Corporate Accounting

Assignment
 Meaning of Preference Shares
As we know the share capital of a company limited by shares may be of two kinds, namaly-

(a) Equity share capital, and

(b) Preference share capital.

According Section 43 of Companies Act, 2013, "Preference Share Capital" with reference to any company limited by share, means
that part of the issued share capital of the company which carries or would carry a preferential right with respect to,

(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to
income tax ; and

(b) repayment in the case of winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have
been paid-up, whether, or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale,
specified in the memorandum or articles of association of the company.

Capital shall be deemed to be preferential capital, not with standing that it is entitled either or both of the following rights,
namely-

(i) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) mentioned above, it
has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;

(ii) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in
sub-clause (b) mentioned above, it has a right to participate, whether fully or to a limited extent, with capital not entitled to that
preferential right in any surplus which may remain after the entire capital has been paid.
Types of
Preference
Shares
1. Cumulative Preference Shares: As the name itself signifies, these shares are entitled to a
fixed amount or rate of dividend, which should be paid either out of current year’s profit or out of
future profit if the current year’s profit not enough for the payment of dividend.Hence, if in a
2. certain accounting year, the dividend is not paid to the preference shareholders then the
dividend is carried forward to the next accounting year as arrears of dividend which appear as a
contingent liability in the company’s balance sheet.
Further, if the company fails to pay dividend consecutively for two years than the holders get the
right to participate and vote at the General Meeting of the company.
3. Non-cumulative Preference Shares: Such shares possess only a fixed amount or rate of
dividend. If the dividend for a particular financial year is not announced due to loss or any other
cause, then dividend for that particular year expires, as it is not carried forward to the next year
and hence remains unpaid.
4. Participating Preference shares: This category of preference shares carries the right to
participate in the surplus profits, left over after paying a dividend to the equity shareholders at a
certain rate.Further, the shareholders are also entitled to receive a specified proportion of
surplus, after the equity shareholders are paid off, at the time of winding up of the company.
1. Non-Participating Preference Shares: The shares which are entitled to a fixed amount of
dividend only, and there is no additional rights conferred to the shareholders are known as Non-
Participating Preference Shares.
2. Redeemable Preference Shares: The preference shares which are repaid at a fixed maturity
date, or the discretion of the company are known as Redeemable Preference Shares. The
repayment of the amount on these shares is called the redemption of shares.
3. Irredeemable Preference Shares: The shares which are non-redeemable in nature are
known as irredeemable preference shares. Such shares do not have an arrangement for
redemption and the amount is repayable to the holders only at the time of winding up of the
company.Further, no company is allowed to issue irredeemable preference shares or the
preference shares which are redeemed after the stipulated term, i.e. 20 years.
4. Convertible Preference Shares: As the name suggests, convertible preference shares are
the ones which are convertible into equity shares, at the option of the shareholder, after the
expiry of the specified term. So, they are also called as quasi-equity shares.
5. Non-Convertible Preference shares: When the preference shareholder is not entitled to
convert their holding into equity shares are termed as non-convertible preference shares.
Issue of Preference Shares
section 55 of the Companies Act provides that:
(i) After the commencement of this Act, "No company limited by shares shall, issue any preference shares which are
irredeemable. Hence, issue of irredeemable preference is prohibited".
[Sec. 55(1)]
(ii) A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed
within a period not exceeding 20 years from the date of their issue.
[Sec. 55(2)]
However, a company engaged in the setting up and dealing with of infrastructural projects
may issue preference shares exceeding 20 years but not exceeding 30 years.
Rules of Issue of Preference Shares
According to Companies (Share capital and debentures) Rule, 2014, Clause 9, following are the rules of issue of preference
shares :
(1) It is necessary for the issue of preference shares that a special resolution should have
been passed in general meeting of the company.
(2) At the time of such issue of preference shares, the company has no susisting default either in the redemption of
preference shares or in repayment of dividend due on preference shares. (3) A company issuing preference shares shall
set out, in the resolution, the following
matters relating to such shares : (i) The priority with respect to payment of dividend or repayment of capital in
comparison
to equity shares;
(ii) The participation in surplus fund;
(iii) The paricipation in surplus assets and profits, on winding-up which may remain after the entire capital has been paid;
(iv) The payment of dividend on cumulative or non-cumulative basis;
(v) The conversion of preference shares into equity shares;
(vi) The voting rights;
(vii) The redemption of preference shares.
(4) If the company wants to get its preference shares listed on a recognised stock exchange, it will issue in accordance
with the rules framed and guidelines issued by the SEBI.
Redemption of Preference Shares
"Redemption means the act of redeeming i.e. paying off." In brief, it means repayment of shares, stocks,
debentures or bonds. The amount payable on redemption is usually specified on issue. The redemption
date may or may not be specified on issue.

