Buy back of shares -extremely confused

Accounting Entries 624 views 3 replies

mukesh

CA FINAL

148 Points Posted on 18 September 2013

I am very much confused in these 2 entries of buy back..

1) a) Equity share capital DR

Loss on issue DR

To equity share holder CR

b) Security Premuim DR

General Reserve DR

P/L DR

To loss on issue CR

2) Free reserves DR

To CRR CR

Now if the questions says that - The company decides to buy back 30000 equity shares at Rs 12/-. FOR THIS PURPOSE IT UTILISES THE SECURITY PREMUIM IN FULL AND GENERAL RESERVE TO THE EXTENT REQUIRED?

Now is it asking for adjustment of security premuim and general reserve in 1 (b) or (2) entry ??

Please don't just copy paste law language...Please explain me

Replies (3)

Samrendra

Asst. Manager- Internal audit

226 Points Posted on 18 September 2013

Dear Mukesh,

First talking about Point 1(b)........

Security Premium is the amount which company receives from shareholders over and above face value of shares at the time of issue of share. At the time of buy back of share any excess amount paid over the face value should be first reduced from Security Premium afterward any unutilised amount over and above should be reduced from Free Reserves.

In Regards to Point 2.......

Capital Redemption Reserve is created to ensure the remaining share holders that there liquidity position has not been disturbed due to such buy back. Capital Redemption Reserve are not eligible for dividend distribution they can only utilized while issue of equity share capital.

Shivani

Learner

1881 Points Posted on 20 September 2013

samrendra sir

what are free reserves

Samrendra

Asst. Manager- Internal audit

226 Points Posted on 22 September 2013

Dear Shivani,

Free Reserve are those reserves which are free for distribution as dividend. Free reserves are not made for some specified purpose like Capital redemption reserve