In this article we will discuss about the accounting entries for buy-back of shares.
Buy-back of shares is just the opposite of issue of shares. Just as shares may be issued at par, at a premium or a discount, even buy-back may be at par, at a premium or at a discount. The basis of accounting for buy-back is Section 77A of the Amended Companies Act. This Section not only permits a company to buy-back or redeem its equity shares, but also specifies the sources from out of which re-purchase is to be effected.
According to this Section, a company may buy-back its shares or other specified securities from out of:
(a) Its free reserves, or
(b) The securities premium account, or
(c) The proceeds of any shares or other specified securities like employees’ stock option. However, no buy-back of shares shall be made out of the proceeds of an earlier issue of the same kind of share. This Section also lays down that all the shares or other specified securities for buy-back are fully paid up.
According to Section 77A, where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer should be disclosed in the balance sheet.
Illustration 1 (Buy-Back at Par):
‘X’ Co. Ltd., buys back its own 1, 50,000 equity shares of Rs. 10 each, at par. The company has sufficient profits otherwise available for dividend besides general reserve. No fresh issue of shares is made for this purpose. The shares are fully paid up. Journalise the transactions.
Illustration 2 (Where Shares are Partly Paid Up):
The Evergreen Co. Ltd., resolved by a special resolution, to buy-back 1,00,000 of its equity shares of the face value of Rs. 10 each, on which Rs. 8 has been paid up. The general balance of the company stood at Rs. 25,000 and no fresh issue of shares was made. Journalise the transactions.
Illustration 3 (Buy-Back of Shares):
The following is the Balance Sheet of Ramco as on 31st Dec.:
On 1st April, the share-holders of the company have approved the scheme of buy-back of equity shares as under:
(a) 20% of the equity shares would be bought back at Rs. 16 per share.
(b) General Reserve balance may be utilised for the purpose.
(c) Premium paid on buy-back of shares should be met from the Securities Premium Account.
(d) Investments would be sold for Rs. 7, 80,000.
Pass journal entries to record the above transactions and prepare the Balance Sheet of the Company immediately after the buy-back of shares.