Question

In: Accounting

On January 1, xxxx, A Ltd established by 4 shareholders: Mr Ali, Ms Bushra, Mr Kamran...

On January 1, xxxx, A Ltd established by 4 shareholders: Mr Ali, Ms Bushra, Mr Kamran and Mrs Danish. Each shareholder owns 25% of the share capital, originally sold at a
premium of Rs. 350 per share. The company has 100 shares of nominal value 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 buy back some of the shares. They presented the offer to all shareholders and Ms Bushra agreed to dispose of her investment in response to the offer for an amount of Rs. 15,000. The company is going to purchase its own shares with agreed terms and conditions.


Requirement:
1. What are the accounting entries of the issue and buyback of shares (separate
entries of both events are required)?
2. What are the advantages of shares repurchase to the companies?

Solutions

Expert Solution

On issue of share capital
Particulars Debit Credit
1 Bank account                                                             Dr 45000
                       To Equity sharecapital account 10000 100*100
           To security premium account 35000 100*350
Security reserve is included in free reserves for the purpose of buyback
Buy Back Journal Entries
Particulars Debit Credit
1 Equity share capital account                               Dr 2500
Premium payable on buy back                           Dr 12500
To Equity share buy back a/c 15000
{Being payment made on buy back is transferred to Equity share buy back a/c }
2 Security premiun A/c                                           Dr 12500
                     To Premium payable on buy back                           12500
{Being premium payable on account of buyback is paid out of security premium
3 Security premiun A/c                                           Dr 2500
           To Capital redemption reserve 2500
{Being face value of equity shares bought back is transferred to capital redemption reserve from free reserve
4 Equity share buy back a/c 15000
                                    To bank a/c 15000
{Being amount paid on buy back of shares to shareholders

advantages of shares repurchase to the companies?

1. It Enhances the confidence of the shareholders in the organisation as management by offering buyback shows the confidence in the bright future of the entity

2. It help organisation to safeguard against the hostile takeover of the orgainsation

3.It helps in decreasing cost of capital of the company

4.Increase in EPS and ROE

ekkarill92 answered 2 years ago
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