Redemption of preference shares (liabilities) Assume that Omega Ltd had issued 30 000 redeemable preference shares, fully paid at $1 each. Omega Ltd had classified these shares as non-current liabilities in its statement of financial position. 1. Redemption from a fresh issue of shares. The shares are to be redeemed in cash out of a fresh issue of 15000 redeemable preference shares issued for $2 each. The journal entries necessary are: 30 000 Dr Cr 30 000 30 000 Preference Shares Liability Shareholders' Redemption (Transfer of preference shares liability to redemption account) Cash Preference Shares Liability (Issue of 15000 preference shares for $2 each) Shareholders' Redemption Cash (Redemption of preference shares) Dr Cr 30 000 30 000 Dr Cr 30 000 2. Redemption out of profits at a premium. Assume that Omega Ltd redeemed the prefer- ence shares out of profits in cash for a price of $1.10 per share. In accordance with ASIC's Regulatory Guide 68 paragraph 101, whenever preference shares are classified as a liability, on redemption of those preference shares the entity must still pass an accounting entry to debit Retained Earnings and credit Share Capital for the original value of the shares being redeemed (as in items 2 and 3 of illustrative example 2.9), and any premium on redemption can be regarded as an expense. The reason for requiring a transfer out of Retained Earnings to Share Capital is that, notwithstanding that accounting standards require the preference shares to be classified as a liability, under the law in Australia, the preference shares are share capital. Hence, the entries to record the redemption of the preference shares liability of Omega Ltd are: 30 000 Dr Cr 30 000 3000 Dr Cr 3000 Preference Shares Liability Shareholders' Redemption (Transfer of preference shares liability to redemption account) Redemption Premium Expense Shareholders' Redemption (Premium on redemption) Retained Earnings Share Capital (equity) (Transfer of retained earnings to capital to preserve the capital of the company under the law) Shareholders' Redemption Cash (Redemption of preference shares at a premium) 30 000 Dr Cr 30 000 33000 Dr Cr 33 000 Redemption of preference shares (liabilities) Assume that Omega Ltd had issued 30 000 redeemable preference shares, fully paid at $1 each. Omega Ltd had classified these shares as non-current liabilities in its statement of financial position. 1. Redemption from a fresh issue of shares. The shares are to be redeemed in cash out of a fresh issue of 15000 redeemable preference shares issued for $2 each. The journal entries necessary are: 30 000 Dr Cr 30 000 30 000 Preference Shares Liability Shareholders' Redemption (Transfer of preference shares liability to redemption account) Cash Preference Shares Liability (Issue of 15000 preference shares for $2 each) Shareholders' Redemption Cash (Redemption of preference shares) Dr Cr 30 000 30 000 Dr Cr 30 000 2. Redemption out of profits at a premium. Assume that Omega Ltd redeemed the prefer- ence shares out of profits in cash for a price of $1.10 per share. In accordance with ASIC's Regulatory Guide 68 paragraph 101, whenever preference shares are classified as a liability, on redemption of those preference shares the entity must still pass an accounting entry to debit Retained Earnings and credit Share Capital for the original value of the shares being redeemed (as in items 2 and 3 of illustrative example 2.9), and any premium on redemption can be regarded as an expense. The reason for requiring a transfer out of Retained Earnings to Share Capital is that, notwithstanding that accounting standards require the preference shares to be classified as a liability, under the law in Australia, the preference shares are share capital. Hence, the entries to record the redemption of the preference shares liability of Omega Ltd are: 30 000 Dr Cr 30 000 3000 Dr Cr 3000 Preference Shares Liability Shareholders' Redemption (Transfer of preference shares liability to redemption account) Redemption Premium Expense Shareholders' Redemption (Premium on redemption) Retained Earnings Share Capital (equity) (Transfer of retained earnings to capital to preserve the capital of the company under the law) Shareholders' Redemption Cash (Redemption of preference shares at a premium) 30 000 Dr Cr 30 000 33000 Dr Cr 33 000