A company bought back 3,000 of its own shares at ₹25 each. Later it reissued 2,000 of those shares at ₹28 each and the remaining 1,000 at ₹24 each. Compute the net effect on the Share Premium account after reissue.
Answer
Share Premium A/c is credited with ₹5,000.
The correct answer is Share Premium A/c is credited with ₹5,000. — Net effect = ₹6,000 credit – ₹1,000 debit = ₹5,000 credit to Share Premium.
Step-by-step solution
- Compute total cost of buy‑back: 3,000 × ₹25 = ₹75,000 (recorded in Treasury Shares).
- For the 2,000 shares reissued at ₹28, premium per share = ₹28 – ₹25 = ₹3; total premium = 2,000 × ₹3 = ₹6,000 (credit Share Premium).
- For the 1,000 shares reissued at ₹24, loss per share = ₹24 – ₹25 = –₹1; total loss = 1,000 × (–₹1) = –₹1,000 (debit Share Premium).
- Net effect = ₹6,000 credit – ₹1,000 debit = ₹5,000 credit to Share Premium.
Common mistake: Adding the re‑issue price directly to Share Premium without considering the original buy‑back cost.
Concept tested: Buy‑back and re‑issue of treasury shares
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