On January 1, xxxx, A Ltd esta
On January 1, xxxx, A Ltd established by 4 shareholders: Mr Ali,Ms Bushra, Mr Kamran and Mrs Danish. Each shareholder owns 25% ofthe share capital, originally sold at apremium of Rs. 350 per share. The company has 100 shares of nominalvalue of Rs.100 each and has a total share premium of Rs.35,000.
On 31st December xxxx, the management of A Ltd has decided to buyback some of the shares. They presented the offer to allshareholders and Ms Bushra agreed to dispose of her investment inresponse to the offer for an amount of Rs. 15,000. The company isgoing to purchase its own shares with agreed terms andconditions.
Requirement:1. What are the accounting entries of the issue and buyback ofshares (separateentries of both events are required)?2. What are the advantages of shares repurchase to thecompanies?
Answer:
| On issue of sharecapital | ||||
| Particulars | Debit | Credit | ||
| 1 | Bankaccount Dr | 45000 | ||
| To Equity sharecapital account | 10000 | 100*100 | ||
| To security premium account | 35000 | 100*350 | ||
| Security reserve is included in freereserves for the purpose of buyback | |||
| Buy Back JournalEntries | |||
| Particulars | Debit | Credit | |
| 1 | Equity share capitalaccount Dr | 2500 | |
| Premium payable on buyback Dr | 12500 | ||
| To Equity share buy backa/c | 15000 | ||
| {Being payment made on buy back istransferred to Equity share buy back a/c } | |||
| 2 | Security premiunA/c Dr | 12500 | |
| To Premium payable on buyback | 12500 | ||
| {Being premium payable on account ofbuyback is paid out of security premium | |||
| 3 | Security premiunA/c Dr | 2500 | |
| To Capital redemption reserve | 2500 | ||
| {Being face value of equity sharesbought back is transferred to capital redemption reserve from freereserve | |||
| 4 | Equity share buy back a/c | 15000 | |
| To bank a/c | 15000 | ||
| {Being amount paid on buy back ofshares to shareholders | |||
advantages of shares repurchase to the companies?
1. It Enhances the confidence of the shareholders in theorganisation as management by offering buyback shows the confidencein the bright future of the entity
2. It help organisation to safeguard against the hostiletakeover of the orgainsation
3.It helps in decreasing cost of capital of the company
4.Increase in EPS and ROE
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