Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights - Test 2: answer key

Question 1 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. Vardhan Chemicals Ltd. is a listed non-Ind AS company preparing its financial statements for the year ended 31 March 2026. Its balance sheet extract as at 1 April 2026 shows: equity share capital ₹50,00,000 (5,00,000 equity shares of ₹10 each, fully paid); 9% preference share capital ₹20,00,000 (20,000 preference shares of ₹100 each, fully paid); general reserve ₹30,00,000; securities premium ₹8,00,000; profit and loss account credit balance ₹5,00,000; and revaluation reserve ₹6,00,000 (created on revaluation of plant, representing unrealised gain). There is no subsisting default in repayment of deposits, debentures, preference shares, dividend or term loans. The company passed a special resolution and bought back 1,00,000 equity shares at ₹30 per share on 1 April 2026. The buy-back is authorised by its articles. The company decided to utilise the securities premium account to the maximum extent possible for the premium payable on buy-back. Any remaining premium and the statutory transfer to Capital Redemption Reserve (CRR) under Section 69 were charged to the general reserve. All legal formalities were completed. You are required to answer the following questions based on the accounting treatment under the Companies Act, 2013 and the relevant accounting standards.

What amount is required to be transferred to the Capital Redemption Reserve (CRR) on buy-back of 1,00,000 equity shares?

1. ₹30,00,000
2. ₹10,00,000 (correct answer)
3. ₹20,00,000
4. ₹8,00,000

Answer: B — ₹10,00,000

Explanation. Section 69(1) requires a sum equal to the nominal value of shares bought back out of free reserves or securities premium to be transferred to CRR. Nominal value = 1,00,000 × ₹10 = ₹10,00,000. The total consideration is ₹30,00,000 and premium is ₹20,00,000, but only nominal value goes to CRR.

Where it goes wrong. Students often transfer the total buy-back consideration or the premium amount to CRR instead of the nominal value.

Authority. Section 69(1) of Companies Act, 2013

Question 2 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

What is the amount of premium on buy-back that can be adjusted against the securities premium account?

1. ₹20,00,000
2. ₹12,00,000
3. ₹10,00,000
4. ₹8,00,000 (correct answer)

Answer: D — ₹8,00,000

Explanation. Total premium on buy-back = 1,00,000 × (₹30 − ₹10) = ₹20,00,000. The securities premium account has a balance of ₹8,00,000. Hence, the maximum amount that can be adjusted against securities premium is ₹8,00,000. The balance premium of ₹12,00,000 must be charged to free reserves.

Where it goes wrong. Students often adjust the entire premium against securities premium even when its balance is insufficient.

Authority. Section 68(1) and Section 69(1) of Companies Act, 2013

Question 3 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

What is the balance amount of premium on buy-back charged to the general reserve?

1. ₹8,00,000
2. ₹12,00,000 (correct answer)
3. ₹20,00,000
4. ₹10,00,000

Answer: B — ₹12,00,000

Explanation. Total premium = ₹20,00,000. Securities premium utilised = ₹8,00,000. Balance premium charged to general reserve = ₹20,00,000 − ₹8,00,000 = ₹12,00,000. This is in addition to the CRR transfer of ₹10,00,000, which is also charged to general reserve.

Where it goes wrong. Students often forget to deduct the securities premium utilised and charge the entire premium to general reserve.

Authority. Section 68(1) and Section 69(1) of Companies Act, 2013

Question 4 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

What is the closing balance of the general reserve after the buy-back?

1. ₹18,00,000
2. ₹10,00,000
3. ₹8,00,000 (correct answer)
4. ₹30,00,000

Answer: C — ₹8,00,000

Explanation. Opening general reserve = ₹30,00,000. Less: premium charged = ₹12,00,000. Less: transfer to CRR = ₹10,00,000. Closing general reserve = ₹30,00,000 − ₹12,00,000 − ₹10,00,000 = ₹8,00,000.

Where it goes wrong. Students often omit the CRR transfer or deduct only the premium, leading to incorrect closing balance.

