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CA Intermediate · Advanced Accounting · Buyback of Securities

Narmada Foods Ltd bought back 20,000 fully paid equity shares of ₹10 each at ₹15 per share. It had earlier issued 12,000 preference shares of ₹10 each at par, and the company used the proceeds of that issue towards the buyback. The rest of the payment came from free reserves, and the premium is to be adjusted against securities premium. What amount must be transferred to Capital Redemption Reserve?

₹80,000 must be transferred to Capital Redemption Reserve. The nominal value bought back is ₹2,00,000, and ₹1,20,000 of it was funded from fresh preference share proceeds. CRR is required only for the nominal value funded out of free reserves or securities premium.

  1. A₹2,00,000
  2. B₹1,80,000
  3. C₹80,000Correct
  4. D₹1,20,000

Explanation

The nominal value of shares bought back is 20,000 × ₹10 = ₹2,00,000. Where part of the buyback is financed from the proceeds of a fresh issue, CRR is needed only for the balance of nominal value. CRR = ₹2,00,000 − ₹1,20,000 = ₹80,000. Transferring the full nominal value ignores the fresh issue proceeds.

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