Question

Redeemable Preference Shares of Rs. 2,00,000 are to be redeemed at a premium of $10\%$. Balance sheet shows profit Rs. 30,000. General Reserve - Rs. 20,000; Share Premium - Rs. 8,000 and Dividend Equalization fund Rs.50,000. How much fresh capital should be issued in order to comply with the provisions of Sec.80 of the companies act, 1956?

• A. Rs. 2,00,000
• B. Rs. 2,12,000
• C. Rs. 2,62,000
• D. Rs. 1,12,000

Answer 1

The correct option is D Rs. 1,12,000

As per section 80 of the Companies Act 1956, company can redeem preference shares only out of fresh issue or profits that are available for distribution as dividends. In case, there is premium to be paid on redemption it should be paid out of profit available for paying dividends or out of securities premium account.

Amount to be paid on redemption = 2,00,000 + 20,000 ( 10% of 2,00,000)

= 2,20,000

Amount of fresh issue = Amount to be paid on redemption - (Free reserves + securities premium reserve)

= 2,20,000 - ( 30,000 + 20,000 + 8,000 + 50,000)

= Rs-1,12,000.