BUY BACK OF SHARES

PRACTICE QUESTIONS

Q1)

The following is the Balance Sheet of Samudra Ltd. as on 31.03.2020

Particulars Note No ₹
EQUITY AND LIABILITIES
Shareholders' Fund
a) Share Capital 1 80,00,000
b) Reserves & Surplus 2 80,00,000

Non-Current Liabilities
Long term Borrowings 3 40,00,000
Current Liabilities
Trade Payables 30,00,000
Short term provisions -
TOTAL 2,30,00,000
ASSETS
Non-Current Assets
Fixed Assets
Tangible Assets 4 98,00,000
Intangible Assets -
Non-Current Investments 15,00,000

Current Assets
Inventories 20,00,000
Trade Receivables 50,00,000
Cash and Cash equivalent 47,00,000
TOTAL 2,30,00,000
Notes to Accounts:
1) Share Capital:
Authorised Share Capital
10,00,000 Equity shares of Rs. 10 each 1,00,00,000

Issued and Subscribed Share Capital

8,00,000 equity shares of Rs. 10 each
fully paid 80,00,000

2) Reserves & Surplus:

General Reserve 10,00,000
Profit & Loss a/c 50,00,000
Securities Premium 20,00,000
80,00,000

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 3) Long term Borrowings:
12% Debentures 20,00,000
Unsecured Loans 20,00,000
40,00,000
4) Fixed Assets:
Tangible fixed assets
Land and Buildings 40,00,000
Plant and Machinery 36,00,000
Furniture and Fittings 22,00,000
98,00,000

The company decided to buy back the maximum number of Equity shares as may be permitted under Companies Act,2013
at a price of ₹ 20 per share. You are required to pass necessary journal entries and prepare Balance Sheet and notes to
accounts post buy back as per Companies Act, 2013.

Solution

Working Notes:

1) The buy back should not exceed 25% of paid up capital and free reserves:
Total capital and free reserves are as under:

Particulars ₹
Equity Share Capital 80,00,000
General Reserve 10,00,000
Profit & Loss A/c 50,00,000
Securities Premium 20,00,000
1,60,00,000

2 mark Maximum amount of buy back is therefore 25% of ₹ 1,60,00,000 = ₹ 40,00,000

2) 1 mark The buy back of equity shares in any financial year shall not exceed 25% of its total paid up capital
in that financial year:
Therefore, the face value of equity shares that can be brought back is 25% of ₹ 80,00,000 = ₹ 20,00,000.

3) 2 mark After buy back the debt equity ratio should not be more than 2:1:
Let the Number Shares that can be brought back = X
Present Debt = ₹ 40,00,000

Equity after buy back will be:

Share Capital [80,00,000 - 10x] (Note 1) 80,00,000 - 10x

Securities Premium 20,00,000
Profit & Loss a/c [50,00,000 - 10x] (Note 2) 50,00,000 - 10x
General Reserve [10,00,000 - 10x] (Note 3) 10,00,000 - 10x
1,60,00,000 - 10x
The Debt Equity Ratio Should be 2:1

Therefore,

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 40,00,000 = 2
1,60,00,000 - 10 x 1

40,00,000 = 3,20,00,000 - 60x

60x = 2,80,00,000
x = 2,80,00,000
60
= 4,66,667 Shares
The least of following can be brought back by the company:

1) ₹ 40,00,000
2) ₹ 20,00,000
3) ₹ 46,66,670 (4,66,667 shares x ₹ 10)
Note : if trade payables is considered by students while calculating debt max number of shares will be
416667.

Therefore, the company can buy back shares of ₹ 20,00,000 (2,00,000 Shares)

Journal Entries in the Books of Complicated Ltd. 1 mark for each entry
Date Particulars Debit Rs. Credit Rs.
Equity Share Capital a/c Dr. 20,00,000
Securities Premium a/c Dr. 20,00,000
To Equity Shareholder a/c 40,00,000
(Being amount payable to Equity Shareholders on buy back 2,00,000 equity
shares)
Equity Shareholders a/c Dr. 40,00,000
To Bank a/c 40,00,000
(Being equity shareholders paid off against buy back)
Profit & Loss a/c Dr. 20,00,000
To Capital Redemption Reserve a/c 20,00,000
(Being creation of capital redemption reserve as per Act)

