T.Y.B.COM M.K.

’S COMMERCE ACADEMY

BUY BACK OF SHARES AND OWN DEBENTURES

Illustration 1. (Buy-back at par out of fresh issue of shares)
A Ltd. wants to buyback 10,000 equity shares of Rs.10 each, which satisfies the prescribed legal
conditions for this purpose the company has decided to issue new preference shares of Rs.10 each
of the equivalent amount. Pass journal entries.
Illustration 2.(Buy-back at par out of Divisible profits)
The balance sheet of P Ltd. on 31-3-2004 was as follows:
Liabilities Rs. Assets Rs.
80,000 Equity shares of Rs.10 Fixed assets 8,00,000
each fully paid 8,00,000 Current Assets 3,20,000
1,000 6% preference shares of Bank Balance 2,40,000
Rs.100 each 1,00,000
General Reserve A/c 90,000
Profit & Loss A/c 1,40,000
Securities premium A/c 30,000
Liabilities 2,00,000
13,60,000 13,60,000
On this date Company bought back 20,000 equity shares at par after satisfying the legal formalities.
Pass journal entries.
Illustration 3.(Buy-back at premium, out of Divisible profits)
T Ltd. purchases its Rs.10,000 equity shares of Rs.10 each @ Rs.15 per share. No fresh issue is
made for this purpose. Make necessary journal entries in accordance with the provisions for buy-
back.
Illustration 4. (Buy-back of equity at premium out of issue of pref. Shares + profits)
Infobyte Ltd.resolved to buy back 30,000 its fully paid equity shares of Rs.10 each at Rs.12 per
share. For this purpose it issued 1,000 10% preference shares of Rs.100 each at par. The Total
amount was payable on application. The company has rs.85,000 balance to the credit of the
securities premium Account. Which was to be used for buy-back. The company had sufficient
balance in the General Reserve to meet the legal requirements for buy-back. Pass the necessary
journal entries.
Illustration 5. (Buy-back at Discount; from profits + issue of Pref. Shares)
N ltd. had issued capital of rs.1,00,00,000 of Rs.10 equity shares. The balance in the security
premium account was Rs.1,00,000 and general Reserves Rs.14,00,000. the company decided to
buy-back 20% of its share capital direct from its shareholders at Rs.8 per share. The company had
issued Rs. 5 lakh 10% preference shares two moths back for the purpose of buy-back. Record the
transactions in the books of the company in accordance with the provisions of section 77A.
Illustration 6.(Buy-back at premium; from profits + New issue of Pref. Shares)
The Balance sheet of Activa Ltd. on 31-3-2004 is as follows:
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets 6,00,000
40,000 Equity shares of Rs.10 each 4,00,000 Bank Balance 2,20,000
2,000 Pref. Shares of Rs.100 each 2,00,000
Profit & Loss A/c 40,000
Debentures 80,000

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T.Y.B.COM M.K.’S COMMERCE ACADEMY

