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Query on Accounting for Buy back of shares

One part of a question contains this information: The company uses Rs 16 lakhs of its balance in Securities Premium account apart from its adequate balance in General Reserve to fulfil the legal requirements regarding Buy Back. (Students are required to pass Journal Entries) In the solution I find that its given like this.. (amount in Lakhs) Equity Share Capital a/c Dr 40 General Reserve a/c Dr 48 To Equity Shares Buy Back a/c 88 SP a/c 16 GR a/c 14 To CRR 30 which is fine... but what about the Premium payable on Buy back a/c? Isnt it absolutely necessary to create it and then adjust it (cancel it) against free reserves? Isn't supposed to go like this: ESC a/c dr 40 Premium payable on BB ac dr 48 To Eq Sh BB a/c 88 General Reserves ac dr 48 To premium payable on BB ac 48


Kumarjit Dey

Kumarjit Dey

CA Inter

4K+

27-May-20 19:43

16

Answers (7)

Best Answer

Sir, I did not follow what you meant by take care. Are you are advising not to debit general reserve straight away and to create Premium Payable on Buy Back first , then adjust it with General Reserve?

I meant a combined entry would also take care of the requirement. Alternatively, you could pass two entries.


Suraj Lakhotia

Suraj Lakhotia

Admin

29-May-20 07:54

Also answer this: is it mandatory to follow a sequence for creating CRR. What I mean is like first from Securites Premium, then from General Reserve, then from P&L Or can we use any of the free reserves to create CRR?


Kumarjit Dey

Kumarjit Dey

CA Inter

4K+

27-May-20 19:51

Please answer. Anyone?


Kumarjit Dey

Kumarjit Dey

CA Inter

4K+

28-May-20 10:08

Regarding your question on Securities Premium Payable on buyback, the first entry where General Reserve is debited by 48 lakhs, take care. Alternate approach would be to first debit the securities premium on buyback first and then transfer it to General Reserve.


Suraj Lakhotia

Suraj Lakhotia

Admin

28-May-20 12:25

Securities premium is a restricted account [dividends cannot be paid] so generally, the first preference would be to use it. Next preference is to use GR because there are some rules to be complied with if GR is to be used for dividend. Last preference is given to P&L.


Suraj Lakhotia

Suraj Lakhotia

Admin

28-May-20 12:26

Regarding your question on Securities Premium Payable on buyback, the first entry where General Reserve is debited by 48 lakhs, take care. Alternate approach would be to first debit the securities premium on buyback first and then transfer it to General Reserve.

Sir, I did not follow what you meant by take care. Are you are advising not to debit general reserve straight away and to create Premium Payable on Buy Back first , then adjust it with General Reserve?


Kumarjit Dey

Kumarjit Dey

CA Inter

4K+

28-May-20 17:42