Following is the Balance Sheet of P Limited as at 31 st March, 2025: Particulars Notes ₹ (in lakhs) EQUITY AND LIABILITIES Shareholders' Funds Share…

CA Intermediate · Advanced Accounting · PYQS · January 2026
Following is the Balance Sheet of P Limited as at 31 st March, 2025: Particulars Notes ₹ (in lakhs) EQUITY AND LIABILITIES Shareholders' Funds Share Capital 1 1,500 Reserves and Surplus 2 2,750 Non-current Liabilities Long Term Borrowings 3 3,450 Current Liabilities Short Term Borrowings (Current Maturities of Long Term Borrowings) 1,980 Trade Payables 1,500 Total 11,180 ASSETS Non-current Assets Property, Plant and Equipment 5,675 Current Assets Inventories 1,005 Trade Receivables 1,500 Cash and Cash Equivalents 3,000 Total 11,180 Notes to Accounts: No. Particulars ₹ (in lakhs) 1. Share Capital Authorized, issued and subscribed capital Equity Share Capital 150 lakh Equity Shares of 10/- each fully paid up 1,500 2. Reserves and Surplus Capital Reserve 380 Securities Premium 300 Revaluation Reserve 120 General Reserve 1,800 Surplus (balance in Statement of Profit and Loss) 150 Total 2,750 3. Long Term Borrowings 12% Debentures 2,250 Unsecured Loans 1,200 Total 3,450 Considering the large surplus funds available at the disposal of the company, it decides to buy back 30 lakh Equity Shares on 1 st April, 2025. The prevailing market value of the company's shares is 16/- per share and in order to induce the existing shareholders to offer their shares for buy back, it was decided to offer a price of 25% over market. Buy-back of shares is duly authorized by its Articles and necessary resolution has been passed by the company towards this. Comment with your calculations, whether buy-back of shares by the company is within the provisions of the Companies Act, 2013. If yes, pass necessary journal entries towards buy-back of shares.

Suggested Answer and Working Notes:

Determination of Buy-back of maximum no. of shares as per the Companies Act, 2013 1. Shares Outstanding Test Particulars Shares (in lakhs) Number of shares outstanding 150 25% of the shares outstanding 37.5 2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free Reserves Particulars ₹ Paid up capital (₹) 1,500 Free reserves (₹) (300 + 1800+150) 2,250 Shareholders' funds (₹) 3750 25% of Shareholders fund (₹) 937.5 Buy-back price per share 20 Number of shares that can be bought back (shares) 46.875 Actual Number of shares for buy-back 30 Lakhs 3. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy-Back Particulars ₹ in Lakhs (a) Loan funds (3,450 + 1,980) 5,430 (b) Minimum equity to be maintained after buy-back in the ratio of 2:1 (a/2) 2,715 (c) Present equity/shareholders fund 3,750 (d) Future equity/shareholders fund (see W.N.) (3750 – 345) 3,405 (e) Maximum permitted buy-back of Equity[ (d) – (b)] 690 (f) Maximum number of shares that can be bought back @20 per share 34.50 Lakhs shares (g) Actual Buy-Back Proposed 30 Lakh Shares Alternative presentation of Debt-Equity Ratio Test The alternative presentation of Debt Equity Ratio Test can also be as follows without using simultaneous equation method: Particulars ₹ in lakhs (a) Loan Fund (2,250 Lakhs + 1,200 Lakhs + 1,980 Lakhs) 5,430 Note: If one share is bought back, the following reduction will be made from Equity: (1) Face value 10will be reduced from share capital (2) Premium on buy back 10will be reduced from Securities Premium (20-10) (3) Amount equal to the face value of 10/- will be transferred from free reserves to CRR, because CRR is not available for dividend distribution, it is not a free reserve. Hence, on buy back such amount should also be excluded from equity. Summary statement determining the maximum number of shares to be bought back Particulars Number of shares in Lakhs Shares Outstanding Test 37.5 Resources Test 46.875 Debt Equity Ratio Test 34.50 Maximum number of shares that can be bought back [least of the above] 34.50 Company qualifies all tests for buy-back of shares and came to the conclusion that it can buy maximum 34.5 Lakhs shares on 1 st April, 2025. However, company wants to buy-back only 30 lakh equity shares @20. Therefore, buy-back of 30 lakh shares, as desired by the company is within the provisions of the Companies Act, 2013. Working Note: Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method. Suppose amount transferred to CRR is “x” and maximum permitted buy back of equity is "y". Equation 1 - (Present Equity – Nominal value of buy back transferred to CRR) - Minimum equity to be maintained = Maximum permitted buy -back of Equity (3,750-x) lakh- 2,715 lakh = y (1) Equation 2 - Maximum permitted buy -back X Nominal value per share/ Offer price per Share y/20X10 = x (2) or y = 2 x By solving the above, we get X = 345 lakh Y= 690 lakh Journal Entries for Buy-back of shares Particulars Debit ₹ in lakhs Credit ₹ in lakhs (a) Equity share capital account Securities premium account To Equity shares buy-back account (Being cancellation of shares bought back) Dr. 300 Dr. 300 600 (b) Equity shares buy-back account To Bank account (Being buy-back of 30 lakh equity shares of 10each @20 per share) Dr. 600 600 (c) Revenue reserve account To Capital redemption reserve account (Being transfer of free reserves to capital redemption reserve to the extent of nominal value of capital bought back through free reserves) Dr. 300 300

Topics: Buyback of Securities

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