GENERAL KNOWLEDGE

Detailed explanation-1: -When a company decides to redeem the redeemable preference shares out of the profits that are otherwise available for paying dividends, it needs to create the Capital Redemption Reserve A/c. The amount in the Capital Redemption Reserve is equal to the nominal value of the redeemable preference shares.

Detailed explanation-2: -Capital Redemption Reserve (CRR) is a requirement under the Companies Act which applies to buy-back schemes and redemptions of preference capital. The requirement should be followed by companies which are redeeming preference capital through any of the three specified modes.

Detailed explanation-3: -To the extent that the preference shares are redeemed out of profits, Capital Redemption Reserve Account must be credited with dividend equalization reserve that are by debiting the profit and loss Account, general reserve or other accounts showing profits otherwise available for distribution of dividends.

Detailed explanation-4: -A statutory, non-distributable reserve into which amounts are transferred following the redemption or purchase of a company’s own shares out of distributable profits or, in certain circumstances, from the proceeds of a fresh issue of shares.

Detailed explanation-5: -Redemption from the profit of the company When it is proposed to redeem Preference shares using company profits, a sum equal to the nominal value of the shares to be redeemed will be transferred from those profits to a reserve that will be called the Capital Redemption Reserve Account.