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Questions and Answers
What will be the journal entry to record the buy-back of shares by Competent Limited?
What will be the journal entry to record the buy-back of shares by Competent Limited?
How will the buy-back of shares affect the Reserves and Surplus of Competent Limited?
How will the buy-back of shares affect the Reserves and Surplus of Competent Limited?
What is the purpose of creating a Capital Redemption Reserve?
What is the purpose of creating a Capital Redemption Reserve?
In the balance sheet provided, what is the total amount of Shareholders' funds?
In the balance sheet provided, what is the total amount of Shareholders' funds?
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What is the correct journal entry for the creation of Capital Redemption Reserve to the extent of the equity shares bought back?
What is the correct journal entry for the creation of Capital Redemption Reserve to the extent of the equity shares bought back?
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What is the purpose of charging premium payable on buy-back from Securities Premium?
What is the purpose of charging premium payable on buy-back from Securities Premium?
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What is the maximum permissible number of equity shares that can be bought back in Situation I?
What is the maximum permissible number of equity shares that can be bought back in Situation I?
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Which account will be debited when recording the buy-back of equity shares?
Which account will be debited when recording the buy-back of equity shares?
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What is the total amount of Reserves and Surplus mentioned in KG Limited's Balance Sheet?
What is the total amount of Reserves and Surplus mentioned in KG Limited's Balance Sheet?
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Which type of account is 'Loan Funds' likely to be in the company's capital structure?
Which type of account is 'Loan Funds' likely to be in the company's capital structure?
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Study Notes
Journal Entries for Buy-Back of Shares
- Record the buy-back entry by debiting Share Capital and Credit Bank Account.
- The buy-back reduces outstanding share capital and is reflected in the financial statements.
Impact on Reserves and Surplus
- Buy-back of shares decreases Reserves and Surplus, as funds are utilized to acquire equity shares.
Capital Redemption Reserve Purpose
- A Capital Redemption Reserve is created to maintain the capital structure by ensuring that the paid-up capital does not fall below a certain threshold post buy-back.
- It acts as a buffer and safeguards creditors' interests.
Shareholders' Funds Calculation
- Total Shareholders' funds in the balance sheet reflects the sum of equity share capital and reserves, minus any buy-backs.
Journal Entry for Capital Redemption Reserve
- Creating a Capital Redemption Reserve involves debiting Retained Earnings and crediting Capital Redemption Reserve for the amount corresponding to the equity shares bought back.
Purpose of Charging Premium from Securities Premium
- Charging the premium payable on buy-back to the Securities Premium Account ensures that the capital base remains intact and complies with legal requirements for capital maintenance.
Maximum Permissible Equity Shares Buy-Back
- The maximum number of equity shares that can be bought back depends on regulations, typically a percentage of the total paid-up equity or according to specific guidelines outlined by governing bodies.
Account Debited for Buy-Back of Equity Shares
- When recording the buy-back of equity shares, the Retained Earnings or Securities Premium accounts are usually debited depending on the scenario.
Total Reserves and Surplus in KG Limited's Balance Sheet
- Reserves and Surplus amount is aggregated from retained earnings and other reserves, crucial for assessing the financial health of KG Limited.
Type of Account for Loan Funds
- 'Loan Funds' are typically classified as liabilities in a company's capital structure, highlighting the financing obtained through loans that need to be repaid.
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Description
Test your knowledge of accounting transactions with this quiz that includes entries related to investments, equity shares, and buy-back transactions. Practice recording journal entries and understanding the purpose behind each transaction.
