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Retirement of Preferred Stocks | Redemption of Preference Shares

Arjun EP

Published on: July 22, 2021

Redemption of Preference Shares

Generally, a limited company cannot return its capital money to common stockholders.

If a company wants to return its capital, it must be mentioned in the Articles of Association.

The company must pass a special resolution to the court to return the capital of the common stocks.

But; the companies can redemption preferred stocks.

There are different types of preferred stocks.

Out of them, redeemable preferred stocks can be redeemed after proper notice.

Redemption can be taken place by fulfilling the following rules:

· Only fully paid preferred stocks can be redeemed.

· If there is partially paid, it must be called up.

· Preferred stock can be redeemed only from profit available for dividends.

· If there is not a sufficient amount, the company can issue new fresh common stocks or preferred stocks.

· If redemption is made out of profit, it should be transferred to ‘capital redemption reserve account.’

· Premium on redemption can be arranged from additional paid-in capital (share or security premium) or profit.

· Premium on issue of preferred stock cannot be used for redemption of preferred stocks.

· Redemption of preferred stocks does not affect the authorized capital of the company.

· If there is an arrears preference dividend, it must be paid before redemption.

· Redemption can be made at par, discount or premium.

Issue and retirement of preferred stocks

Issue		Retirement (redemption)
Issued at par		Retirement at par
Issued at discount	Capitalized loss	Retirement at discount	Capitalized gain
Issued at premium	Capitalized gain	Retirement at premium	Capitalized loss

Keep in Mind

Capitalized loss is debited in the journal entry

Capitalized gain is credited in the journal entry

Premium = Additional paid-in capital or security premium

Journal Entries for New Issue

Date	Particulars		LF	Amount Dr	Amount Cr
	New issues at par
	Bank account	Dr		xxxx
	To Common stocks/Preferred stock account				xxxx
	(Being- xxxx stocks issued of $xx at par)

	New issues at discount
	Bank account	Dr		xxxx
	Discount on issue of preferred stock account	Dr		xxxx
	To Common stocks/Preferred stock account				xxxx
	(Being- xxxx stocks issued of $xx at discount)

	New issues at premium
	Bank account	Dr		xxxx
	To Common stocks/Preferred stock account				xxxx
	To Additional paid-in capital (share/security premium)				xxxx
	(Being- xxxx stocks issued of $xx at premium)

Note: Premium received on the new issue cannot be used for redemption or retirement of the stocks.

Journal Entries

For transferring and retirement

Date	Particulars		LF	Amount Dr	Amount Cr
	Stock transferred to stockholders at par
	Redeemable preferred stock account	Dr		xxxx
	To Preferred stockholders account				xxxx
	(Being- preferred stocks transferred stockholders at par)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		xxxx
	To Bank account				xxxx
	(Being- payment made to preferred stockholders)

Journal Entries

For transferring and retirement

Date	Particulars		LF	Amount Dr	Amount Cr
	Stock transferred to stockholders at discount
	Redeemable preferred stock account	Dr		xxxx
	To Preferred stockholders account				xxxx
	To Discount on redemption)				xxxx
	(Being- preferred stocks transferred stockholders at discount)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		xxxx
	To Bank account				xxxx
	(Being- payment made to preferred stockholders)

Journal Entries

For transferring and retirement

Date	Particulars		LF	Amount Dr	Amount Cr
	Stock transferred to stockholders at premium
	Redeemable preferred stock account	Dr		xxxx
	Additional paid-in capital (premium on redemption)	Dr		xxxx
	To Preferred stockholders account				xxxx
	(Being- preferred stocks transferred stockholders at premium)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		xxxx
	To Bank account				xxxx
	(Being- payment made to preferred stockholders)

Journal entries

Date	Particulars		LF	Amount Dr	Amount Cr
	Profit and reserve utilized for retirement
	Retained earnings account	Dr		xxxx
	General reserve account	Dr		xxxx
	To Capital retirement reserve account				xxxx
	(Being- profit/reserve utilized for the retirement)

