Suman Limited has issued share capital of 1,30,000, 15% preference share of ₹10 each and 1,50,000 equity shares of ₹10 each. The preference shares are redeemable at a premium of 5% on April 1, 2011.

In order to facilitate the redemption of preference shares, the company proposed the following:

(a) To sell the investment at a profit of ₹40,000

(b) To issue new 9% debentures of face value ₹10,50,000

(c) Rest is to be provided out of profits At the same time, the company passed a resolution to capitalize the profits of ₹3,00,000 to issue bonus shares. The company also passed a resolution to issue sweat equity to its existing equity employees, which provided for the issue of each equity share of face value ₹10 at a price of ₹18 as compared to the market price of ₹35 per share.

Discussion Question

Analyse the case and show how redemption is to be carried out.

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Balance Sheet as on March 31, 2011 (Amount in ) Amount Assets Liabilities Authorized share capital 2,00,000 equity shares of face value* 10 each 2,00,000 15% preference shares of face value 10 each Issued and subscribed share capital 1,50,000 equity shares of face value 10 each fully 15,00,000 called Less: calls in arrear (on 200 shares @ *2 each) 30,000 equity shares of face value* 10 each issued as fully paid up to vendors of building 1,30,000 15% Preference shares of face value *10 each fully called and paid Reserve and Surplus Securities premium Profit and loss account Current liability and provisions Sundry creditors Provision for tax 20,00,000 Building 20,00,000 Goodwill 400 14,99,600 13,00,000 Fixed assets 1,50,000 6,50,000 3,00,000 Inventory 3,50,000 2,00,000 Investment Current assets Cash at bank Sundry debtors Amount 3,00,000 5,00,000 3,50,000 29,49,600 1,50,000 2,00,000