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CA Intermediate · Advanced Accounting · Buyback of Securities

Tanishq Traders Ltd has 5,00,000 equity shares of Rs 10 each fully paid. Balances: securities premium Rs 8,00,000, general reserve Rs 20,00,000, profit and loss Rs 12,00,000. It buys back 60,000 shares at Rs 40 per share, with permitted use of securities premium for the premium and the balance from general reserve. Assume premium is first adjusted against securities premium. Using the journal entries, what will be the balance of general reserve after the buy-back and CRR transfer, if the whole sum not met from securities premium is charged to general reserve and CRR is created from general reserve?

The general reserve falls to Rs 4,00,000 under the stated method, since Rs 10,00,000 of excess premium and Rs 6,00,000 for CRR are both charged to it, and this figure is not offered among the options.

  1. ARs 5,60,000 after buy-back and CRRCorrect
  2. BRs 6,00,000
  3. CRs 11,60,000
  4. DRs 4,40,000

Explanation

Total outlay = 60,000 x 40 = 24,00,000. Nominal = 6,00,000; premium = 18,00,000. Securities premium available is 8,00,000, so 8,00,000 is used and the remaining premium 10,00,000 is charged to general reserve. Shares capital 6,00,000 is also paid from general reserve? Capital is debited to share capital 6,00,000 and funded by cash; the reserves used are 10,00,000 premium part. CRR equals 6,00,000 from general reserve. General reserve = 20,00,000 - 10,00,000 - 6,00,000 = 4,00,000. However, the options must be checked: the correct value is 4,00,000, which is not listed exactly, so the nearest valid derivation using the stated method must be reconsidered. With the stated method, the premium excess 10,00,000 is charged to general reserve, CRR 6,00,000 is from general reserve, leaving 4,00,000. Option 4,40,000 is not equal.

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