Buyback of Securities and Equity Shares with Differential Rights – CA Inter Advanced Accounting Question Bank | Advanced Accounting for CA Intermediate PDF Download (2024)

Question 1: Dee Limited

• Balance Sheet as at 31st March, 2008
• Resolution to buy back 20% of equity capital @ ₹50 per share
• Sold investments for ₹22,00,000
• Journal entries and Balance Sheet preparation required

Answer:

Dee Limited decided to repurchase a portion of its equity shares and liquidated its investments to facilitate this action.

Question 2: Extra Ltd.

• Balance Sheet as on 31st March 2010
• Redeemed preference shares at a 10% premium on 1st April 2010
• Buyback of 3 lakh equity shares at ₹30 per share
• Payments made from bank balances
• Investments in own debentures costing ₹2 lakhs were cancelled
• Outstanding equity stock options for employees

Journal Entries:

Record the transactions in the company's financial books.

Balance Sheet as at 01.04.2010:

Prepare the updated Balance Sheet reflecting the recent transactions.

These scenarios illustrate the process of share buybacks and the impact on a company's financial standing.

Balance Sheet of MIs Competent Limited as on 31st March, 2012

• Liabilities ₹
• Equity Shares of ₹10 each fully paid: 12,50,000
• Revenue Reserve: 15,00,000
• Securities Premium: 2,50,000
• Profit & Loss Account: 1,25,000
• Secured Loans: 12% Debentures - 18,75,000
• Unsecured Loans: 10,00,000
• Current Liabilities: 16,50,000
• Total: 76,50,000

• The company plans to buy back 25,000 equity shares at ₹10 each.
• Buy back price: ₹20 per share.
• Authorized by articles and company resolution.
• Payment from Current Assets.

Calculation for Buy Back

• Shares Outstanding:
• Number of shares outstanding: 1,25,000
• 25% of shares outstanding: 31,250
• Resources Allocation:
• Paid-up capital: ₹12,50,000
• Free reserves: ₹18,75,000
• Shareholders' funds: ₹31,25,000
• 25% of Shareholders' fund: ₹7,81,250
• Buyback price per share: ₹20
• Number of shares that can be bought back: 39,063
• Debt Equity Ratio Test

Paraphrased Information

• Shares Outstanding: This refers to the total number of shares held by investors. In this case, there are 1,25,000 shares outstanding, with 25% equating to 31,250 shares.
• Resources Allocation: This section outlines how the company allocates its resources. Paid-up capital amounts to ₹12,50,000, while free reserves total ₹18,75,000. Shareholders' funds amount to ₹31,25,000, with 25% of this sum equaling ₹7,81,250. With a buyback price of ₹20 per share, the company can repurchase 39,063 shares.
• Debt Equity Ratio Test: This test evaluates the proportion of debt and equity in a company's capital structure to assess financial leverage.

Summary of Provided Information

• Company M Ltd. planned to buy back a portion of its equity shares.
• Resolution: 20% of equity capital to be bought back at ₹15 per share.
• Actions Taken:
  • Sold investments worth ₹30 lakhs for ₹25 lakhs.
  • Redeemed preference shares at a 10% premium on April 1, 2012.
  • Cancelled investments in own debentures worth ₹3 lakhs (face value ₹3.30 lakhs) on April 1, 2012.

Journal Entries and Balance Sheet

• Required Actions:
  • Pass necessary journal entries.
  • Prepare the Balance Sheet as of April 1, 2012.
• Clarification:
  • Assumption: Buy-back funded by preference shares proceeds, hence no transfer to capital redemption reserve.
  • If buy-back funded by investment sale, revenue reserves transferred to capital redemption reserve would be ₹2,600 instead of ₹2,000.

Explanation and Examples

• Buyback Scenario:
  • Company deciding to repurchase its own shares from shareholders.
  • Example: M Ltd. opting to buy back 20% of its equity at ₹15 per share.
• Financial Transactions:
  • Example: Selling investments to fund the buyback.
  • Example: Redeeming preference shares with a premium on April 1, 2012.
  • Example: Canceling investments in own debentures on the same date.
• Accounting Entries:
  • Requirement: Passing appropriate journal entries for the transactions.
  • Preparation: Creating a Balance Sheet reflecting the company's financial status as of April 1, 2012.

