Question

Cumnor Hill Ltd issues 1 million redeemable preference shares of $2.00 each on 1st July 2019. The shares offer a rate of return of 7 per cent per annum. The shares are redeemed at the option of the shareholders on 30th June 2021 Required: a) Would you classify these preference shares as debt or as equity? Why? (1 mark) b) Provide the journal entries to account for the issue and subsequent redemption of the shares, assuming that the issue was by a private placement and that the shares are redeemed out of profits. (15 marks) c) What effect does the redemption of the preference shares have on the total share capital once the ournal entries are completed. (1 mark)

Answer 1

	ans 1
	As preference shares are redeemable after 2 years, hence the company has a liability
	to pay them back after 2 years so it will be considered as a debt
	ans 2
Date	Accounts Title	Dr	Cr
July 1 2019	Cash	$2,000,000
	Redeemable Preference share		$2,000,000
	(1*2$)
being Redeemable Preference share issued
If its from old profits than the money could be saved in
	General reserve	$2,000,000
	Capital Redemption reserve		$2,000,000
June 30 2021	Redeemable Preference share	$2,000,000
	Cash		$2,000,000
ans 3	Total share capital will be decreased by $2000000
	As shares are redeemed out of profits
If any doubt please comment