Buyback of Equity Shares
Buyback of equity shares is a process of capital restructuring. It is a financial strategy which allows a company to but its equity shares issued earlier. A company can buybacks it shown shares by obtaining permission of the Company Law Board, under the provisions of the Companies Act, 1956.
Purpose:
a) To facilitate reduction of share capital or redemption of capital
b) To generate higher return to the left over equity shareholders.
c) To return surplus cash to the shareholders in the form of buyback when there is no proper investment opportunities.
d) To maintain shareholders value in the situation of poor secondary market.
e) To arrest downtrend in the value of shares.
Sources of Buyback:
- Free Reserves
- Securities Premium Account
- Proceeds of earlier issue of shares or other specified securities like employees stock option.
Accounting of Buyback:
A) If offer price is given:
1) Calculate the sources of Buyback
Source of Buyback = Free Reserves + Securities Premium
2) Compute the limit of Buyback
Limit = 25% of (Equity Share Capital + Prefe. Share Cap + Free Res. + Securities Premium)
3) Calculate Debt Equity Ratio after Buyback.
After Buyback, Debt Equity Ratio should not exceed 2 : 1.
4) Calculate the limit of 25% of Equity Share Capital
Maximum Nominal Value of Equity Shares = 25% of paid up Equity Share Capital
5) Find out the maximum number of Equity Shares that can be bought.
Max. No. of Eq. Sh. Bought. = Max. Nom. Value of Eq. Shares / Nominal Value per share
6) Find out the amount of Buyback
No. of Equity Shares to be bought back X Offer Price.
B) If offer price is not given:
7) Repeat Step No. 1, 2 and 3
8) Select the lowest amount of the three amounts
9) Find out maximum number of equity shares that can be bought back.
10) Find out maximum possible officer price.
= Lowest amt as per step 8 / max. no. of Equity Shares as per step no. 9
Accounting Entries:
1) Making partly paid equity shares fully paid.
a) Making a final call
b) Receiving a final call
2) Sale of Investments
3) Issue of Fresh Share (Other Kind) (at par, premium or at a discount)
4) Creating CRR
5) Providing premium on buyback
6) Deciding the buyback claim
a) Buyback at par
Equity Share Capital A/c Dr
To Equity Shareholder’s A/c
b) Buyback at Premium
Equity Share Capital A/c Dr
Premium Payable on Buyback A/c Dr
To Equity Shareholder’s A/c
c) Buyback at discount
Equity Share Capital A/c Dr
To Equity Shareholder’s A/c
To Capital Reserve A/c
7) Payment to equity shareholder
8) Payment of Buyback Expenses
Buyback Expenses A/c Dr
To Bank A/c
9) Writing off buyback expenses against Profit & Loss Account
Profit & Loss Account Dr
To Buyback Expenses A/c
Practical Problems
1. X Ltd. has furnished the following information :
Paid up Capital: Rs. 5,000. Free Reserves: Rs. 12,000. No. of Shares: 500 .
Face value per share Rs. 10.
Price settled Rs. 50 per share.
2 . X Ltd desires to buyback, 5,000 equity shares of Rs. 10 each complies with the conditions. For this purpose, the company decided to issue new preference shares of Rs. 10 each of the equivalent amount.
Pass Journal Entries in the books of X Ltd.
3. Vinit Ltd.
Balance Sheet
As on 31st March, 2009
Liabilities | Rs. | Assets | Rs. |
40,000 Equity Shares of Rs. 10 each 500 11.5 % Preference Shares of Rs. 100 each Revenue Reserve Profit and Loss A/c Securities Premium Creditors
| 4,00,000
50,000 45,000 70,000 15,000 1,00,000
6,80,000 | Fixed Assets Stock Debtors Bank
| 4,00,000 1,00,000 60,000 1,20,000
6,80,000 |
The company bought back 10,000 equity shares at par after complying with the legal formalities.
Pass Journal Entries.
4. VIMI Ltd bought back 6,000 equity shares of Rs. 10 each at Rs. 15 per share. No fresh issue is made for the purpose. Pass Journal Entries.
5. Vedant Ltd. had issued capital of Rs. 50, 00,000 of Rs. 10 each. The balance on general reserve was Rs. 7, 00,000 and securities premium Rs. 50,000. The company decided to buyback 1/5 of its share capital at 20% discount. The company had issued Rs. 2, 50,000 11% preference shares for buyback one month back.
Pass Journal Entries.
6. Vikas Ltd passed a resolution for buying back 25,000 equity shares of Rs. 5 each fully paid at a premium of 20%. For this purpose, it issued 15%preference shares of Rs. 100 each at par which was fully subscribed. The company has sufficient balance in Revenue Reserves and Securities Premium Account. Pass Journal Entries for the above.
7. X Ltd furnishes the following information:
80,000 Equity Shares of Rs. 10 each, Rs. 7 per share paid up: Rs 5, 60,000.
General Reserve: RS. 80,000. Profit and Loss A/c: Rs. 6, 00,000.
Securities Premium: Rs. 1, 20,000. Bank Loan (secured): Rs. 3, 00,000.
