Basic query in accounting

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pavankumar (Querist)
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02 November 2013 Below is a item from Balance sheet of Srabanti Company limited
Liabilities Rs
Issued and Subscribed Capital:
5000, 7.5% Redeemable Pref.Shares 5,00,000
of Rs100 each

Assets Rs
Investments, at cost 3,00,000
(Market Value Rs2,80,000)

Given:On 1.1.1996,To finance the redemption,all the investments were sold at Market Price.

In the above context:
Q1)How investment transaction helps for Redemption of Preference shares? While solving problems I have not seen any cash which got due to sale of investment is utilized for payment of Preference shares.

I will be very much thankful to you.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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02 November 2013 what you mean by "I have not seen any cash". It has been provided that investments were disposed of at market price. ie Rs 2.8 lakhs will come from the sale of investment. Rest needs to be taken out of from whatever cash you already had.

Cash/Bank Dr Rs 2.8 lakhs

To Investments Rs 2.8 lakhs
(Being investments sold)

Preference Shares A/c Dr Rs 5 lakhs

To Cash/ Bank A/c Rs 5 lakhs

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Nikhil Kaushik

Nikhil Kaushik (Expert)
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CA Pallav Singhania

CA Pallav Singhania (Expert)
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02 November 2013 Bank A/c 280000
P/L A/c 200000
To Investment A/c 300000
{Investment sold at loss}

7.5 Prep share Capital A/c Dr. 500000
To Prep Shareholder A/c. 500000
{due Entry}

Prep Shareholder A/c. 500000
To Bank 500000
{Payment Entry}

If redemption done out of profit then CCR is to be created...

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pavankumar

pavankumar (Querist)
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18 November 2013
Whether below statement is correct?
A company has no right to sales its Assets to redeem its Preference Shares.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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18 November 2013 it is correct statement. Refer proviso (a) to section 80 of the companies act 1956. redeemable preference shares can be redeemed only out of distributable profit.

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Nikhil Kaushik

Nikhil Kaushik (Expert)
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18 November 2013 or by issue of fresh shares.

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CA Pallav Singhania

CA Pallav Singhania (Expert)
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18 November 2013 I don't think its right.. selling asset for redemption of prep shares...

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