Redemption of redeemable preference shares

Section 158 (1) of CAMD 1990 States that the provisions of this sector
shall apply with respect to the redemption by a company of any redeemable
preference shares issued by it under section 122 of this Decree.

In section 122 of CAMD 1990, it was stated that subject to the
provisions of section 158 of this Decree, a company limited by shares may, if
so authorized by its articles, issue preference shares which or at the option
of the company by liable to be redeemed.

According to section 158 (2) the shares shall not be redeemed unless
they are fully paid and redemption shall be made only out of

(a) Profits of the company which
would otherwise be available for divided or

(b) The proceeds of a fresh
issue of shares made for the purpose of the redemption.

(c) Before the shares are
redeemed, the premium, if any, payable on redemption, shall be provided from
out of the profits of the company or out of the company’s share premium.

Example I

Shares redeemed at par out
of profits

In accordance with the terms of issue, a company of 1/1/97 redeems
50,000 6% reference shares of N 1 each
at par (par means nominal or face value of a share) out of profits otherwise
available for dividend. Required – show by means of journal entries the records
of the company.

Journal
1997		N	N
Jan. 1.	Profit and Loss Application Account	50,000
	Capital Redemption Reserve fund being appropriation to reserve out of available profits of a sum equal to the nominal amount of shares redeemed in redeeming 50,000 preference shares of N 1 each in accordance with CAMD 1990 and resolution dated ……………..		50,000
	Redeemable preference share capital Account	50,000
	Cash		50,000
	being redemption of 50,000 6 percent redemption preference shares of N 1 each at par in accordance with resolution dated …………

Example II

Shares Redeemed At Par Out
of Proceeds of New Issue of Shares

In accordance with a resolution dated Jan. 3 1997, a company decides to
issue 50,000 ordinary shares of N1 each
on 05/01/97 at par and utilize the proceeds to redeem 50,000 6 percent
preference shares of N 1 each at par,
Assuming the new issue was fully subscribed and paid up, show by means of
journal entries the records in the company’s books.

Journal
1997		N	N
Jan. 5	Cash	50,000
	Ordinary share capital account		50,000
	being issue of 50,000 ordinary shares of N 1 each in order to provide funds for the redemption of preference shares amounting to N 50,000.
	Redeemable preference shares capital account Cash being redemption of 50,000 6 percent redeemable preference shares of N 1 each at par in accordance with resolution dated 01/01/97.	50,000	50,000

Example III

Shares Redeemed At A
Premium Out of Profit

Assuming the shares in example 1 are redeemed at a premium of 12 ½ per
share, show by means of journal entries the records in the books of the
company.

Journal
1997		N	N
Jan. 1	Profit and Loss Application Account	56,250
	Capital Redemption Reserve fund		50,000
	Premium on Redemption Account being appropriation out of attainable profits of a sum equal to the nominal amount applied in redeeming the 50,000 6 percent preference shares of N 1 each and the premium payable in accordance with CAMD 1990 and resolution dated…………	6.250
	Redeemable Preference Share Capital Account	6,250
	Cash being redemption of 50,000 6 percent redeemable preference shares of N 1 each at a premium of 12 ½ k per share in accordance with the terms of issue and resolution dated ………….		56,250

IV Shares Redeemed At A Premium Out of Proceeds of New Issue
of Share

Assuming the shares in example II are a premium of 12 ½ k per share,
show by means of journal entries the records in the books of the company.

Journal
1997		N	N
Jan. 1	Cash	50,000
	Ordinary share capital Account		50,000
	being issue of 50,000 ordinary shares of N 1 each in order to provide funds for the redemption of preference shares amounting to N 50,000
	Premium on Redemption Account premium 12 ½ k per share payable on redemption of 50,000 6 percent preference shares of N 1 each in accordance with CAMD 1990 and resolution dated 03/01/97		6,250
	Redeemable Preference share Capital Account Premium on Redemption Account Cash being redemption of 50,000 6 percent redeemable preference shares of N 1 each at a ½ premium of 12 per share in accordance with the terms of issue and resolution dated 03/01/97.	50,000 6,250	56,250

NOTE: It will be seen that, in
this case, premium paid be provided out of profits and charged to premium of
Redemption Account, this the balance on this account is automatically
eliminated.

It must not be overlooked that the capital Redemption Reserve Fund may
be created by transfer from revenue reserves, for example, General Reserve and
not Loss Appropriation Account over the period of years during which the
Redeemable preference shares are outstanding.

Shares may, of course, be redeemed partly out of profits and partly out
of the proceeds of a new issue of shares made for the purpose, but the
necessary entries are on similar lines
to the foregoing examples.

Any balance on share premium
Account, whether arising in connection with the fresh issue of shares made for
the purpose of redemption or any other issue, may be applied in providing the
premium: if any , payable on the redemption of redeemable preference shares.
The statutory provision in this regard is permissive and not obligatory: there
is no compulsion to utilize the share premium Account for this purpose although
generally it would be wise to take advantage of the opportunity to do so.

The capital redemption reserve fund which be stated separately in the balance sheet (being classified as a capital
reserve), may be applied in paying up unissued shares of the company to be
issued as fully – paid bonus shares but otherwise can be reduced only in
accordance with the provision of CAMD 1990 for reduction of share capital.