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CA Intermediate · Advanced Accounting · Buyback of Securities

Godavari Pharma Ltd buys back 30,000 fully paid equity shares of ₹10 each at ₹14 per share, paying in cash. Before the buyback, securities premium is ₹2,00,000, general reserve is ₹6,00,000 and the statement of profit and loss balance is ₹1,00,000. The premium is charged to securities premium, and the nominal value of shares bought back is transferred to Capital Redemption Reserve out of general reserve. What is the general reserve balance after these entries?

The general reserve balance is ₹3,00,000. The premium of ₹1,20,000 is absorbed by securities premium, while the nominal value of ₹3,00,000 is transferred from general reserve to Capital Redemption Reserve. The general reserve falls from ₹6,00,000 by that transfer only.

  1. A₹1,80,000
  2. B₹3,00,000Correct
  3. C₹4,80,000
  4. D₹6,00,000

Explanation

Nominal value is 30,000 × ₹10 = ₹3,00,000 and the premium is 30,000 × ₹4 = ₹1,20,000, which is charged to securities premium. The transfer to CRR of ₹3,00,000 comes from general reserve, leaving ₹6,00,000 − ₹3,00,000 = ₹3,00,000. Deducting the whole outlay of ₹4,20,000 from general reserve (giving ₹1,80,000) wrongly ignores the securities premium used.

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