Creditors 1,00,000
8,20,000 8,20,000
The company wants to buy back 20% of its Equity Capital at 10% premium. Not having sufficient
profits to buy back. The company issued 600 Pref. Shares of Rs.100 each at 10% premium payable
as Rs.20 on application and the balance on allotment. Thee shares were duly taken up and
company purchased the equity shares immediately. Sufficient profits were used supplement the
new issue.
Pass journal entries. Prepare the new balance sheet after the buy-back.
Illustration 7.(sale of investments issue of debentures; bonus shares )
Following is the Balance sheet of X ltd. as on 31-3-2004.
Liabilities Rs. Assets Rs.
Share Capital Land & building 10,00,000
2,00,000 Equity shares of Rs.10 Plant and Machinery 10,00,000
each fully paid 20,00,000 Furniture 1,00,000
Securities Premium A/c 2,50,000 Investments 2,00,000
Profit & Loss A/c 3,00,000 Stock 1,70,000
General reserve A/c 3,00,000 Debtors 3,80,000
Creditors 3,00,000 Bank Balance 3,00,000
31,50,000 31,50,000
The company decided to buy-back 20% of its equity share capital out of profits. all the legal
formalities were duly completed. The company sold its investments for Rs.2,05,000 and issued 500
8% debentures of Rs. 100 each which amount was received in full. After the buy-back the
company issued bonus share to equity shareholders in the ratio of 1 bonus share to 2 equity shares
held using the least possible amount our of the profit & loss account.
Pass journal entries and prepare the Balance sheet after the buy-back and issue of bonus shares.
Illustration 8. (Redemption of preference & Buy-back of equity)
Kuber Ltd. finishes you with the following Balance sheet as at 31st March 2004: (Rs. in crores)
Particulars Rs. Rs.
Source of Funds:
Share Capital:
Authorized : 100
Issued
12% redeemable preference shares of Rs.100 each fully paid 75
Equity shares of Rs.10 each fully paid 25 100
Reserve and surplus:
Capital Reserve 15
Securities Premium 25
Revenue Reserves 260 300
400
Funds Employed in : 100
Fixed Assets: Cost 100 -
Less: Provision for depreciation 100
Investments at cost (market value Rs.400 Cr.) 340
Current Assets 40 300

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Less: Current Liabilities 400

The company redeemed preference shares on 1st April 2004 it also bought back 50 lakh equity
shares of Rs. 10 each at Rs. 50 per share. The payments for the above were made out of the huge
bank balances which appeared as part of current assets .
You are asked to : (1)pass journal entries to record the above. (2)prepare balance sheet. (3) Value
equity share on net assets basis.
Illustration 9 (Making shares fully paid before buy-back)
Following is the Balance sheet of BTC ltd. as on 31-3-2004
Liabilities Rs Assets Rs
Share Capital Sundry Assets 12,20,000
60,000 Equity shares of Rs.10 each Cash at Bank 2,00,000
Rs.8 paid up 4,80,000
10% Preference share Capital
Rs.100 paid 5,00,000
Securities Premium A/ c 15,000
Capital reserves 15,000
General reserve 60,000
Profit & Loss A/c 50,000
Other Liabilities 3,00,000
14,20,000 14,20,000
Company took all necessary steps to make the equity shares eligible for buy-back. Then company
decided to issue 1,200 preference shares at par in order to buy-back 20% equity capital of the
company. The new issue was fully subscribed. The company also issued 1000, 10% Debentures of
Rs.100 each fully paid. After the issue of shares and debentures the company bought back 20%
equity share capital from the open market. Pass journal entries and prepare the balance sheet of the
company.
Illustration 10.(sources for buy back):From the following balance sheet ascertain the sources for
buy back as per the relevant legal provisions.
Liabilities Rs. Rs. Assets Rs. Rs.
1.Share Capital 1.Fixed Assets
Authorized: ? Gross Block 28,000
Paid up: Less: Depreciation to-date 6,000
Equity shares of Rs.10 each 5,000 Net Block 22,000
2.Reserves & Surplus 2.Investments
Capital Redemption Reserve 1,800 Trade Investments 3,000
Securities Premium A/c 1,000 Non-trade investments 1,000 4,000
General Reserve 5,000 3.Current Assets
Profit & Loss a/c 500 loans & Advances
Revaluation reserve 1,000 a. Current Assets: 11,000
Export Profits reserve b. Loans & Advances: -
2,300 4. Misc. Expenditure -
Investment Allowance reserve [not W/O]
700 13,000

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T.Y.B.COM M.K.’S COMMERCE ACADEMY

