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Com 2015-16 Accounts Paper 1

Buy Back of Shares


i. The term buy back means buying back by company of its equity shares
from equity shareholders for immediate cancellation.
ii. According to Section 77 of The Companies Act, 1956, no company having
share capital shall have power to buy its own shares except-
a. Redemption of Preference Shares Under Section 80 or
b. Capital Reduction under Section 100-104.
iii. However Section 77A introduced in Companies Act, empowers the
company to buyback (Cancel) its equity shares either out of-
a. Fresh Issue of Preference Shares. Or
b. Free Reserves. Or
c. Partly out of Fresh Issue and partly out of free reserves.
iv. A company cannot buy back its equity shares unless it is fully paid.
v. Free reserves utilised for purpose of buy back of equity shares are
immediately transferred to an account called as “CRR A/c” (Section
vi. Free reserves include not only revenue profits but also Securities
vii. Premium on buy back is a capital loss and can be set out of Free

Problem 1
Infobyte Ltd. resolved to buy back 30000 of its fully paid equity shares of
Rs.10 each at Rs.12 per share. For this purpose, it issued 1000 10%
preference shares of Rs.100 each at par. The Total amount was payable
on application. The company has Rs.85000 balance to the credit of the
Securities Premium Account, which was to be used for buy back. The
company has sufficient balance in the General reserve to meet the legal
requirements for buy back. Pass the necessary journal entries.

How to ascertain amount of buy back:

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T.Y.B.Com 2015-16 Accounts Paper 1

For ascertainment of amount of buy back one has to follow three

conditions/norms given by Companies Act.
The buyback amount is least of these three conditions.

Sr. Amt
No. (Rs.)
1 Limit of 25% of own Funds:
25%[Paid up Equity+ Preference+ Free Reserves-Misc. XXX
2 Debt-Equity Limit:
Own Funds-(Debt./2)
3 Limit of 25% of Equity Shares:
25% X Equity Shares issued X Buy Back Price
 Debt = Secured Loan + Unsecured Loan
Buy Back Amount=Least of the above three

Problem 2

The Balance Sheet of AFCONS Ltd. as on 31/3/2012 was as follows:

Liabilities Amt. Assets Amt.

Eq. Shares of Rs.10 Net Block of Fixed 750000
Each Assets
Preference Shares of Investments 50000
Rs.100 each
Security premium 127500 Current Assets 1000000
General Reserve 100000
Profit & Loss A/c 122500
Debentures 800000
Current Liabilities 150000
1800000 1800000
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 Balance Sheet thereafter.

Problem 3

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T.Y.B.Com 2015-16 Accounts Paper 1

The summary of Balance Sheet of Manish Ltd. As on 31/03/2012 is as follows:

Liabilities Amt.(Rs.) Assets Amt.(Rs.)

Share Capital: Fixed Assets:
Equity Shares of Rs.10 Net Block 40,00,000
each 25,00,000
Reserves & Surplus: Trade Investments 15,00,000
Security Premium 5,00,000 Current Assets:
General Reserve 10,00,000 Current Assets
(Including Bank Balance
Rs. 15,00,000 35,00,000
Profit & Loss Account 10,00,000 Loans and Advances 5,00,000
Secured Loan:
10% Debentures 25,00,000
Current Liabilities:
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.

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