share redemption a/c

DR: Preference share Redemption a/c: with Total Value of Redemption

CR: Bank; with total Value of Redemption

Scenario 5
Shares are to be Redeemed at a PREMIUM
Calculate the value of Redemption
Was there a new issue of shares? YES
Was the issue sufficient to cover the redemption NO
Calculate the DIFFERENCE (Redemption Value – Value of new issue)
Double Entry:
To show the issue of the NEW shares
DR: Bank a/c
CR: Ord./Pref. shares a/c
To show the redemption: Ask!
- were those shares issued at a Premium? YES
- Is this premium sufficient to cover the premium on Redemption?
NO
- Calculate the DIFFERENCE ( Premium for redemption –
premium when issued)
 DR: % Pref. share capital a/c: with PAR VALUE
CR: Preference share Redemption a/c: with PAR VALUE
DR: Share premium: with PREMIUM when issued
CR: Preference share redemption a/c

DR: Profit and Loss (Retained Earnings) a/c Difference on Premium

CR: Preference shares Redemption a/c

DR: Preference share Redemption a/c: with Total Value of Redemption

CR: Bank; with Total Value of Redemption

DR: Profit and Loss (Retained Earnings) ; with(DIFFERENCE on issue –

Difference on premium
CR: CRR

Scenario 6
Shares are to be Redeemed at a PREMIUM
Calculate the value of Redemption
Was there a new issue of shares? NO
Double Entry:
To show the redemption: Ask!
- were those shares issued at a Premium? YES
- Therefore, premium on redemption is covered solely from the
Net Profit (Retained Earnings) a/c

DR: % Pref. share capital a/c: with PAR VALUE

CR: Preference share Redemption a/c: with PAR VALUE
DR: Profit and Loss (Retained Earnings) a/c Total Premium for Redemption
CR: Preference shares Redemption a/c

DR: Preference share Redemption a/c: with Total Value of Redemption

CR: Bank; with Total Value of Redemption

DR: Profit and Loss (Retained Earnings) ; with(Total value of redemption –

Total premium on Redemption)
CR: CRR