A company bought back 3,500 of its own shares at ₹40 each. The shares were originally issued at ₹20 each without premium. Later, it reissued 2,000 of those shares at ₹45 each and 1,500 at ₹38 each. Determine the net effect on the Share Premium account after the reissue. Also calculate the effect on Capital Reserve.
Answer
Share Premium increases by ₹7,000; Capital Reserve unchanged
The correct answer is Share Premium increases by ₹7,000; Capital Reserve unchanged — Both reissue prices are above nominal, so no discount arises; hence Capital Reserve remains unchanged.
Step-by-step solution
- Buyback premium per share = 40 – 20 = 20.
- Total buyback premium = 20 × 3,500 = 70,000; add to Share Premium.
- Premium on reissue of 2,000 shares = (45 – 20) × 2,000 = 50,000.
- Premium on reissue of 1,500 shares = (38 – 20) × 1,500 = 27,000.
- Total premium from reissue = 50,000 + 27,000 = 77,000.
- Net effect on Share Premium = 77,000 – 70,000 = 7,000 increase.
- Both reissue prices are above nominal, so no discount arises; hence Capital Reserve remains unchanged.
Common mistake: Ignoring the buyback premium or mis‑calculating reissue premium
Concept tested: Effect of reissue on Share Premium and Capital Reserve
Published · How this solution was prepared and checked
← All Accounting for Share Capital questions