	Issue of new stocks for retirement purpose
	Bank account	Dr		xxxx
	Discount on issue of shares account	Dr		xxxx*
	To Common/preferred stocks account				xxxx
	To Additional paid-in capital (share/security premium)				xxxx*
	(Being- new stocks issued for retirement purpose)

	Preferred stock transfer to preferred stockholders
	…% Preferred stocks account	Dr		xxxx
	Additional paid-in capital on retirement account	Dr		xxxx
	To Preferred stockholders account				xxxx
	(Being- stocks transfer to preferred stockholders)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		xxxx
	To Bank account				xxxx
	(Being- payment made to preferred stockholders)

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country

PROBLEM: 4A

EP Company Ltd issued 22,500; 8% redeemable preferred stock of $100 par value 8 years ago at par; retirement (redeemable) at par. This year, the maturity period is ended. There is not any arrear of dividend.

Required: Journal entries for retirement if:

(a) Out of profit viz the company has sufficient retained earnings for retirement;

(b) By issuing new common stock of $10 at par;

[Answer: (a) Bank $22,50,000; (b) 125,000 stocks;

(c) 250,000 stock; (d) Bank $22,50,000

SOLUTION

(a) Retirement out of profit viz the company has sufficient retained earnings for retirement

Journal Entries

Date	Particulars		LF	Amount Dr	Amount Cr
	Retirement from profit
	Retained earnings account	Dr		22,50,000
	To Capital retirement reserve account				22,50,000
	(Being- retained earnings utilized for the retirement of preferred stocks)

	Preferred stock transfer to preferred stockholders
	8% Redeemable preferred stocks account	Dr		22,50,000
	To Preferred stockholders account				22,50,000
	(Being- stocks transfer to preferred stockholders)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		22,50,000
	To Bank account				22,50,000
	(Being- payment made to preferred stockholders)

(b) Retirement of preferred stock by issuing new common stock of $10 at par

No. of new common stock = $22,50,000 ÷ $10 = 2,25,000

Journal Entries

Date	Particulars		LF	Amount Dr	Amount Cr
	Issue of new stocks for retirement purpose
	Bank account	Dr		22,50,000
	To Common stock account				22,50,000
	(Being- 225,000 common stocks of $10 par value issued for the retirement of preferred stocks)

	Preferred stock transfer to preferred stockholders
	8% Redeemable preferred stocks account	Dr		22,50,000
	To Preferred stockholders account				22,50,000
	(Being- stocks transfer to preferred stockholders)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		22,50,000
	To Bank account				22,50,000
	(Being- payment made to preferred stockholders)

(c) Retirement of preferred stock by issuing new common stock of $10 at 10% discount

No. of new common stock = $22,50,000 ÷ ($10C – 1D) = 250,000

Journal Entries

Date	Particulars		LF	Amount Dr	Amount Cr
	Issue of new stocks for retirement purpose
	Bank account	Dr		22,50,000
	Discount on preferred stocks	Dr		2,50,000
	To Common stock account				25,00,000
	(Being- 250,000 common stocks of $10 issued at 10% discount for the retirement of preferred stocks)

	Preferred stock transfer to preferred stockholders
	8% Redeemable preferred stocks account	Dr		22,50,000
	To Preferred stockholders account				22,50,000
	(Being- stocks transfer to preferred stockholders)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		22,50,000
	To Bank account				22,50,000
	(Being- payment made to preferred stockholders)

(d) Retirement of preferred stock by issuing 230,000 new common stock of $10 at 20% premium

Value of new common stock = 225,000 x ($10C + 2P)

Journal Entries

Date	Particulars		LF	Amount Dr	Amount Cr
	Issue of new stocks for retirement purpose
	Bank account	Dr		27,00,000
	To Common stock account				22,50,000
	To Additional paid-in capital (share or security premium)				4,50,000
	(Being- 225,000 common stocks of $10 issued at 20% premium for the retirement of preferred stocks)

	Preferred stock transfer to preferred stockholders
	8% Redeemable preferred stocks account	Dr		22,50,000
	To Preferred stockholders account				22,50,000
	(Being- stocks transfer to preferred stockholders)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		22,50,000
	To Bank account				22,50,000
	(Being- payment made to preferred stockholders)

Note: Premium received on the new issue cannot be used for redemption or retirement of the stocks.