Balance Sheet of Complicated Ltd (After Buy Back)

As on 31.03.2020(2 marks)
Particulars Note No ₹
EQUITY AND LIABILITIES
Shareholders' Fund
a) Share Capital 1 60,00,000
b) Reserves & Surplus 2 60,00,000

Non-Current Liabilities
Long term Borrowings 3 40,00,000
Current Liabilities
Trade Payables 30,00,000
Short term provisions -
TOTAL 1,90,00,000

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 ASSETS
Non-Current Assets
Fixed Assets
Tangible Assets 4 98,00,000
Intangible Assets -
Non Current Investments 15,00,000

Current Assets
Inventories 20,00,000
Trade Receivables 50,00,000
Cash and Cash equivalent 7,00,000
TOTAL 1,90,00,000
-
Notes to Accounts (5 marks -0.5 mark for each item):
1) Share Capital:
Authorised Share Capital
10,00,000 Equity shares of Rs. 10 each 1,00,00,000

Issued and Subscribed Share Capital

6,00,000 equity shares of Rs. 10 each
fully paid 60,00,000

2) Reserves & Surplus:

Capital Redemption Reserve 20,00,000
Profit & Loss a/c 30,00,000
General Reserve 10,00,000
60,00,000

3) Long term Borrowings:

Secured Loans
12% Debentures 20,00,000
Unsecured Loans 20,00,000
40,00,000
4) Fixed Assets:
Tangible fixed assets
Land and Buildings 40,00,000
Plant and Machinery 36,00,000
Furniture and Fittings 22,00,000
98,00,000

Q2 JJ Ltd. Balance Sheet as at 31st March, 2022 is as follows:

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 Particulars Note No. As at 31st March,2022 Notes to
(Rs.)
EQUITY & LIABILITIES

Shareholder Funds
Share Capital 1 1,25,00,000
Reserves and Surplus 2 1,57,75,000

Amount received against share warrants NIL

Application Money Pending Allotment NIL

Non-Current Liabilities
Long Term Borrowings 3 10,00,000
Current Liabilities
Trade Payables 1,00,000
Total Equity and Liabilities 2,93,75,000
ASSETS
Non-Current Assets
Fixed Assets
Tangible Assets 4 68,75,000
Non-Current Investments 1,25,00,000
Current Assets
Inventories 25,00,000
Trade Receivable 50,00,000
Cash and Cash Equivalents 25,00,000
Total Assets 2,93,75,000
Accounts:
1. Share Capital
7,50,000 Equity Shares of Rs.10 each fully paid up 75,00,000
50,000 9% Preference Shares of Rs.100 each 50,00,000
Total 1,25,00,000
2. Reserves and Surplus
Capital Reserve 25,000
Revenue Reserve 1,00,00,000
Securities Premium 12,50,000
Profit and Loss Account 45,00,000
Total 1,57,75,000
3. Long Term Borrowings
10% Debentures 10,00,000
Total 10,00,000
4. Tangible Assets
Property, Plant and Equipment at Cost 75,00,000
Less: Provision for Depreciation 6,25,000
Net 68,75,000

The company passed a resolution to buy-back 20% of it’s Equity Share Capital @ Rs.15 per share on
1st April ,2022. For the purpose, it sold its investment of Rs.75,00,000 at a loss of Rs.5,00,000 on 15 th
April,2022.
On 30th April,2022 the company achieved the target of buy back.
On 1st June,2022 the company redeemed 9% Preference Shares at a premium of 10%.
On 1st July,2022 bonus shares were issued in the ratio of two equity shares for every one share held.

You are required to pass necessary journal entries for the above transactions. Narrations are not required to be
given.