Authority. Section 69(1) of Companies Act, 2013

Question 5 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. Sterling Garments Ltd. is an unlisted non-Ind AS company. As at 31 March 2026, its equity share capital is ₹40,00,000 (4,00,000 equity shares of ₹10 each, fully paid), and 10% preference share capital is ₹10,00,000 (10,000 preference shares of ₹100 each, fully paid). Reserves and surplus include general reserve ₹30,00,000, securities premium ₹3,00,000, and profit and loss account credit balance ₹2,00,000. There is no subsisting default. The company decided to buy back 80,000 equity shares at ₹25 per share. To fund the buy-back, it issued 5,000 10% preference shares of ₹100 each at par on 1 April 2026, raising ₹5,00,000. The buy-back was authorised by a special resolution and the articles. The company utilised the proceeds of the preference share issue towards the buy-back. It also used the securities premium account to the maximum extent possible for the premium payable on buy-back. The balance premium and the statutory transfer to CRR under Section 69 were charged to the general reserve. All legal formalities were completed. You are required to answer the following questions based on the accounting treatment under the Companies Act, 2013 and relevant accounting standards.

Can Sterling Garments Ltd. utilise the proceeds of the fresh issue of preference shares for the purpose of buy-back of equity shares?

1. Yes, as preference shares are a different kind of security (correct answer)
2. No, only free reserves can be used
3. No, only securities premium can be used
4. Yes, but only up to 50% of the issue proceeds

Answer: A — Yes, as preference shares are a different kind of security

Explanation. Section 68(1) permits buy-back out of proceeds of issue of any shares or other specified securities, but not the same kind. Preference shares are a different kind of security from equity shares, so their proceeds can be used for equity buy-back. There is no 50% restriction.

Where it goes wrong. Students often think only free reserves or securities premium are allowed and forget the proceeds of a different kind of security.

Authority. Section 68(1) of Companies Act, 2013

Question 6 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

What amount is transferred to CRR on buy-back of 80,000 equity shares?

1. ₹8,00,000 (correct answer)
2. ₹20,00,000
3. ₹12,00,000
4. ₹5,00,000

Answer: A — ₹8,00,000

Explanation. CRR transfer is equal to the nominal value of shares bought back = 80,000 × ₹10 = ₹8,00,000. The buy-back consideration is ₹20,00,000 and premium is ₹12,00,000, but only nominal value is transferred to CRR.

Where it goes wrong. Students often transfer the total consideration or premium to CRR.

Authority. Section 69(1) of Companies Act, 2013

Question 7 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

After utilising the securities premium to the maximum extent, what is the balance premium charged to the general reserve?

1. ₹9,00,000 (correct answer)
2. ₹12,00,000
3. ₹3,00,000
4. ₹15,00,000

Answer: A — ₹9,00,000

Explanation. Total premium = 80,000 × (₹25 − ₹10) = ₹12,00,000. Securities premium available = ₹3,00,000. Balance premium charged to general reserve = ₹12,00,000 − ₹3,00,000 = ₹9,00,000.

Where it goes wrong. Students often charge the entire premium to general reserve or forget to deduct the securities premium utilised.

Authority. Section 68(1) and Section 69(1) of Companies Act, 2013

Question 8 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

What is the closing balance of the general reserve after the buy-back?

1. ₹13,00,000
2. ₹17,00,000
3. ₹30,00,000 (correct answer)
4. ₹21,00,000

Answer: C — ₹30,00,000

Explanation. Opening general reserve = ₹30,00,000. Less: premium charged = ₹9,00,000. Less: transfer to CRR = ₹8,00,000. Closing general reserve = ₹30,00,000 − ₹9,00,000 − ₹8,00,000 = ₹13,00,000. The preference share issue proceeds of ₹5,00,000 are used to pay for the buy-back but do not affect the general reserve directly.

Where it goes wrong. Students often omit the CRR transfer or incorrectly include the preference share issue proceeds as a reserve.

Authority. Section 69(1) of Companies Act, 2013

Question 9 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. Which of the following is not a permissible source for buy-back of equity shares under Section 68(1) of the Companies Act, 2013?

Which of the following is not a permissible source for buy-back of equity shares under Section 68(1) of the Companies Act, 2013?

1. Revaluation reserve (correct answer)
2. Free reserves
3. Securities premium account
4. Proceeds of issue of preference shares

Answer: A — Revaluation reserve

Explanation. Section 68(1) permits buy-back out of free reserves, securities premium account, or proceeds of issue of any shares or other specified securities. Revaluation reserve represents unrealised gain and is specifically excluded from free reserves. Therefore, it cannot be used for buy-back.

Where it goes wrong. Students often treat revaluation reserve as a free reserve and consider it a permissible source.

Authority. Section 68(1) and definition of free reserves under Section 68 of Companies Act, 2013

Question 10 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. When a company buys back its own shares out of free reserves, what amount is required to be transferred to the Capital Redemption Reserve Account?

When a company buys back its own shares out of free reserves, what amount is required to be transferred to the Capital Redemption Reserve Account?

1. The market value of shares bought back
2. The nominal value of shares bought back (correct answer)
3. The purchase price of shares bought back
4. The premium paid on buy-back

Answer: B — The nominal value of shares bought back

Explanation. Section 69(1) requires a sum equal to the nominal value of shares so purchased to be transferred to CRR. The purchase price or premium is not transferred to CRR; only the face value is transferred.

Where it goes wrong. Students often transfer the total consideration or premium instead of nominal value.

Authority. Section 69(1) of Companies Act, 2013

Question 11 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. Which of the following journal entries is correct for transferring the nominal value of shares bought back to CRR?

Which of the following journal entries is correct for transferring the nominal value of shares bought back to CRR?

1. General Reserve A/c Dr. To CRR A/c
2. CRR A/c Dr. To General Reserve A/c
3. Equity Share Capital A/c Dr. To CRR A/c (correct answer)
4. Securities Premium A/c Dr. To CRR A/c

Answer: C — Equity Share Capital A/c Dr. To CRR A/c

Explanation. The transfer to CRR is made from free reserves such as general reserve. The correct entry is to debit the free reserve (e.g., General Reserve A/c) and credit CRR A/c. The other options reverse the entry or use incorrect accounts.

Where it goes wrong. Students often reverse the debit and credit or use equity share capital instead of free reserves.

Authority. Section 69(1) of Companies Act, 2013

Question 12 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. The Capital Redemption Reserve Account can be utilised by the company for which of the following purposes?

The Capital Redemption Reserve Account can be utilised by the company for which of the following purposes?

1. Payment of dividend to shareholders
2. Buy-back of preference shares
3. Writing off preliminary expenses
4. Issue of fully paid bonus shares (correct answer)

Answer: D — Issue of fully paid bonus shares

Explanation. Section 69(2) restricts the utilisation of CRR to paying up unissued shares to be issued as fully paid bonus shares. It cannot be used for dividend, buy-back of preference shares, or writing off expenses.

Where it goes wrong. Students often think CRR can be used for dividend or other purposes.

Authority. Section 69(2) of Companies Act, 2013

Question 13 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company buys back shares at a premium. The premium amount is adjusted against:

A company buys back shares at a premium. The premium amount is adjusted against:

1. Only securities premium account
2. Only free reserves
3. Capital reserve account
4. Securities premium account and/or free reserves (correct answer)

Answer: D — Securities premium account and/or free reserves

Explanation. The premium on buy-back is adjusted against securities premium and/or free reserves. Section 68(1) allows buy-back out of securities premium and free reserves, and the premium paid is part of the buy-back consideration. Capital reserve is not a free reserve unless it is realised and available for distribution.

Where it goes wrong. Students often think only securities premium or only free reserves can be used, ignoring the flexibility.

Authority. Section 68(1) and Section 69(1) of Companies Act, 2013

Question 14 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company has a balance in securities premium account of ₹5,00,000. It buys back shares at a premium of ₹8,00,000. What is the maximum amount that can be adjusted against securities premium?

A company has a balance in securities premium account of ₹5,00,000. It buys back shares at a premium of ₹8,00,000. What is the maximum amount that can be adjusted against securities premium?

1. ₹5,00,000 (correct answer)
2. ₹8,00,000
3. ₹3,00,000
4. Nil

Answer: A — ₹5,00,000

Explanation. The securities premium account can be utilised only to the extent of its available balance. The balance premium of ₹3,00,000 must be charged to free reserves. Adjusting the entire ₹8,00,000 against securities premium would be incorrect.

Where it goes wrong. Students often adjust the entire premium against securities premium even when its balance is insufficient.

