Question

Amount of profit used for redemption of preference shares should be transferred to Capital Reserve.

• A. True
• B. False

Answer 1

The correct option is B False

a company can redeem only fully paid-up preference shares out of the profits available for dividend or out of the proceeds of a fresh issue of shares for redemption.

Hence, the preference shares are redeemed from the capital reserve account created for the purpose of the redemption.When the company proposes to redeem the preference shares out of the profits, it transfers an amount equal to the nominal value of the redeemable preference shares to the Capital Redemption Reserve A/c out of the profits of the company.

Also, in this case, the provisions relating to the reduction of share capital shall apply. The company can also use the Capital Redemption Reserve to issue the fully paid-up bonus shares.