Investment Allowance
(utilized Reserve) 19,000
700 -
3.Secured Loans -
13% Debentures 15,000
Bank Terms Loans 4,000 -
-
4. Unsecured Loans 37,000 37,000
5. Current Liabilities & Provisions
a. Current Liabilities:
b. Provisions:
Illustration 11. (Maximum buy-back of equity shares; at par)
Refer illustration 10 above Ascertain the maximum number of shares that the company can buy
back at par keeping in view the legal provisions. [ignore the condition regarding post-by back debt-
capital ratio].
Illustration 12. (Maximum price for Buy-back of maximum no. of shares )
Refer illustration 11 above. Ascertain the maximum price that the company can offer for buying
back maximum possible number of shares.
Illustration 13.(Maximum buy-back of Equity shares; at premium )
Refer illustration 10 to 12 above. Ascertain the maximum number of shares that the company can
back at a price of rs.25 keeping in view the legal provisions. [ignore the condition regarding post-
buy back debt-capital ratio].
Illustration 14. (Maximum Buy-back considering Post-buyback Debt-capital Ratio)
Refer illustration 10 to 13 above. Ascertain whether the company can proceed for the buy back at a
price of Rs.50 keeping in view the legal condition regarding post-buy-back debt-capital ratio.
Illustration 15.(Maximum Buy-back considering Debt-capital Ratio Post-buy-back)
Refer illustration 14 above. Advise the company as to how many shares the company should buy
back at Rs. 50 each in order to satisfy the legal condition regarding post-buy back debt-capital ratio.
Illustration 16. Refer illustration 15 Pass the necessary entries in the journal of the company to
record the buy-back. Prepare the Balance sheet after the buy-back
Illustration 17.(Maximum Buy-back at given offer price)
The balance sheet of M Ltd. as on 31-3-2004 is as follows:
Liabilities Rs. Assets Rs.
Equity shares of Rs.10 each 3,00,000 Net Block of Fixed Assets 8,00,000
Preference shares of Rs.100 each 1,00,000 Investments 1,00,000
Securities premium A/c 1,50,000 Current Assets 7,50,000
General Reserve 1,00,000
Profit & Loss A/c 1,00,000
Debentures 8,00,000
Current liabilities 1,00,000
16,50,000 16,50,000
Keeping in view all the legal requirements ascertain the maximum no. of equity shares that M
Ltd.can buyback @ Rs.30 per share being the current market price. assume that the buy-back is

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T.Y.B.COM M.K.’S COMMERCE ACADEMY

carried out actually on the changed terms and accordingly record the entries in the journal of m ltd.
and prepare its balance sheet thereafter.
Illustration 18. (Maximum Buy-back at Maximum Possible offer price)
The balance sheet of V Ltd. as on 31-3-2004 is as follows:
Liabilities Rs. Assets Rs.
i. Share Capital i.Fixed Assets
Authorised: ? Net Block 60,00,000
Paid up: ii.Investments
Equity Shares of Rs.10 each 50,00,000 investments 50,00,000
ii.Reserves & Surplus iii.Current Assets, Loans &
Securities premium A/c 5,00,000 Advances
General reserve 20,00,000 a. Current assets: 80,00,000
Profit & Loss A/c 25,00,000 b. Loans & Advances: -
iii. Secured Loans iv.Misc.Expenditure -
Debentures 50,00,000 [not w/o]
iv. Unsecured Loans -
v. Current Liabilities & Provisions
a. Current Liabilities: 40,00,000
b. Provisions: -
1,90,00,000 1,90,00,00
0
Keeping in view all the legal requirements ascertain (i)the maximum no. of equity shares that V
Ltd. can buy back; and (ii)the maximum price it can offer. Assume that the buy-back is carried out
actually at the legally permissible terms record the entries in the journal of V Ltd. and prepare its
balance sheet thereafter.
Illustration 19. The Balance sheet of AFCONS Ltd. as on 31st March 2004 was as follows:
Liabilities Rs. assets Rs.
Equity shares of Rs.10 each 4,00,000 Net Block of fixed Assets 7,50,000
Preference shares of Rs.100 each 1,00,000 Investments 50,000
Securities premium 1,27,500 Current Assets 10,00,000
General Reserves 1,00,000
Profit & Loss Account 1,22,500
Debentures 8,00,000
Current Liabilities 1,50,000
18,00,000 18,00,000
Keeping in view the legal requirements ascertain the maximum number of equity shares that
AFCONS Ltd. can buy back @ Rs. 25 per share.
Pass journal entries to record buy back and prepare a balance sheet thereafter.
Illustration 20. The balance sheet of Manish Ltd. as on 31-03-2005 is as follows:
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
Authorized, issued, subscribed and Net Block 40,00,000
called-up: Investments 15,00,000
Equity shares of Rs.10 each 25,00,000 Current Assets, loans &Advances

