Multiple choice

A Company has already issued 30,000 5% Redeemable Preference Shares of Rs. 100 each on which Rs. 80 per share has been received. The Company wants to redeem these shares at a premium of 5%. The company has sufficient profits for distribution, but to increase liquid assets, it issues the following:

  1. 10,000 Equity Shares of Rs. 100 each at a Premium of 10%.
  2. 10,000 5% debentures of Rs. 100 each. The above scheme was executed and full amount is received.

Which of the following is incorrect?

  1. Redeemable Preference Shares are redeemable only when they are fully paid up.

  2. The amount payable on redemption is Rs. 31,50,000.

  3. Principal amount of Rs. 30 lacs is to be returned whereas Rs. 10 lacs have been received from the issue of fresh Equity Shares & Rs.10 lacs have been received on 5% Debentures. Therefore, the balance of Rs.10 lacs shall be paid out of Profits.

  4. Share Premium of Rs. 1,50,000 has to be paid on redemption. This shall be paid as Rs. 1,00,000 out of the Premium received from issue of fresh Equity Shares and the balance of Rs. 50,000 from Profits.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Principal amount of Rs. 30 lacs is to be returned whereas Rs. 10 lacs have been received from the issue of fresh Equity Shares Therefore the balance of Rs. 20 lacs shall be paid out of Profits. The sum of Rs. 10 lacs received on 5% Debentures cannot be utilized for the payment of Preference Shares.

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