Question

Premium on redemption of preference shares may be provided out of __________________.

• A. Security Premium
• B. Profits
• C. Both A and B
• D. Issue of debentures

Answer 1

The correct option is C Both A and B

The premium on redemption of preference shares may be adjusted against the securities premium account or the profit and loss account. It is only fully paid preference shares which can be redeemed.

Partly paid preference shares cannot be redeemed unless they are fully paid. When the preference shares are redeemed out of undistributed profits, it is necessary, as per provisions of Companies Act, that an amount equal to the face value of the preference share redeemed is transferred to capital redemption reserve.

This is necessary in order to immobilize profit from being used for any other purpose such as declaration of dividend, redemption of debentures, etc. Capital redemption reserve can be utilized for the purpose of issuing fully paid-up bonus shares.