Buy

Buy Back
Back of
of Securities
Securities

STUDENT
STUDENT
Question 1: RTP May 2022 NOTES
NOTES
Complicated Ltd. (an unlisted company) gives the following information as on
31.3.2021:

Particulars Amount (`)

Equity shares of ` 10 each, fully paid up 13,50,000
Share option outstanding Account 4,00,000
Revenue Reserve 15,00,000
Securities Premium 2,50,000
Profit & Loss Account 1,25,000
Capital Reserve 2,00,000
Unpaid dividends 1,00,000
12% Debentures (Secured) 18,75,000
Advance from related parties (Long term - Unsecured) 10,00,000
Current maturities of long term borrowings 16,50,000
Application money received for allotment due for 2,00,000
refund
Property, plant and equipment 46,50,000
Current assets 40,00,000
The Company wants to buy back 25,000 equity shares of ` 10 each, on 1st
April, 2021 at
` 15 per share. Buy back of shares is duly authorized by its Articles and
necessary resolution has been passed by the Company for this. The buy-back
of shares by the Company is also within the provisions of the Companies Act,
2013. The payment for buy back of shares was made by the Company out of
sufficient bank balance available shown as part of Current Assets.
You are required to prepare the necessary journal entries towards buy back of
shares and prepare the Balance Sheet of the company after buy back of
shares.
 Buy Back of Securities

STUDENT
Answer: NOTES
As per the information given in the question, buy-back of 25,000 shares @ `
15, as desired by the company, is within the provisions of the Companies Act,
2013.

Sr. Journal Entries: Debit (`) Credit (`)

No.
(a) Equity shares buy-back account Dr. 3,75,000
To Bank account 3,75,000
(Being buy back of 25,000 equity shares
of ` 10each @ `15 per share)
(b) Equity share capital account Dr. 2,50,000
Premium payable on buyback account Dr. 1,25,000
To Equity shares buy-back account 3,75,000
(Being cancellation of shares bought
back)
(c) Securities premium account Dr. 1,25,000
To Premium payable on buyback 1,25,000
account
(Being Premium payable on buyback
adjustedagainst securities premium
account)
(d) Revenue reserve account Dr. 2,50,000
To Capital redemption reserve account 2,50,000
(Being transfer of free reserves to capital
redemption reserve to the extent of
nominal value of capital bought back
through free reserves)
 Buy Back of Securities

STUDENT
NOTES

Balance Sheet of Complicated Ltd. as at 1st April, 2021

Particulars Note No Amount

EQUITY AND LIABILITIES

1 Shareholders' funds
(a) Share capital 1 11,00,000
(b) Reserves and Surplus 2 23,50,000
2 Non-current liabilities
(a) Long-term borrowings 3 28,75,000
3 Current liabilities
(a) Short-term borrowings 4 16,50,000
(b) Other current liabilities 5 3,00,000
Total 82,75,000
ASSETS
1 Non-current assets
(a) Property, Plant and Equipment 46,50,000
2 Current assets (` 40,00,000 – ` 3,75,000) 36,25,000
Total 82,75,000
 Buy Back of Securities

STUDENT
NOTES
Notes to Accounts: ` `
1. Share Capital
Equity share capital
1,10,000 Equity shares of `10 each
11,00,000
2. Reserves and Surplus
Capital Reserve 2,00,000
Capital Redemption Reserve 2,50,000
Securities premium 2,50,000
Less: Utilization for share buy-back 1,25,000
(1,25,000)
Share Option Outstanding Account 4,00,000
Revenue reserves 15,00,000
Less: Transfer to CRR (2,50,000) 12,50,000
Surplus i.e. Profit and Loss A/c 1,25,000 23,50,000
3. Long-term borrowings
Secured
12% Debentures 18,75,000
Unsecured loans 10,00,000 28,75,000
4. Short-term borrowings
Current maturities of long-term 16,50,000
borrowings
5. Other Current Liabilities
Unpaid dividend 1,00,000
Application money received for
allotment duefor refund 2,00,000 3,00,000
 Buy Back of Securities

STUDENT
Question 2: Past Exam Dec ’2021 NOTES
(i) Can preference shares be also issued with differential rights? Explain in brief.
(ii) Explain the conditions under Companies (Shares Capital and Debentures) Rules
2014, to deal with equity shares with differential rights.
Answer:
(i) No; the preference shares cannot be issued with differential rights. It is only the
equity shares, which are issued. Equity shares with Differential Rights means the
share with dissimilar rights as to dividend, voting or otherwise.
(ii) As per Share Capital and Debentures Rules, 2014, for equity shares with
differential rights, following conditions to be compulsorily complied with:
• The articles of association of the company authorizes the issue of shares
with differential rights;
• The issue of shares is authorized by an ordinary resolution passed at a
general meeting of the shareholders: Provided that where the equity
shares of a company are listed on a recognized stock exchange, the issue
of such shares shall be approved by the shareholders through postal
ballot;
• The voting power in respect of shares with differential rights shall not
exceed seventy four percent of the total voting power including voting
power in respect of equity shares with differential rights issued at any
point of time;
• The company has not defaulted in filing financial statements and annual
returns for three financial years immediately preceding the financial year
in which it is decided to issue such shares;
• The company has no subsisting default in the payment of a declared
dividend to its shareholders or repayment of its matured deposits or
redemption of its preference shares or debentures that have
become due for redemption or payment of interest on such deposits
or debentures or payment of dividend;
• The company has not defaulted in payment of the dividend on
preference shares or repayment of any term loan from a public
financial institution or State level financial institution or scheduled
Bank that has become repayable or interest payable thereon or
dues with respect to statutory payments relating to its employees to
any authority or default in crediting the amount in Investor
Education and Protection Fund to the Central Government;
Provided that a company may issue equity shares with differential rights upon
expiry of five years from the end of financial year in which such default was
made good.
 Buy Back of Securities