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country

PROBLEM: 4B

TK Company Ltd issued 20,000 redeemable preferred stocks of $100 par value redeemable at $130 on maturity period. The company issued 20,000 new common stocks of $100 par value at $150 to the retirement of preferred stock. The company took the remaining balance from retained earnings for payment.

Required: Journal entries

[Answer: Retained earnings = $600,000]

SOLUTION

Journal Entries

Date	Particulars		LF	Amount Dr	Amount Cr
	Issue of new stocks for retirement purpose
	Bank account	Dr		30,00,000
	To Common stock account				20,00,000
	To Additional paid-in capital (share/security premium)				10,00,000
	(Being- 20,000 common stocks of $100 issued at $150 for the retirement of preferred stocks)

	Preferred stock transferred to preferred stockholders
	Redeemable preferred stocks account	Dr		20,00,000
	Additional paid in capital (premium on redemption)	Dr		6,00,000
	To Preferred stockholders account				26,00,000
	(Being- stocks transfer to preferred stockholders)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		26,00,000
	To Bank account				20,00,000
	To Retained earnings account (b/f)				6,00,000
	(Being- payment made to preferred stockholders)

Note: Premium received on the new issue cannot be used for redemption or retirement of the stocks.

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country

PROBLEM: 4C [Retirement at par, out of reserve and profit]

KP Corporation Ltd provides the following information:

	Amount $
Common stock of $100 par value	40,00,000
10% Preference shares of $100 par value	10,00,000
Capital reserve	500,000
Additional paid in capital (share/security premium)	600,000
General reserve	800,000
Profit and loss (Cr)	400,000

The company decided to redeem all preference shares utilizing the entire profit and general reserve.

Required: Redemption of preference shares

SOLUTION:

Journal entries

In the book of KP Corporation Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Profit and reserve utilized for retirement
	Profit and loss account	Dr		4,00,000
	General reserve account	Dr		6,00,000
	To Capital redemption reserve account				10,00,000
	(Being: profit and reserve utilized for retirement)

	stock transferred to preferred stockholders			10,00,000
	10% Preferred stock capital account	Dr
	To Preferred stockholders account
	(Being- preferred stock transferred to preferred
	stockholders				10,00,000

	Payment made to preference shareholder
	Preferred stockholders account	Dr		10,00,000
	To Bank account				10,00,000
	(Being- payment made to preferred stockholder)

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country

PROBLEM: 4D [Redemption at premium, out of reserve and new stocks issue]

OPQ Company Ltd. has the following information:

	Amount in $
Common stock of $100 each	20,00,000
8% Preferred stock of $100 each	10,00,000
Revenue reserve	1,00,000

The company decided to redeem all preference shares at 10% premium by issuing equity shares of $100 at par.

Required: Journal entry

SOLUTION:

Journal entries

In the book of OPQ Company Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Profit and reserve utilized for retirement
	General reserve account	Dr		1,00,000
	To Capital redemption reserve account				1,00,000
	(Being: reserve utilized for retirement)

	Issue of new share for redemption purpose
	Bank account	Dr		10,00,000
	To Common stock account				10,00,000
	(Being- 10,000 common stock of $100 issued for
	redemption purchase)

	Stocks transferred to preferred stockholders
	8% Preferred stock capital account	Dr		10,00,000
	Additional paid in capital (premium on redemption)	Dr		1,00,000
	To Preferred stockholders account				11,00,000
	(Being- stocks transfer to stockholder with premium)

