Caoital Redemption Reserve

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ansarimn (Querist)
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10 April 2010 When Capital Redemption Reserve is Created ?

If a Com[any redeem preference shares capital
of Rs. 50,000 at 5% premium, what is the amount of Capital Redemption Reserve to be created ?

ansarimn

ansarimn (Querist)
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11 April 2010 Any answer please

Rasesh

Rasesh (Expert)
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11 April 2010 The CRR is to be created only to the extent of the capital amount i.e. the face value of the shares redeemed.

The premium has to be adjusted out of the profits.

CA Ravi Sisodia

CA Ravi Sisodia (Expert)
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11 April 2010 Agree, CRR is to be credited by face value of redeemable shares.

shakuntala chhangani

shakuntala chhangani (Expert)
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14 April 2010 There are only two sources for redemption of pref shares :
1. out of fresh issue
2. out of divisible profits
As u know, redemption of pref. shares reduces capital. but when the first option is exercised, it again increases the capital. but in the second case, capital reduces. hence an equivalent amount is transferred from free reserves to a separate A/c called CRR. CRR has only one use - issue of fully paid bonus shares. whenever the co. will use CRR, its capital will increase again.
For ur question, if there is no fresh issue then CRR will be created of Rs. 50,000.
If there is fresh issue of Rs. 30,000, then CRR will be created for Rs. 20,000.
If full amount is financed through fresh issue then no CRR will be created.
Since i used the word capital, it will be at nominal value only.
In Short, u can say that through CRR, co. converts its profits into share capital.
In case u hv any further doubt, revert back to me.
Regards, CA Shakuntala Chhangani

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