Redemption of Shares

Meaning of Redemption of Shares: A company can purchase its own shares in the open market if so authorised in the articles of association. These can be ordinary or preference shares. One of the main reasons for buying back own shares is to buy out a troublesome shareholder.

Shares can be redeemed in the following ways:

(1) Purchase of own shares out of the proceeds of new share issue:
Transfer of shares purchased from the share capital account by debiting the Share Capital Account and crediting the Share Purchases Account. Then, record the new issue: Debit Bank Account and Credit both Share Capital account as well as Share Premium Account. Finally, record the payment made for the redemption: Debit Share Purchases Account and Credit Bank Account.

(2) Purchase of own shares out of distributable profits:
Transfer of shares being purchased: Debit Share Capital Account and Credit Share Purchases Account. Then, transfer the par value of shares purchased from the distributable reserves to a new account called Capital Redemption Reserve: Debit Profit & Loss and Credit Capital Redemption Reserve. Finally, record the amount paid for the redemption: Debit Share Purchases Account and Credit Bank Account.

* Next: Redemption of Debentures
0 comments: