Comprehensive Buyback Problem – Multiple Transactions, Bonus Issue, and Balance Sheet

# Comprehensive Buyback Problem: End-to-End Approach

These questions combine several transactions in one year: fund-raising, buyback, bonus issue, and final balance sheet. The key is processing transactions in the right order and tracking available balances.

## Typical Transaction Set (CDR-style)

1. Issue of Debentures at premium

2. Issue of Preference Shares (may also be redeemed)

3. Sale of Investments (profit or loss)

4. Buy Back of Equity Shares

5. Buy Back Expenses (charged to P&L)

6. Bonus Issue on post-buyback equity capital

7. Prepare Balance Sheet

## Phase-by-Phase Approach

### Phase 1 — Fund-Raising and Asset Disposal

Process these first; they build up resources before the buyback.

• Issue of Debentures at premium: Increases Bank and Securities Premium
• Issue of Preference Shares: Increases Bank (reduces future CRR requirement)
• Sale of Investments at profit: Bank Dr / Investment Cr / P&L Cr
• Sale of Investments at loss: Bank Dr / P&L Dr / Investment Cr

### Phase 2 — Track Available Securities Premium

```

Available Sec Prem for BB premium =

Sec Prem (opening)

+ Premium on debenture issue

+ Premium on pref/equity issue

− Premium on preference redemption (if applicable)

```

If Available ≥ BB premium → fund entirely from Sec Prem

If Available < BB premium → shortfall from General Reserve, then P&L

### Phase 3 — Execute Buy Back

Follow the four-step journal sequence (see Journal Entries lesson):

1. Record obligation (ESC + Premium on BB / Eq Sh BB A/c)

2. Pay shareholders (Eq Sh BB / Bank)

3. Fund premium (Sec Prem / GR / P&L / Prem on BB)

4. Create CRR (GR / P&L / CRR) ← exclude debenture proceeds from deduction

### Phase 4 — Bonus Issue

Bonus is calculated on post-buyback equity shares outstanding.

```

Post-buyback shares = Opening shares − Shares bought back

Bonus shares = Post-buyback shares × Bonus ratio

Journal:

General Reserve / P&L A/c Dr [FV × Bonus shares]

To Bonus Shares Pending Allotment A/c [Same]

Bonus Shares Pending Allotment A/c Dr [Same]

To Equity Share Capital A/c [Same]

```

### Phase 5 — Balance Sheet

Post all entries and prepare the Balance Sheet. Verify:

• Share Capital Note shows post-buyback + post-bonus shares
• Reserves Note shows all movements (CRR added, GR/P&L reduced)
• Bank balance reflects all receipts and payments

## Running Balance Worksheet (keep this while solving)

## Profit on Cancellation of Debentures

When debentures are cancelled (bought back at a discount) in a CDR, the gain is:

```

Debenture Face Value − Purchase Price = Profit on Cancellation → Capital Reserve

```

This is a capital profit, so it goes to Capital Reserve, not P&L or General Reserve.