Redemption of preference shares means repayment of capital to the preference shareholders. According to
Section 55(2) "A company limited by shares may, if so authorised by its articles, issue preference shares
which are liable to be redeemed within a period of 20 years from the date of their issue subject to such
conditions as may be prescribed. The Act further states that "Provided that a company may issue
preference shares for a period exceeding 20 years for infrastructure projects, subject to the redemption of
such percentage of shares as may be prescribed on an annual basis at the option of such preferential
shareholders."

Rule 10 of Companies (Share Capital and Debentures) Rules, 2014 provides that the maximum tenure
(period) of such preference shares shall not be more than 30 years and the company shall redeem every
year at least 10% of such preference shares beginning from the expiry of 20 years.
Rules of Redemption of Preference Shares
Conditions or Rules of Redemption of Preference Shares According to Section 55 of the Companies Act, 2013 preference shares can be redeemed only

if the following conditions are fulfilled:

(1) Right of Issue: Redeemable preference shares can be issued only by the companies limited by shares.

(2) Authorised by Articles of Association: Redeemable preference shares can be issuedif so authorised by the Articles of Associations and by complying with
necessary conditions.

(3) Maximum Period of Redemption: Preference shares must be redeemed within 20 years from the date of issue of such shares. However, in case of
infrastructural projects where maximum period of preference shares is 30 years, the company shall redeem every year at least 10% of such preference shares
beginning from the expiry of 20 years. Rule 10 of Companies (Share Capital and Debentures) Rules, 2014.

(4) Redemption at par value or at Premium: Redemption of preference shares may be at par or at premium. If premium is paid on redemption, it must be
paid out of the profits or Securities Premium Account of the company.

(5) Fully Paid-up Preference Shares: Such preference shares must be fully paid up.

(6) Source of Redemption: The redemption of preference shares can be funded only either from distributable profits or from fresh issue of shares made for
the purpose of redemption.

(7) Creation of Capital Redemption Reserve Account: Where the preference shares are proposed to be redeemed out of the profits of the company, there
shall, out of such profits, be transferred, a sum equal to the nominal value (or face value) of the shares to be redeemed, to a reserve to be called the Capital
Redemption Reserve Account.
Methods of Redemption of Preference Shares
The redemption of preference share can be done in following manner:-

Redemption out of profit

Methods
Of By issue of new shares
Redemption
Partly out of profits and partly by new issue of shares

By conversion
 Accounting Entries
1) Making the Partially paid-up Preference Shares Fully Paid up
(i) Share Final Call A/c Dr.
To Preference Share Capital A/c
(Being Final Call Money due)
(ii) Bank A/c Dr.
To Share Final Call A/c
(Being Final Call Money Received)
If there is calls-in-arrears on some shares, then the redemption should not be done for
those preference shares. If the amount of calls-in-arrear is received, then the following
entry will be made:
Bank A/c Dr.
To Calls-in-arrear A/c
(Being Calls-in-arrear Received)
Partly paid-up preference shares will be shown under the heading 'Share Capital' till they are not redeemed or they are not forfeited. The
shares on which there is calls-in-arrears, the company should do the provision of proper divisible profits for their redemption.

