Question

X Ltd has redeemed its 12% preferences shares of Rs 1,00,000 at a premium of 4%. To meet the redemption it has issued Rs 1,00,000 worth of shares of Rs 20 each at a premium of 5%. The balance outstanding to the credit of Securities Premium Account after adjusting premium on redemption of preference shares = ?

• A. Rs Nil
• B. Rs 4,000
• C. Rs 1,000
• D. Rs 96,000

Answer 1

The correct option is C Rs 1,000

Redemption of preference shares is done usually at some premium on shares so that the shareholder remains satisfactory on the return of their capital. The company has to pay the amount for premium and thus it is debited in security premium reserve account, being an expense for the company.

The company issues new shares wile redeeming the preference shares at some premium to get the benefits of the premium amount. Thus premium received on the issue has to be credited to security premium reserve account being, an income of the company.

Premium on redemption= $Redemptionamount\times Premiumgiven$

Premium on redemption= $Rs1,00,000\times \frac{4}{100}=Rs4,000$

Thus, premium given by company on redemption is RS4,000

Premium on issue= $Issueamount\times Premiumcharged$

Premium on issue= $Rs1,00,000\times \frac{5}{100}=Rs5,000$

Since, the credit is more than debit amount. the net balance of premium account will be on credit side.

Net credit amount= $Premiumonissue-Premiumonredemption=Rs5,000-Rs4,000=Rs1,000$

Hence, amount credited to premium account is Rs1,000.