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CA Intermediate · Advanced Accounting · Buyback of Securities

Sundaram Textiles Ltd. bought back 20,000 equity shares of Rs 10 each at Rs 15 per share, fully paid, out of its free reserves. Which of the following is the correct amount to be transferred to Capital Redemption Reserve (CRR)?

Rs 2,00,000 must be transferred to Capital Redemption Reserve. Where shares are bought back out of free reserves, CRR is created for the nominal value of the shares bought back, which is 20,000 shares multiplied by Rs 10. The premium does not enter CRR.

  1. ARs 2,00,000Correct
  2. BRs 1,00,000
  3. CRs 3,00,000
  4. DRs 5,00,000

Explanation

When buyback is out of free reserves, an amount equal to the nominal value of shares bought back must be transferred to CRR. Nominal value = 20,000 x Rs 10 = Rs 2,00,000. Rs 3,00,000 is the total buyback consideration, so it is wrong as the base. Rs 1,00,000 would be the premium paid (20,000 x Rs 5), which is also not the CRR amount.

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