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solution

Date Particulars Debit Credit

Bank A/c…………………………..Dr 70,00,000
15-04-
Profit and Loss A/c………………..Dr. 5,00,000
2022
To Investment A/c 75,00,000
Equity Share Capital A/c………….Dr. 15,00,000
30-04-
Prem on buy-back A/c……………..Dr. 7,50,000
2022
To Equity Share Buy-back A/c 22,50,000
Equity Share Buy-back A/c……….Dr.
30-04- 22,50,000
To Bank A/c 22,50,000
2022
Securities Premium Reserve A/c….Dr.
7,50,000
To Premium on Buy-back A/c 7,50,000
30-04-
Revenue Reserve A/c……………...Dr.
2022 15,00,000
To Capital Redemption Reserve A/c 15,00,000
9% Preference Share Capital A/c….Dr. 50,00,000
01-06-
Prem on Redemption of P.Sh A/c….Dr. 5,00,000
2022
To Pref Sh. Holders A/c 55,00,000
Pref. shareholders A/c……………..Dr.
01-06- 55,00,000
To Bank A/c 55,00,000
2022
Revenue Reserve A/c……………...Dr.
50,00,000
To Capital Redemption Reserve A/c 50,00,000
01-06-
Revenue Reserve A/c……………....Dr.
2022 5,00,000
To Prem on Redemption of PS 5,00,000
01-07- Capital Redemption Reserve A/c…..Dr.
30,00,000
2022 To Bonus to Eq. Shareholders A/c 30,00,000
01-07- Bonus to Eq. Shareholders A/c 30,00,000
2022 To eq sh cap 30,00,000

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Q3

Jason John Ltd. wants to buy-back 1,75,000 equity shares of Rs 10 each at a price of Rs 20 each on 01.04.2021.
The shareholders on the recommendation of their Board of Directors have approved a proposal to buy-back the
shares as the same is allowed in its Articles of Association. The company has sufficient bank balance to make
the payment for buy-back of equity shares.

Rs.
Equity Share Capital (Rs 10 each fully paid) 87,50,000
General Reserve 1,05,00,000
Dividend Equalization Reserve 17,50,000
Profit and Loss (Cr.) 8,75,000
10% Debentures (Rs 100 each) 1,31,25,000
Bank Loan 70,00,000
Current Liabilities 1,15,50,000

You are required to confirm whether the company meets the conditions specified by the Companies Act, 2013 as
regards the maximum buy back. Can the Company go ahead with its buyback plan? If yes, pass necessary
journal entries to record the buy back transactions in the books of Jason John Ltd..

Solution

ACCOUNTING ENTRIES
EQUITY SHARE CAPITAL A/C DR. 17,50,000
PREMIUM PAYABLE ON BUY BACK A/C DR. 17,50,000

TO EQUITY SHARES BUY BACK A/C 35,00,000

(Being the amount due on buy back of equity shares)

EQUITY SHARES BUY BACK A/C DR. 35,00,000

TO BANK A/C 35,00,000
(Being payment made for buy back of equity shares)

GR A/C DR. 17,50,000

TO PREMIUM PAYABLE ON BUY BACK 17,50,000
(Being premium payable on buy-back charged from GR)

GENERAL RESERVE A/C DR. 17,50,000

TO CAPITAL REDEMPTION RESERVE 17,50,000
(Being creation of capital redemption reserve to the extent of he nominal value of equity
shares bought back)

Equity Share Capital (Rs 10 each fully paid) 87,50,000

General Reserve 1,05,00,000
Dividend Equalization Reserve 17,50,000

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Balance of Profit and Loss (Cr.) 8,75,000
10% Debentures (Rs 100 each) 1,31,25,000
Bank Loan 70,00,000

Current Liabilities 1,15,50,000

Shares Outstanding Test: Max. Permissible Limit = 25% of Outstanding

Shares
Total number of shares outstanding 8,75,000
25% of the shares outstanding 2,18,750

Resource Test: Max. Permissible Limit = 25% of Paid up Capital plus Free
Reserves
Equity share capital (`) 87,50,000
Free Reserve (General Reserve + Dividend Equalization Reserve + Profit & Loss
Cr. Balance) 1,31,25,000
Paid up Capital plus Free Reserves 2,18,75,000
25% of Paid up Capital plus Free Reserves 54,68,750

Buy back price per share 20

No. of shares that can be bought back 2,73,437.50
2,73,438
Debt Equity Ratio Test: Debt after buyback cannot exceed twice the paid up
capital
plus free reserves

Total Debt 3,16,75,000

Minimum Equity to be maintained after buyback in the ratio 2:1 1,58,37,500
Paid up capital plus free reserves before buyback 2,18,75,000

Suppose amount equivalent to nominal value of bought back shares

transferred to CRR account is “x” and maximum permitted buy back of equity is
“y”.

