A company has to redeem redeemable preference shares of the value of Rs. 1,00,000 at a premium of 10% for which the company has issued 5,000 equity shares of Rs. 10 each at a premium of 20%. The amount to be transferred to capital redemption reserve account would be:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Rs. 50,000
Preference shares may be redeemed out of the proceeds of a fresh issue of shares or out of divisible profits. The part of the nominal value that is not covered by the fresh issue must be transferred to the Capital Redemption Reserve, so that the capital of the company is not reduced. Only the nominal value of the fresh issue counts; the premium collected on it and the premium paid on redemption are left out.
Nominal value of preference shares redeemed = Rs. 1,00,000
Nominal value of fresh equity issue = 5,000 × Rs. 10 = Rs. 50,000
Transfer to Capital Redemption Reserve = Rs. 1,00,000 − Rs. 50,000 = Rs. 50,000
Note: This topic is not covered in any edition of the NCERT Accountancy textbook.