Page 61 - Ebook Financial Accounting 3
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b) Redemption out of profit
➢ Where the redeemable preference shares are redeemed out of profit, an amount equal
to the amount of shares redeemed must be transferred out of the profits into
contributed capital. This process has been effect to ‘freezing’ past profits and
converting them to become part of paid-up capital.
Example 3.5
Statement of Financial Position of Sapphire Bhd as at 31 December 2019
RM
Non-current assets 70,000,000
Current assets (except cash at bank) 15,000,000
Cash at bank 50,000,000
135,000,000
Issued share capital
40,000,000 ordinary shares 48,000,000
Retained profits 50,000,000
Non-current liability
20,000,000 6% redeemable preference shares 22,000,000
Current liabilities 15,000,000
135,000,000
Sapphire Bhd issued 20 million 6 percent redeemable preference shares which were
redeemable at a premium of 10 percent on 31 December 2019. All the redeemable preference
shares were to be redeemed out of profits.
Required:
Prepare the journal entries to record the above transactions and the statement of financial
position immediately after the redemption.
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