Buy back of shares -extremely confused

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)

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. 

samrendra sir

what are free reserves

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

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