Question

Describe the accounting and reporting for re-acquisition of shares

Answer 1

Accounting for re-acquisition of shares:

Any gains or losses go through capital and/or retained earnings rather than income

- if reacquire for less than the original cost, allocate the reacquisition cost as follows:

i) first to share capital in an amount equal to par, stated, or assigned value of the shares

ii) any remainder credit to contributed surplus.

- if reacquire for more than original (average) cost, allocate the reacquisition cost as follows:

i) first to share capital in an amount equal to par, stated, or assigned value of the shares

ii) debit any excess to the extent of any existing contributed surplus that was created by a net excess of proceeds over cost on a cancellation or resale of shares of the same class,

iii) debit any excess from the second allocation to contributed surplus in an amount equal to the pro-rata share of contributed surplus that arose from transactions, other than those above, in the same class of shares.

iv) any remaining excess to retained earnings.

Reporting for Buy-Back of Shares

Example:

Zaveri Ltd. resolved to buy back 3,00,000 of its fully paid equity shares of Rs 10 each at Rs 12 per share. For the purpose, it issued 10,000 13% preference shares of Rs 100 each at par, the total sum being payable with applications. The company uses Rs 8,50,000 of its balance in Securities Premium Account apart from its adequate balance in General Reserve Account to fulfill the legal requirements regarding buy-back.

Pass journal entries for all the transactions involved in the buy-back.