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CS Executive · Corporate Accounting and Financial Management · Related Aspects of Company Accounts

Meera Ltd has paid-up capital of Rs 50,00,000 and free reserves of Rs 30,00,000. It has total secured and unsecured debts of Rs 1,20,00,000 after the proposed buy-back. Under the debt-to-capital-and-free-reserves test of section 68(2)(d), which statement is correct?

The buy-back is permitted. Debt after buy-back must not exceed twice the paid-up capital and free reserves, which is twice Rs 80,00,000, that is Rs 1,60,00,000. The company's debt of Rs 1,20,00,000 is within this limit.

  1. ABuy-back is permitted, as debt is below twice the paid-up capital and free reservesCorrect
  2. BBuy-back is not permitted, as debt exceeds twice the paid-up capital and free reserves
  3. CBuy-back is permitted, as debt is within three times the capital
  4. DBuy-back is not permitted only if debt exceeds Rs 2,00,00,000

Explanation

The condition is that debt after buy-back must not exceed twice the paid-up capital and free reserves. Where the buy-back amount is already reflected in the post-buy-back figures given, the test is applied as stated: twice (50,00,000 + 30,00,000) = Rs 1,60,00,000. Debt of Rs 1,20,00,000 is below this, so it is permitted.

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