STUDENT
Question 3: MTP- May 2022 NOTES
Alpha Ltd. furnishes the following information as at 31st March, 2021:
`In lakhs `In lakhs
Shareholders' Funds
Equity share capital (fully paid up shares of `10 each) 2,400
Reserves and Surplus
Securities Premium 350
General Reserve 530
Capital Redemption Reserve 400
Profit & Loss Account 340 1,620
Non-current Liabilities
12% Debentures 1,500
Current Liabilities
Trade PayabIes 1,490
Other Current Liabilities 390 1,880
Non-current Assets
Property, plant and equipment 4,052
Current Assets
Current Investments 148
Inventories 1,200
Trade Receivables 520
Cash and Bank 1,480 3,348

On 1st April, 2021, the company announced buy-back of 25% of its equity
shares @ ` 15 per share. For this purpose, it sold all its investment for ` 150
lakhs.
On 10th April, 2021 the company achieved the target of buy-back.
On 30th April, 2021, the company issued one fully paid up equity share of ` 10
each by way of bonus for every four equity shares held by the equity
shareholders by capitalization of Capital Redemption Reserve. Premium
(excess of buy-back price over the par value) paid on buy-back should be
adjusted against securities premium account.
You are required to pass necessary journal entries and prepare the Balance
Sheet of Alpha Ltd. after bonus issue.
 Buy Back of Securities

STUDENT
Answer: In the books of Alpha Limited NOTES
Journal Entries
Date Particulars Dr. Cr.
2021 (` in lakhs)
April 1 Bank A/c Dr. 150
To Investment A/c 148
To Profit on sale of investment 2
(Being investment sold on profit)
April 10 Equity share capital A/c Dr. 600
Securities premium A/c Dr. 300
To Equity shares buy back A/c 900
(Being the amount due to equity shareholders on
buyback)
Equity shares buy back A/c Dr. 900
To Bank A/c 900
(Being the payment made on account of buy back of `
60Lakh Equity Shares)
April 10 General reserve A/c Dr. 530
Profit and Loss A/c Dr. 70
To Capital redemption reserve (CRR) A/c 600
(Being amount equal to nominal value of buy back
shares from free reserves transferred to capital
redemption reserveaccount as per the law)
April 30 Capital redemption reserve A/c Dr. 450
To Bonus shares A/c (W.N.1) 450
(Being the utilization of capital redemption
reserve toissue bonus shares)
Bonus shares A/c Dr. 450
To Equity share capital A/c 450
(Being issue of one bonus equity share for every four
equity shares held)
Profit on sale of Investment Dr. 2
To Profit and Loss A/c 2
(Profit on sale transfer to Profit and Loss A/c)
 Buy Back of Securities

STUDENT
Note: For transferring amount equal to nominal value of buy back shares from NOTES
free reserves to capital redemption reserve account, the amount of ` 340 lakhs
from P & L A/c and the balance from general reserve may also be utilized. The
combination of different set of amounts (from General Reserve and Profit and
Loss Account) aggregating ` 600 lakhs may also be considered for the purpose
of transfer to CRR.

Balance Sheet (After buy back and issue of bonus shares)

Particulars Note Amount
No (` in Lakhs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 2,250
(b) Reserves and Surplus 2 872
(2) Non-Current Liabilities
(a) Long-term borrowings - 12% Debentures 1,500
(3) Current Liabilities
(a) Trade payables 1,490
(b) Other current liabilities 390
Total 6,502
II. Assets
(1) Non-current assets
(a) Property, plant and equipment 4,052
(2) Current assets
(a) Current investments
(b) Inventory 1,200
(c) Trade receivables 520
(d) Cash and cash equivalents (W.N. 2) 730
Total 6,502
 Buy Back of Securities

STUDENT
NOTES

Notes to Accounts: ` In lakhs

1. Share Capital
Equity share capital (225 lakh fully paid up
shares of 2,250
` 10 each)
2. Reserves and Surplus
General Reserve 530
Less: Transfer to CRR (530) -
Capital Redemption Reserve 400
Add: Transfer due to buy-back of shares from 70
P/L
Add: Transfer due to buy-back of shares from Gen. res.
530
Less: Utilisation for issue of bonus shares (450) 550
Securities premium 350
Less: Adjustment for premium paid on buy (300) 50
back
Profit & Loss A/c 340
Add: Profit on sale of investment 2
Less: Transfer to CRR (70) 272 872

Working Notes:
1. Amount of equity share capital = 2,400 - 600 (buyback)
+ 450 (Bonus shares)
= 2,250

2. Cash at bank after issue of bonus shares

` in lakhs
Cash balance as on 1st April, 2021 1480
Add: Sale of investments 150
1630
Less: Payment for buy back of shares (900)
730