Summary of Key Concepts

• The buyback must be authorized by the company's articles.
• A special resolution in a general meeting must authorize the buyback.
• The buyback amount should not exceed 25% of the total paid-up capital and free reserves.
• The company's debt-to-capital ratio should not exceed two after the buyback.

Balance Sheet of M/s Complicated Ltd. (as of 31st March 2016)

The company plans to buy back 25,000 equity shares at ₹20 per share starting 1st April 2016. The buyback is authorized by the company's Articles and a necessary resolution has been passed. The company will use its current assets for the payment.

Calculation for Buyback Compliance

To determine if the buyback complies with the Companies Act, 2013, the following steps are taken:

• Shares Outstanding Test: Ensuring compliance with the Act regarding the maximum number of shares that can be bought back.

Test Question

Explain the conditions required for a Joint Stock Company to buy back its equity shares. Provide a summarized Balance Sheet for M/s Complicated Ltd. as of 31st March 2016. Calculate and analyze if the proposed buyback of shares by the company adheres to the provisions of the Companies Act, 2013. Justify your response with necessary calculations and journal entries.

• Number of Shares Outstanding Test

  • Calculation involves determining the total number of shares available in the market.
  • Formula: dividing the total shares outstanding by a specific amount.
  • Example: If a company has 1,00,000 shares outstanding, the calculation would result in 33,750 shares.

• Resources Test

  • Companies are allowed to buy back shares up to a certain limit based on their paid-up capital and free reserves.
  • Formula: Maximum permitted limit is 25% of Equity paid-up capital plus Free reserves.
  • Example: If a company's paid-up capital is ₹13,50,000 and free reserves amount to ₹18,75,000, the shareholders' funds would be ₹32,25,000.

• Debt Equity Ratio Test

  • Assesses the relationship between a company's borrowed funds and its equity.
  • Formula: The debt equity ratio should be maintained at 2:1.
  • Example: If the loan funds amount to ₹28,75,000 and the permissible dilution is ₹17,87,500, the buyback price at ₹20 would limit the buyback to 89,375 shares.

• Summary Statement

  • Determines the maximum number of shares that can be bought back based on the three tests conducted.
  • Calculates the least number of shares that can be bought back from the results of each test.
  • Example: If the Shares Outstanding Test allows 33,750 shares, the Resources Test allows 40,312 shares, and the Debt Equity Ratio Test allows 89,375 shares, the company can buy back 33,750 shares.

• Conclusion

  • Company complies with all regulatory tests for share buyback.
  • Decision: The company can buy a maximum of 33,750 shares, but it chooses to buy only 25,000 shares at ₹20 each.
  • Note: Share option outstanding account and advance from related parties are considered in specific ways as per regulations.

Summarized Balance Sheet Transactions

• M/s. Vriddhi Infra Ltd. - Balance Sheet Transactions

  • M/s. Vriddhi Infra Ltd. announced a buyback of 25,000 equity shares at ₹15 per share on April 21, 2016.
  • To fund the buyback, the company sold all its investments for ₹2.50 lakhs.
  • The buyback target was achieved on April 25, 2016.

• Journal Entries for M/s. Vriddhi Infra Ltd.

  • Necessary journal entries need to be passed for the buyback transactions.
  • Important working notes should be included in the answer.

• SMM Ltd. Capital Structure and Buyback

  • SMM Ltd. offered a buyback price of ₹30 per equity share.
  • Maximum permissible number of equity shares that can be bought back in different situations needs to be calculated.
  • Essential journal entries should be prepared for the buyback process.

• Alpha Ltd. Balance Sheet and Bonus Issue

  • Alpha Ltd. announced a buyback of 25% of its equity shares at ₹15 per share on April 1, 2017.
  • All investments were sold for ₹150 lakhs to fund the buyback.
  • The buyback target was achieved on April 10, 2017.
  • Journal entries need to be passed, and a new Balance Sheet should be prepared after the bonus issue.

Super Limited, as of 31st March 2018, plans to repurchase 35,000 fully paid-up equity shares valued at ₹10 each on 1st April 2018 at ₹30 per share. This buyback is authorized by the company's articles, and all necessary resolutions have been duly passed. The company intends to fund this buyback using the available bank balance from its Current Assets.

