Page 63 - Ebook Financial Accounting 3
P. 63
c) Redemption out of capital
➢ There could be an instance when the company has sufficient capital and funds to
redeem the preference shares and it is best not to increase the contributed capital.
➢ Is allowable only if the company will not become insolvent due to the redemption of
shares, and the director can vouch for the solvency of the company by making a
solvency statement.
Example 3.6:
Statement of Financial Position of Ruby Bhd as at 31 December 2019
RM
Non-current assets 200,000,000
Current assets (except cash at bank) 150,000,000
Cash at bank 90,000,000
440,000,000
Issued share capital
100,000,000 ordinary shares 350,000,000
Retained profits 50,000,000
Non-current liability
20,000,000 6% redeemable preference shares 25,000,000
Current liabilities 15,000,000
440,000,000
Ruby Bhd issued 20 million 6 percent redeemable preference shares which were redeemable
at a premium of 25 percent on 31 December 2019. All the redeemable preference shares were
to be redeemed out of capital.
Required:
Prepare the journal entries to record the above transactions and the statement of financial
position immediately after the redemption.
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