Question

When preference shares are redeemed out of divisible profits, which amount is transferred to Capital Redemption Reserve under Section 80?

• A. Premium payable of redemption of preference shares.
• B. Nominal value of preference shares redeemed out of divisible profits.
• C. Nominal value of preference shares redeemed out of fresh issue of shares.
• D. Nominal value of preference shares redeemed out of divisible profits + premium payable on redemption.

Answer 1

The correct option is B Nominal value of preference shares redeemed out of divisible profits.

To the extent that the preference shares are redeemed out of profits, Capital Redemption Reserve Account must be credited, debiting the profit and loss Account, general reserve or other accounts showing profits otherwise available for distribution of dividends.

Capital Redemption reserve account can be utilized for the issue of fully paid bonus shares to the members of the company. Only to the extent of nominal value of preference shares redeemed out of divisible profits should be transferred to CRR.