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Home > Accounting and Auditing > Introduction to Company Accounts > Capital Redemption Reserve Account 
Introduction to Company Accounts

Capital Redemption Reserve Account 

A limited company may issue redeemable preference shares if it’s Articles of Association provide. Thus, these preference shares are liable for redemption within a period not exceeding twenty years from the date of issue. A company cannot issue irredeemable preference shares. Also, a company can redeem only fully paid-up preference shares out of the profits available for dividend or out of the proceeds of a fresh issue of shares for redemption. Hence, the preference shares are redeemed from the capital reserve account created for the purpose of the redemption.

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Capital Redemption Reserve Account     

When the company proposes to redeem the preference shares out of the profits, it transfers an amount equal to the nominal value of the redeemable preference shares to the Capital Redemption Reserve A/c out of the profits of the company.

Also, in this case, the provisions relating to the reduction of share capital shall apply. The company can also use the Capital Redemption Reserve to issue the fully paid-up bonus shares.

Browse more Topics under Introduction To Company Accounts

Premium on Redemption of Preference Shares

The companies whose financial statements comply with the Accounting Standards, it needs to provide the premium payable on redemption out of the profits of the company, before the redemption of shares.

Also, when the company redeems the preference shares issued on or before the commencement of the Companies Act, 2013, it shall provide the premium on redemption out of the profits or out of the securities premium account of the company.

While, the companies whose financial statements do not comply with the Accounting Standards, can provide the premium payable on redemption of the preference shares out of the profits or the securities premium account of the company.

capital reserve

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Situation 1: Redemption out of the profits

When a company decides to redeem the redeemable preference shares out of the profits that are otherwise available for paying dividends, it needs to create the Capital Redemption Reserve A/c.

The amount in the Capital Redemption Reserve is equal to the nominal value of the redeemable preference shares. The company has to transfer the profits available for dividends to the CRR.

Journal Entries

Date Particulars Amount (Dr.) Amount (Cr.)
1. Transfer of profits to the CRR A/c General Reserve A/c Dr.
Profit & Loss Appropriation A/c Dr.
Dividend Equalization A/c Dr.
To Capital Redemption Reserve A/c
(Being transfer of profits from general reserve or P&L Appropriation A/c or Dividend Equalization A/c of an amount equal to the nominal value of the redeemable preference shares to the Capital Redemption Reserve A/c)
2. When current assets are sold to provide cash for redemption Bank A/c Dr.
To Asset A/c
(Being sale proceeds of the asset)
3. Transfer of the redeemable preference share capital to shareholders A/c Redeemable Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(Being the nominal value of the shares to be redeemed transferred to the shareholders A/c)
4. On redemption at Premium Redeemable Preference Share Capital A/c Dr.
Premium on Redemption of Preference Shares A/c (premium amt.) Dr.
To Preference Shareholders A/c
(Being the nominal value and redemption premium on the shares to be redeemed transferred to the shareholders A/c)
5. For providing Redemption Premium Securities Premium A/c Dr.
Profit and Loss A/c Dr.
To Premium on Redemption of Preference Shares A/c
(Being premium on redemption provided for)
6. On redemption of preference shares Preference Shareholders A/c Dr.
To Bank A/c
(Being preference shares redeemed)

 

 Situation 2: Redemption out of the proceeds from a fresh issue

A company may redeem the redeemable preference shares out of the proceeds from a fresh issue of shares. In this case, firstly the company needs to pass the entries regarding the fresh issue and then that regarding the redemption.

Thus, in this case, the new Equity or Preference Share Capital A/c shall be equal to the nominal value of the Redeemable Preference Shares.

Situation 3: Redemption partly out of the profits and partly out of the proceeds from a fresh issue

In the above situation, the Redeemable Preference Share Capital is equal to the amount in Capital Redemption Reserve A/c and the new Share Capital A/c.

Therefore, the company needs to pass all entries under situation 1 and 2. However, we can combine the common entries.

Solved Example For You

Sony Ltd. Co. issued 10000, 8% redeemable preference shares of ₹100 each on 1 January 2008. The shares are redeemable at a premium of 10%.  The shares are now due for redemption.

The company decides to redeem the preference shares out of the General Reserves and write off the premium payable on redemption out of the Securities Premium A/c. Show the necessary journal entries.

Ans.

In the books of Sony Ltd. Co.

Journal Entries

Date Particulars Amount (Dr.) Amount (Cr.)
1. General Reserve A/c Dr. 1000000
To Capital Redemption Reserve A/c 1000000
(Being transfer of profits from a general reserve of an amount equal to the nominal value of the 8% redeemable preference shares to the Capital Redemption Reserve A/c)
2. 8% Redeemable Preference Share Capital A/c Dr. 1000000
A premium on Redemption of Preference Shares A/c (premium amt.) Dr. 100000
To 8% Preference Shareholders A/c 1100000
(Being the nominal value and redemption premium @ 10% on the shares to be redeemed transferred to the shareholders A/c)
3. Securities Premium A/c Dr. 100000
To Premium on Redemption of Preference Shares A/c 100000
(Being premium on redemption written off)
4. 8% Preference Shareholders A/c Dr. 1100000
To Bank A/c 1100000
(Being preference shares redeemed)

 

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