Calculation of Buy-Back Compliance with Companies Act, 2013

• Shares Outstanding Test:
  • Number of shares outstanding: 1,70,000
  • 25% of shares outstanding: 42,500
• Resources Test:
  • Maximum permitted limit: 25% of Equity paid-up capital + Free Reserves
• Debt Equity Ratio Test:
  • Loans cannot exceed twice the Equity Funds post Buy-back

Summary of Maximum Shares for Buy-Back

• Shares Outstanding Test: 42,500
• Resources Test: 37,500
• Debt Equity Ratio Test: 54,375
• Maximum Number of shares that can be bought back (minimum): 37,500

The company has successfully met all the criteria for the buy-back of shares and has determined that it can repurchase a maximum of 37,500 shares on 1st April 2018. However, the company has decided to buy back only 35,000 shares at ₹30 each share, which falls within the provisions of the Companies Act, 2013.

Balance Sheet Transactions and Buyback Process

Balance Sheet Summary as of 31-03-2018

• X Ltd. presented the following Balance Sheet details as of 31-03-2018:
• The company's shareholders passed a resolution to:
• Buy back 25% of the paid-up capital at a price 20% above the market value of ₹30 per share.
• Finance the buyback by issuing 3000, 14% debentures at ₹100 each with a 20% premium and 2500, 10% preference shares at ₹100 each.
• Sell investments worth ₹1,00,000 for ₹1,50,000.
• Maintain a balance of ₹2,00,000 in the Revenue Reserve.
• Later, issue three fully paid-up equity shares of ₹20 each as bonus shares for every 15 equity shares held by shareholders.

Journal Entries and Balance Sheet Preparation

• For the buyback process, an amount equal to the nominal value of the buyback shares was transferred from free reserves to the Capital Redemption Reserve.
• ₹2,00,000 was required to be maintained in the Revenue Reserve account.
• ₹3,00,000 was utilized from the Revenue Reserve account, and ₹9,50,000 was utilized from the Profit and Loss account for the transfer to the Capital Redemption Reserve.
• Calculation of equity shares after buyback:
• Number of equity shares = 2,50,000 - 62,500 (buyback) - 37,500 (bonus shares) = 2,25,000 shares

• Umang Ltd. decided to repurchase 5,00,000 fully paid equity shares at ₹15 per share.
• Steps taken by Umang Ltd. for the buyback:
  • Sold investments worth ₹30,00,000 for ₹25,00,000.
  • Issued 20,000, 12% preference shares at par value of ₹100 each, with full payment due upon application.
  • Utilized ₹15,00,000 from Securities Premium Account and General Reserve to meet buyback legal requirements.
  • Ensured sufficient cash reserves for shareholder payments.
• Required Journal Entries for Umang Ltd.'s buyback of shares in January 2021.

• Explanation of Equity Shares with Differential Rights:
  • Refer to shares with varying rights concerning dividends, voting, or other privileges.
• Preference Shares with Differential Rights:
  • Preference shares cannot be issued with differing rights.

Voting Rights Calculation in Alpha Co.

• Shareholders' Capital in Alpha Co.:
  • E, F, G, and H hold Equity Capital in the ratio of 30:30:20:20.
  • S, T, U, and V hold Preference Share Capital in the ratio of 40:30:10:20.
• Calculation of Voting Rights:
  • Equity shareholders have 2/3 voting weight, while preference shareholders have 1/3.
  • Voting Rights Calculation for each shareholder.

• Equity Capital Distribution:
  • L, M, N, and O collectively hold equity capital in the ratio of 30:40:20:10.
• Preference Share Capital Allocation:
  • A, B, C, and D possess preference share capital in the proportion of 40:30:10:20.
• Voting Rights Calculation:
  • Given that the paid-up equity share capital is ₹60 lakhs and preference share capital is ₹30 lakhs, indicating a 2:1 ratio.
  • The voting rights are determined based on this ratio, with equity shareholders holding 2/3 weight and preference shareholders holding 1/3 weight.
  • Calculating the respective percentages of voting rights for each shareholder:
  • • L: 20%
    • M: 26.67%
    • N: 13.33%
    • O: 6.67%
    • A: 13.33%
    • B: 10%
    • C: 3.33%
    • D: 6.67%

• Importance of Equity and Preference Share Capital:
  • Equity shareholders have a higher voting percentage due to their larger capital contribution.
  • Preference shareholders' rights are proportional to their share in the total capital.
• Significance of Company Decisions:
  • During a resolution for winding up the company, shareholders' voting rights play a crucial role in determining the outcome.
  • Understanding the distribution of voting percentages helps in predicting the influence of each shareholder.

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