CMA Intermediate · Corporate Accounting and Auditing · Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares
Arun Ltd has 1,00,000 equity shares of Rs 10 each, fully paid, and free reserves of Rs 30,00,000 including securities premium of Rs 5,00,000. It buys back 20,000 shares at Rs 25 per share out of free reserves. The company has not yet issued any new shares for the purpose. Which entry correctly reflects the transfer to Capital Redemption Reserve (CRR) and the amount debited to free reserves overall?
The company pays Rs 5,00,000, being Rs 2,00,000 face value and Rs 3,00,000 premium. Because the buy-back is out of free reserves, Rs 2,00,000, the nominal value of shares bought back, is transferred to Capital Redemption Reserve. Overall, free reserves of Rs 5,00,000 are utilised.
- ACRR of Rs 2,00,000 is created from free reserves; total free reserves used are Rs 5,00,000Correct
- BCRR of Rs 5,00,000 is created from free reserves; total free reserves used are Rs 5,00,000
- CCRR of Rs 3,00,000 is created from free reserves; total free reserves used are Rs 3,00,000
- DNo CRR is required as the shares are bought back at a premium
Explanation
Buy-back cost = 20,000 x 25 = Rs 5,00,000, of which face value is Rs 2,00,000 and premium Rs 3,00,000. The premium is written off against securities premium or free reserves. When the buy-back is from free reserves, an amount equal to the nominal value of shares bought back, Rs 2,00,000, is transferred to CRR. Total free reserves reduced are Rs 5,00,000, being Rs 3,00,000 premium plus Rs 2,00,000 transferred to CRR.
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