2) Amount of Capital due to Preference Shareholders on Redemption

(a) If the redemption is to be made at par value, then the following entry will be made:

Red. Preference Share Capital A/c dr.

To Preference Shareholders A/c

(Being Preference Share Capital due at Par)

(b) If the redemption is to be made at premium, then following entry will be made :

Red. Preference Share Capital A/c dr.(face value)

Premium on Redemption of Preference Shares A/c dr.(premium)

To Preference Shareholders A/c

(Being Preference Share Capital due at Par)

(3) Fresh Issue of Shares
(a) When the shares are issued at par :
Bank A/c Dr.
To Equity Share Capital A/c
(Being Equity Share issued at Par)
(b) When the shares are issued at premium :
Bank A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c
(Being Equity Share issued at Premium)
(c) Section 53 of the Companies Act prohibits the issue of shares at
discount.
4) Creation of Capital Redemption Reserve A/c
(

Statement of Profit and Loss/Surplus A/c Dr.

General Reserve A/c Dr.
Any other Divisible Profit A/c Dr.
To Capital Redemption Reserve A/c
(Being Profits Transferred to CRR A/c)
(5) Written off or Adjustment for Premium on Redemption (if any)
The redemption of preference shares can be made at par or at premium. If the preference shares are being
redeemed at premium, then it should be adjusted out of Securities Premium A/c or out of profits. Its entry will
be made in the following manner :
Securities Premium A/c Dr.
or
Statement of Profit and Loss Dr.
To premium on Redem. of Preference Shares A/c
(Being Premium Redeemable Preference Shares due)
(6) Arranging of Cash for Redemption
If there is no sufficient cash with the company on due date, then the company should arrange the cash. For this the company
can take loan from the bank or can sale any property.

Bank A/c Dr.

To Bank Loan A/c

To Investment A/c

To Current Asset A/c

To Fixed Assets A/c

(Being Amount arranged for Redemption of Preference Share)

The profit or loss on account of sale of current assets will be transferred to the Statement of Profit and Loss.

The profit or loss accruing from sale of fixed asset will be transferred to the Capital Reserve A/c.

(7) Payment to Preference Shareholders

Red. Preference Shareholders A/c Dr.

To Bank A/c

(Being Amount Paid to Preference Shareholders)

(8) To make partly paid Preference Shares as fully paid for final call made:

(i) (Red.) Preference Share Final Call A/c Dr.

To (Red.) Preference Share Capital A/c
(Being final call made on preference share)
(ii) For Final Call Money Received Bank A/c Dr.
To (Red.) Preference Share Final Call A/c
(Being money realised on final call)
If the payment to the preference shareholders is not possible due to some reasons, then there will be some
balance in their account. Such preference shareholders can be shown under the heading 'Current Liabilities' as
Due to Preference Shareholders.
(9) Issue of Bonus Shares
(1) Issue of Fully Paid-up Bonus Shares :

(i) According to Section 63 the capital redemption reserve can be used for issuing fully paid bonus shares to its
existing shareholders. The following entry will be made for it :

Capital Redemption Reserve A/c Dr.

Securities Premium A/c Dr.
Capital Reserves A/c Dr.
General Reserve A/c (if need be) Dr.
Statement of Profit & Loss (if need be) Dr.
To Bonus to Shareholders A/c
(Being Bonus due)
(ii) Issue of Bonus Shares Dr.
Bonus to Shareholders A/c
To Equity Share Capital A/c
(Being Bonus Paid)
(2) Bonus share may be issued to make the partly paid shares as fully paid-up. In this case distributable or divisible profits
can be used.

Journal Entries

(i) Share Final Call A/c Dr.

To Share Capital A/c

(ii) Profit and Loss Statement/(Surplus)

General Reserve A/c Dr.

Other Divisible Profit A/c Dr.

To Share Final Call A/c

Question & Solution
Thankyou