	Payment made to preferred stockholders
	Preferred stockholders account	Dr		11,00,000
	To Bank account				11,00,000
	(Being- payment made to preferred stockholders)

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country

PROBLEM: 4E [Redemption at premium, out of new stocks issue, profit and reserve]

Balance Sheet

Duggar Agro Ltd

Liabilities	Amount $	Assets	Amount $
Share capital:		Property, plant and equipment:
5,000 Common stock of $100	5,00,000	Plant and Machinery	3,00,000
2,500; 12% Red. Pref. stock of $100	2,50,000	Land and Building	5,00,000
Retained earnings:		Current assets:
Capital reserve	50,000	Inventory	2,50,000
Additional paid in capital (premium)	50,000	Account payable	30,000
General reserve	80,000	Cash at bank	4,20,000
Profit and loss	70,000
Current liabilities:
Account payable	3,00,000
Bank overdraft	2,00,000
	15,00,000		15,00,000

Additional information:

(a) BOD decided to redeem the preferred stock at 10% premium.

(b) The company issues new common stock of $100 at par after using general reserve and profit.

Required: Journal entry and new balance sheet

[Answer: New stocks issued = 1,250; Balance sheet = $13,50,000]

SOLUTION

Journal entries

In the book of Duggar Agro Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Profit and reserve utilized for retirement
	General reserve account	Dr		80,000
	Profit and loss account	Dr		70,000
	To Capital redemption reserve account				150,000
	(Being: reserve and profit utilized for retirement)

	Issue of new share for redemption purpose
	Bank account	Dr		1,25,000
	To Common stock account				1,25,000
	(Being- 1,250 common stock of $100 at par issued for redemption purpose)

	Preference shares transfer to preference shareholder
	8% Preferred stock capital account	Dr		2,50,000
	Additional paid in capital (premium on redemption)	Dr		25,000
	To Preferred stockholders account				2,75,000
	(Being- stocks transfer to stockholder with premium)

	Payment made to preference shareholder
	Preferred stockholders account	Dr		2,75,000
	To Bank account				2,75,000
	(Being- payment made to preferred stockholders)

Balance Sheet

Duggar Agro Ltd

Liabilities	Amount $	Assets	Amount $
Share capital:		Property, plant and equipment
6,250 Common stocks of $100	6,25,000	Plant and Machinery	3,00,000
Retained earnings:		Land and Building	5,00,000
Capital reserve	50,000	Current assets:
Additional paid in capital [50,000 – 25,000]	25,000	Inventory	2,50,000
Capital redemption reserve	1,50,000	Account receivable	30,000
Current liabilities:		Cash at bank	2,70,000
Account payable	3,00,000
Bank overdraft	2,00,000
	13,50,000		13,50,000

Net cash = 420,000 balance + 125,000 share issue – 275,000 paid = $270,000

#####

PROBLEMS AND ANSWERS OF RETIREMENT OF PREFERRED STOCKS

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country

PROBLEM: 4A

TK Company Ltd issued 20,000 redeemable preferred stocks of $100 par value redeemable at $150 on maturity period. The company issued 20,000 new common stocks of $100 par value at $130 to the retirement of preferred stock. The company took the remaining balance from retained earnings for payment.

Required: Journal entries

[Answer: Retained earnings = $10,00,000]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = ₦ = Birr = Currency of your country

PROBLEM: 4B

AM Company Ltd issued 100,000; 8% redeemable preferred stock of $10 par value 8 years ago at par; retirement (redeemable) at par. This year, the maturity period is ended. There is no arrear of dividend.

Required: Journal entries for retirement if:

(a) Out of profit viz the company has sufficient retained earnings for retirement;

(b) By issuing new common stock of $10 at par;

[Answer: (a) Bank $10,00,000; (b) 100,000 stocks;

(c) 111,111 stock; (d) 62,500 stocks

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