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Reserves & Surplus: Current Assets

Securities Premium 5,00,000 (including Bank Balance Rs.15,00,000) 35,00,000
General reserve 10,00,000 Loans and Advances 5,00,000
Profit & Loss Account 10,00,000
Secured Loan:
10% Debentures 25,00,000
Current Liabilities & Provisions:
Sundry Creditors 15,00,000
Bills Payable 5,00,000
95,00,000 95,00,000
Keeping in view all the legal requirements ascertain:
(1)Maximum number of equity shares that Manish Ltd. can buy-back.
(2)The maximum price it can offer.
Assume that the buy-back is carried out actually on the legally permissible terms record the entries
in the journal of Manish Ltd. and prepare its Balance sheet thereafter.
Illustration 21. X Ltd. decided to redeem Rs.25,000 15% debentures and purchased Rs.20,000
debentures in the open market at Rs. 98.50 each the expenses being Rs. 100. Company redeemed
by drawing Rs.5,000 debentures. Pass the necessary journal entries to record the above transactions.
Illustration 22. On 1-1-2002 a company made an issue of 1,000 6% Debentures of Rs. 1,000 each
at Rs.960 per debenture. The terms of issue provided for the redemption of Rs.20,000 debentures
every year commencing from end of 2003 either by purchase of by drawing at par at the company’s
option Rs.10,000 was also written off the Debenture discount Account in 2002 and 2003.
On 31-12-2003 the company purchased for cancellation Debentures of the face value of Rs.8,000
at Rs.950 per debenture and of Rs.12,000 at Rs.900 per debenture.
Journalise the above transactions (ignore the payment of interest)
Illustration 23. On 1-1-2002 A Ltd. made an issue of 10,000 12% Debentures of Rs.100 each at 98
per debenture. According to the terms of issue commencing from 2003 the company should
redeem 500 debentures either y purchasing them from the open market or by drawing lots at par at
the company’s option. Company’s accounting year ends on 31-12- Interest is payable on 30-6 and
.31-12.
During 2002 the company wrote off Rs.5,000 from debenture discount account.
During 2003 the company purchased and cancelled the debentures as given below:
(1)Rs.20.000 at Rs.97 per debenture on 30-6 and
(2)Rs.30,000 at Rs.96 per debenture on 31-12
give journal entries in the books of A ltd. for both the years.
Illustration 24. A Ltd. buys its own 6% Debentures of nominal value Rs. 30,000 at Rs.96 cum-
interest on 31-3-2004. company cancels these debentures immediately. Record the transaction in
the books of A Ltd. A. Ltd. pays debenture interest half yearly on 30th June and 31st December
Illustration 25. (Ex-interest)
Refer to above illustration No.22 Record the entry for cancellation assuming that debentures were
purchased at Rs.96 Ex-interest.
Illustration 26. Indebted Ltd. issued 10% Debentures at par for 8 lakhs on 1st January 1999.
interest was payable half yearly on 30th June and 31st December every year. Under the terms of the
trust deed the debentures are redeemable at par (after three years of issue) by the company
purchasing them in the open market and canceling them with a minimum redemption of Rs.80,000

