i know what is the entry but i'm not getting the logic derived from capital redemption reserve use in that..........plz let me know
CMA Shilpa somani (CWA final cleared) (93 Points)
05 April 2010i know what is the entry but i'm not getting the logic derived from capital redemption reserve use in that..........plz let me know
Kaushik Vankadkar
(Service)
(350 Points)
Replied 05 April 2010
If you utilise free reserves for bonus issue, the reserves gets exhausted and to reinstate that you need to create a reserve called Capital Redemption Reserve.
Kaushik
As per Sec 80(5) of companies act,1956 Capital redemption reserve(CRR) can be used to issue only fully paid bonus shares... The logic goes like this---
why CRR is created???? It is created at the time of redemption of prefrence shares.... why? It is created to protect the interest of outsiders(creditors) to whom the amount is payable before redemption of preference share capital as per winding up scheme... The interest of outsiders is protected by substituting the preference capital place with CRR. If this is not done we will not protect interest of outsiders... Moreover, if CRR is not created it may lead to distribution of that portion of funds to get distributed to shareholders by way of dividend.. Thus, we create CRR to maintain the rights of outsiders first by keeping the net assets intact....
The above logic is very much clear by now if u apply this to SEc 80(5)... we r now able to issue fully paid bonus shares by using CRR. in this way we r still keeping the net assets intact and achieving a win-win situation by giving fully paid up bonus shares to existing shareholders and also maintaining the interest of outsiders.. We issue fully paid bonus shares which takes the place of CRR in B/s
Hope you have now understood
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