Then

Equaton 1: (Present Equity – Nominal value of buy-back transfer to CRR) -

Minimum equity to be maintained = Maximum permissible buy-back of equity

(21875000 – x) – 15837500 = y……………… eqn 1

6037500 – x = y

Equation 2 :
[(Maximum buy-back / Offer price for buy-back) * Nominal Value] = Nominal
value of shares bought back to be transferred to CRR

(y / 20 )*10 = x

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Or
y = 2x

Substituting eqn 2 in eqn 1 we get

6037500 – x = 2x
Or
6037500 = 3x
x = 6037500 / 3
2012500
Or Nominal value of bought back shares = 2012500

Therefore No. of Shares bought back = 2012500 / 10 = 201250 2,01,250

Summary of three test results:

Permissible Buyback as per -
Share Outstanding Test 2,18,750
Resource Test 2,73,438
Debt-Equity Ratio Test 2,01,250
Maximum permissible buyback (least of the three) 2,01,250
Actual buyback plan 1,75,000

Since actual buyback proposed is below the permissible limit, the company can buy
back 1,75,000 shares at Rs 20 each.

Q4

Extra Ltd. furnishes you the following summarised Balance Sheet as 31st March, 2021
(Rs.in
Lakhs)
Liabilities Amount Assets Amount
Equity Shares of Rs. 10 each fully paid 120.00 Fixed assets Less Depreciation 65.00
9% Redeemable Preference Shares 25.00 Investments at Cost 160.00
(of Rs. 100 each) Current Assets 145.50
Capital Reserves (Pre-incorporation profit) 10.00
Revenue Reserves 75.00
Securities Premium 62.50
Profit & Loss 10.00
10% Redeemable Debentures 3.00
Secured Loan 60.00
Current Liabilities 5.00
370.50 370.50

(i) On 1st April, 2021, the Company redeemed 9% Preference Shares at a premium of 10%.
(ii) On 10th April, 2021, the Company decided to buy back 1,15,000 equity shares at a premium of Rs. 40 per share.

(iii) For the purpose of buy back, Company decided to sell 30% of its investments at Rs. 45 Lakhs.
(iv)

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 On 15th April, 2021, the Company decided to issue Bonus shares in the ratio of two equity shares for every five equity
shares held. Company decided that there should be minimum reduction in free reserves.

You are required to:

Comment with your calculations, whether buy back of shares by company is within the provisions of the Companies
(a) Act.
(b) Pass necessary journal entries to record above transactions.

Solution

Journal Entries in the Books of Extra Ltd.

(Rs. In
Lakhs)
Cr.
Date Particulars LF Dr. Amount Amount
01.04.2021 9% Red. Pref. Share Capial a/c Dr. 25
Premium on redemption of preference share Dr 2.5
To Preference Shareholders 27.5
(Being preference share capital transferred to
shareholders account)
01.04.2021 Sec prem 2.5
To Premium on redemption of preference share 2.5
(prem on red w/off)

01.04.2021 Preference shareholders A/c Dr. 27.5

To Bank 27.5
(Being payment made to shareholders)

01.04.2021 Revenue Reserve a/c Dr. 25

To Capital Redemption Reserve 25
(Being creation of capital redemption reserve
account to the extent of the face value of
preference shares redeemed as per the law)

10.04.2021 Bank a/c Dr. 45

P& L Dr. 3
To Investments 48
(Being on investments sold and loss on sale recorded in books,
(WN-1))

10.04.2021 Equity shares buy-back A/c Dr. 57.5

To Bank A/c 57.5
(Being 1.15 lakh equity shares of Rs. 10 each
bought back @ Rs. 50 per share (WN-5))
10.04.2021 Equity share capital a/c (1.15 x 10) Dr. 11.5
Security premium a/c (1.15 x 40) Dr. 46
To Equity Share Buy-Back a/c 57.5
(Being cancellation of buy back shares)

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10.04.2021 Revenue Reserve a/c Dr. 11.5
To Capital Redemption Reserve 11.5