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every year in case there was a short fall in redemption by the company by open market operations,
the shortfall would be made good by the company by payment on the last day of the accounting
year to the trustees who would draw lots and redeem the debentures..
The company purchased its own debentures for cancellation as under:
(a)30th September 2001 Rs. 1,00,000 at Rs.98 cum-interest
(b)31st May 2002 Rs. 60,000 at Rs.95 ex-interest
(c)31st July 2003 Rs. 90,000 at Rs. 96 cum-interest
the company carried out its obligations under the deed. Prepare he following ledger accounts for
calendar years 2001, 2002, 2003.
(1)Debentures Account (2)Debentures Redemption Account and (3)Debentures interest Account.
Illustration 27.Reliable ltd. had issued 5,000 12% debentures of Rs. 100 each in 1999 it
hadRs.5,00,000 worth of debentures outstanding as on 1st April 2002. interest on debentures is
payable on 30th June and 31st December every year. Company purchased the following debentures
for immediate cancellation:
On 1-06-2002 400Debentures @ Rs.97 cum-interest
On 1-11-2002 200 Debentures @ Rs. 96 ex-interest
On 1-12-2002 400 Debentures @ Rs.99 ex-interest
Pass necessary journal Entries in the books of Reliable ltd. for the year 2002-2003.
Financial year is the accounting year.
Illustration 28. Sure Ltd. made a issue of 1,000 6% debentures of Rs.1,000 each on 1-1-2001 at
the issue price of Rs.960. the terms of Issue provided that beginning with 2003. Rs.40,000
debentures should be redeemed either by purchase in the market or by lot at par. The expenses of
the issue amounted to Rs.8,000 which were written off in 2001 in 2002 and 2003 the discount on
issue of debentures was written off equally.
In 2003 the company purchased Rs. 12,000 debentures at Rs. 940cum-interest on 30 th September
and Rs.20,000 debentures at rs.950-ex-interest on 30th November, the expenses being Rs.800. on
31st December the debentures necessarily tom be redeemed were paid off at par by drawing by lot.
Assuming the interest is payable on 30th June and 31st December make journal entries to record the
above transactions.
Illustration 29. Raja Ltd. issued on 1st April 2000, 20,000 12% debentures of Rs.100 each
redeemable at the option of the company after the second year at trs.104 upon giving two months
notice to the debentureholder. The company purchased the following debentures in the open
market:
(1)On 12th June 2002 Rs.4,000 nominal value at cum-interest cost Rs.4,025.
(2)On 24th August 2002 Rs.7,000 nominal value at ex-interest cost Rs.6,915.
These debentures were retained as investments till 30th September 2003 when these debentures
were cancelled show the respective ledger accounts as assuming that the company close its books
of account every year on 31st March. Interest is payable half yearly on 30th September and 31st
March ignore income-tax..
Illustration 30.On 31-3-2003 Green India Ltd’s balance sheet showed 10,000 12% debenture of
Rs. 100 each. Interest on debentures is payable on 30th September and 31st march every year. 0n
1-8-2003 the company purchased 500 its own debentures as investment at Rs.97 Ex-interest.
Pass journal entries if
(a)The company cancels all its own debentures on 1-3-2004 or alternatively, if
(b)the company resells all its own debentures at Rs.105 cum-interest an 1-3-2004.

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Illustration 31: (1)Swati Associates Ltd. has issued 10,000 12% debentures of Rs.100 each on
1-1-2001. these Debentures are redeemable after 3 years at par interest is payable annually.
(2)On October 1,2002 it buy 1,500 debentures from the market at Rs. 98 per Debenture. These are
sold away on June 30,2003 at Rs.105 per debenture.
(3)On January 1, 2003 it buys 1,000 debenture from the open market. These are cancelled on April
1. 2003.
(4)On October 1, 2003 it buys 2,000 debentures at Rs.106 per debenture from the open market.
These debentures along with other debentures are redeemed on 31st December 2003.
Make journal entries journal entries and prepare the relevant ledger Account showing the above
transactions. Working should from part of your answer.