Question

X ltd provides the following information:

12% Preference Shares of Rs 10 each	6,00,000
General reserve	3,00,000
Profit and loss account	5,00,000
Securities Premium	70,000
Investments	4,50,000
Cash	1,00,000

The 12% preference shares are redeemable at a premium of 10%. The company wishes to maintain the cash balance at Rs 50,000. For the purpose of redemption of preference shares, It proposed to sell the investment for Rs 4,00,000. The company proposes to issue a sufficient number of equity shares of Rs 100 each at a premium of 5% to raise required cash resources.
The balance of Securities Premium Account after adjusting premium on redemption of pref. Shares is ________.

• A. Nil
• B. Rs. 10,000
• C. Rs. 20,000
• D. Rs. 30,000

Answer 1

The correct option is C Rs. 20,000

Security premium reserve account is an account created by the company for the purpose of transfer of the premium on redemption as well as issue of various shares.

$Securitypremiumreservevalue=Balanceofpremium-Premiumonredemption+Premiumonissue$

Premium on redemption is deducted because it is an expense that the company has to pay for the premium paid on redemption of shares. Whereas premium received on issue of shares is the income of the company.

Substitute values in the above equation

$Securitypremiumreservevalue=Rs70,000-Rs60,000+Rs10,000=Rs20,000$

The balance of premium account after adjustment is $Rs20,000$

Thus, security premium reserve account will have a balance of Rs20,000 when considered in balance sheet.