Unsecured Loan: Rs. 1, 00,000.
Keeping in view the legal requirements, ascertain the maximum number of equity shares that can be bought back by the company at a price of Rs. 40 per shares.
8. Following information is available from the books of a company :
1,20,000 Equity Shares of RS. 10 each : Rs. 12,00,000. Securities Premium : Rs. 70,000. General Reserves : Rs. 3,50,000.
The compay decided to buyback 25% of the equity share capital Rs. 12 per share. Pass Journal Entries without narration.
9. A company buyback 50,000 shares of Rs. 10 each at Rs. 20 per share.
The reserves of the company are as follows :
Securities Premium : RS. 15,00,000.
General Reserve : Rs. 23,00,000.
Pass Journal Entries in the books of a company without narration for buyback of share.
10. Following is the balance sheet of Suyog Ltd. as on 31st, March 2009.
Liabilities | Rs. | Assets | Rs. |
Share Capital : Authorised : 10,00,000 Equity Shares of Rs. 10 each Issued : 8,00,000 Equity Shares of Rs. 10 each Rs. 8 paid up Reserve : General Reserve Profit and Loss A/c Securities Premium Secured Loans : 11% Debentures Unsecured Loans : Current Liabilities Creditors Bills Payable
|
1,00,00,000
64,00,000
10,00,000 50,00,000 20,00,000
20,00,000 20,00,000
15,00,000 15,00,000
2,14,00,000 | Fixed Assets : Land and Building Plant and Machinery Furniture Investments Current Assets : Debtors Bill Receivable Bank Balance Stock
|
30,00,000 30,00,000 22,00,000 15,00,000
47,00,000 10,00,000 40,00,000 20,00,000
2,14,00,000 |
The company decides to buyback the maximum number of equity shares as may be permitted at a price of Rs. 20 per share.
Find out maximum number of shres to be bought back and pass Journal Entries and prepare Balance Sheet after buyback.
11. Following is the Balance Sheet of Indica Ltd. as on 31st, December 2008.
Balance Sheet
Liabilities | Rs. | Assets | Rs. |
Share Capital : Authorised : 10,00,000 Equity Shares of Rs. 10 each Issued, Subscribed and Called up : 8,00,000 Equity Shares of Rs. 10 each, Rs. 8 per share paid up Reserves and Surplus : Profit and Loss A/c Securities Premium A/c Secured Loans: 10% Debentures Unsecured loans: Current Liabilities & Provisions: Sundry Creditors Bills Payable Provision for Tax
|
1,00,00,000
64,00,000
50,00,000 30,00,000
30,00,000 10,00,000
20,00,000 10,00,000 5,00,000
2,19,00,000 | Fixed Assets: Land and Building Plant and Machinery Furniture Investments Current Assets, Loans & Advances Debtors Bills Receivables Bank Balance Stock
|
40,00,000 22,00,000 20,00,000 20,00,000
42,00,000 10,00,000 45,00,000 20,00,000
2,19,00,000 |
Keeping in the view the legal requirements ascertain the maximum number of equity shares that Indica Ltd. can buy back at Rs. 20 per share.
Pass journal entries to record Buy Back and prepare a balance sheet thereafter.
12. The balance sheet of Manish Ltd. as on 31st March, 2009 is as follows:
Liabilities | Rs. | Assets | Rs. |
Share Capital Authorised, Issued, Subscribed and Called up: Equity shares of Rs. 10 each Reserves & Surplus: Securities Premium General Reserve Profit & Loss Account Secured Loans: 10% Debentures Current Liabilities & Provisions: Sundry Creditors Bills Payable
|
25,00,000
5,00,000 10,00,000 10,00,000
25,00,000
15,00,000 5,00,000
95,00,000 | Fixed Assets: Net Block Investments Current Assets, Loans & Advances: Current Assets (including Bank balance Rs. 15,00,000) Loans & Advances
|
40,00,000 15,00,000
35,00,000 5,00,000
95,00,000 |
Keeping in the view all the legal requirements ascertain:
a) Maximum number of equity shares that Manish Ltd. can Buy Back.
b) The maximum price it can offer.
Assume that the Buy Back is carried out actually on the legally permissible terms, record the entries in the journal of Manish Ltd. and prepare its balance sheet therafter.
13. The balance sheet of ABC Ltd. as on 31st March, 2009 was as follows:
Liabilities | Rs. | Assets | Rs. |
Equity Shares of Rs. 10 each Preference Shares of Rs. 10 each Securities Premium General Reserve Profit & Loss Account Debentures Current Liabilities
| 4,00,000 1,00,000 1,27,500 1,00,000 1,22,500 8,00,000 1,50,000
18,00,000 | Net Block of Fixed Assets Investments Current Assets
|
7,50,000 50,000 10,00,000
18,00,000 |
Keeping in the view the legal requirements, ascertain the maximum number of equity shares that ABC Ltd. can Buy Back at Rs. 25 per share.
Pass journal entries to record Buy Back and prepare a balance sheet thereafter.
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