(Being creation of capital redemption reserve

account to the extent of the face value of
equity shares bought back as per the law)
15.04.2001 Capital Reserve A/c Dr. 10
Capital Redemption Reserve A/c Dr. 33.4
To Bonus to Shareholders A/c (WN-6) 43.4
(Bonus issue of two shares for every five shares held, by
utilising various reserves)

15.04.2001 Bonus to Shareholders A/c Dr. 43.4

To Equity Share Capital A/c 43.4
(Being Capitalisation of profit)

WN - 1 Calculation of Loss on sale of investment

Cost of investments sold (160 x 30%) 48

Less: Sale value of investments 45
Loss on sale on investment 3

WN - 2 Resource Test

Particulars Rs. In Lakhs

Eq shares A 120
Sec Prem B 60
Revenue Reserve C 50
P&L 10
Total shareholder's funds (A+B+C) D 240
25% of shareholders funds (D x 25%) E 60
Buyback price F 50
No. of shares (E/F) G 1.2000 ←

WN -3 Shares outstanding test

Particulars Rs. In Lakhs
No. of shares outstanding A 12
25% of outstanding shares (A x 25%) B 3 ←

WN - 4 Debt Equity Ratio Test

Particulars Rs. In Lakhs
Debt (60+3) A 63
Debt equity ratio to be maintained B 02:01
Min equity (A/B) C 31.5
Present equity (Shareholder’s funds) D 240
(As per E of WN-1)

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 Maximum possible dilution in equity (D-C) E 208.5
Buy-back price F 50
Amount to be transferred to CRR per share G 10
Shares to be bought back [E/(F+G)] H 3.475 ←

WN - 5 No. of shares to be bought back

No. of shares
in lakhs
Particulars

As per resource test (WN - 2) A 1.20

As per Shares Outstanding Test (WN - 3) B 3
As per Debt Equity Ratio Test ( WN -4) C 3.475

Shares buy buck (Lower of A, B, C) D 1.20 ←

WN - 6 Calculation of Bonus Shares

No. of shares
Date Particulars
in lakhs

31.03.2021 No. of shares outstanding 12

01.04.2021 Less: Equity shares buyback -1.15
15.04.2021 No. of shares before bonus issue 10.85
15.04.2021 No. of shares issued as bonus (2:5) 4.34 ←

Extra Ltd.
Balance Sheet as at 15th April, 2021
(Amount in
Rs.)
Note
Particulars Amount
No.
I. EQUITY AND LIABILITIES
1. Shareholder's Fund:

a) Share Capital 1 151.90

b) Reserves & Surplus 2 62.60

-

Notes to Balance Sheet

(Rs. In Lakhs)
Note No. Particulars Amount

1 Share Capital
Equity Share Capital 151.9 ←

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 (15.19 lakhs equity shares of Rs. 10 each, of which 4.34 lakhs
shares have been issued by way of bonus shares)

Details of number of shares outstanding

Opening number of shares 12
Add: Bonus shares 4.34
Less: Shares Bought back -1.15
Closing number of shares 15.19

Preference Share Capital

9% preference share capital 25
(0.25 lakh of preference shares of Rs. 100 each)
Less: Redemption -25
(0.25 lakh of preference shares of Rs. 100 each) 0

Total 151.9 ←

2 Reserves & Surplus

Capital Reserves (Pre-incorporation profit)
Opening Balance 10
Less: Utilisation for Bonus issue -10
Closing Balance 0 ←

Capital Redemption Reserve

Opening Balance 0
Add: Transfer due to Buy-back of equity shares 11.5
25
Add: Transfer due to Redemption of preference shares
Less: Utilisation for Bonus issue -33.4 3.1 ←

Securities Premium 62.5

Less: Utilisation for buy - back of shares -46
Less: Utilisation for redemption of preference shares -2.5
Less: Utilisation for Bonus issue 0
Closing Balance 14 ←

Revenue Reserves 75
Less: Transfer to Capital Redemption Reserve on account of
Buy back of equity shares -11.5
Less: Transfer to Capital Redemption Reserve on account of
redemption of preference shares -25
Less: Utilisation for Bonus issue 0
Closing Balance 38.5 ←

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P&L 10
Less: loss on sale of invt -3 7

Total 62.6

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