Authority. Section 68(1) and Section 69(1) of Companies Act, 2013

Question 15 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · medium

Scenario. Which of the following statements about buy-back of shares is false?

Which of the following statements about buy-back of shares is false?

1. Buy-back can be made out of free reserves
2. Buy-back can be made out of securities premium
3. Buy-back can be made out of proceeds of issue of same kind of shares (correct answer)
4. Buy-back can be made out of proceeds of issue of preference shares

Answer: C — Buy-back can be made out of proceeds of issue of same kind of shares

Explanation. Section 68(1) prohibits buy-back out of proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. Proceeds of preference shares (a different kind) can be used, but proceeds of equity shares cannot be used for equity buy-back.

Where it goes wrong. Students often think any proceeds can be used, ignoring the prohibition on same-kind proceeds.

Authority. Section 68(1) of Companies Act, 2013

Question 16 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company buys back 1,00,000 equity shares of ₹10 each at ₹25 per share. It uses securities premium of ₹10,00,000 and the balance from general reserve. What is the amount transferred to CRR?

A company buys back 1,00,000 equity shares of ₹10 each at ₹25 per share. It uses securities premium of ₹10,00,000 and the balance from general reserve. What is the amount transferred to CRR?

1. ₹10,00,000
2. ₹25,00,000 (correct answer)
3. ₹15,00,000
4. ₹5,00,000

Answer: B — ₹25,00,000

Explanation. CRR transfer is always equal to the nominal value of shares bought back, irrespective of the source of funds. Nominal value = 1,00,000 × ₹10 = ₹10,00,000. The premium and the source of funds do not affect the CRR amount.

Where it goes wrong. Students often transfer the premium amount or total consideration to CRR.

Authority. Section 69(1) of Companies Act, 2013

Question 17 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. The balance in Capital Redemption Reserve Account is disclosed in the balance sheet under which head?

The balance in Capital Redemption Reserve Account is disclosed in the balance sheet under which head?

1. Share capital
2. Long-term borrowings
3. Current liabilities
4. Reserves and surplus (correct answer)

Answer: D — Reserves and surplus

Explanation. CRR is a reserve created out of free reserves and is disclosed under Reserves and Surplus in the balance sheet as per Schedule III. It is not part of share capital or liabilities.

Where it goes wrong. Students often classify CRR as share capital or borrowings.

Authority. Schedule III Division I of Companies Act, 2013

Question 18 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. Which of the following is not a free reserve for the purpose of buy-back under Section 68?

Which of the following is not a free reserve for the purpose of buy-back under Section 68?

1. General reserve
2. Profit and loss account credit balance
3. Revaluation reserve (correct answer)
4. Securities premium

Answer: C — Revaluation reserve

Explanation. Revaluation reserve represents unrealised gain and is specifically excluded from free reserves. General reserve and P&L credit balance are free reserves. Securities premium is not a free reserve but is separately allowed as a source for buy-back.

Where it goes wrong. Students often treat revaluation reserve as a free reserve and consider it available for buy-back.

Authority. Definition of free reserves under Section 68 of Companies Act, 2013

Question 19 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. In the journal entry for buy-back of shares, the Equity Shares Buy-back Account is:

In the journal entry for buy-back of shares, the Equity Shares Buy-back Account is:

1. Debited with the nominal value
2. Credited with the purchase consideration (correct answer)
3. Debited with the premium amount
4. Credited with the nominal value

Answer: B — Credited with the purchase consideration

Explanation. When shares are bought back, the Equity Shares Buy-back Account is credited with the total purchase consideration payable. Subsequently, it is debited when payment is made to shareholders. The nominal value and premium are separated only when cancelling the shares.

Where it goes wrong. Students often credit the nominal value or debit the purchase consideration in the first entry.

Authority. Accounting treatment of buy-back under Section 68 of Companies Act, 2013

Question 20 · 2 marks · Chapter 12: Buy Back of Securities and Equity Shares with Differential Rights · hard

Scenario. A company bought back shares out of free reserves. Which account is credited when the nominal value is transferred to CRR?

A company bought back shares out of free reserves. Which account is credited when the nominal value is transferred to CRR?

1. Capital Redemption Reserve Account (correct answer)
2. General Reserve Account
3. Equity Share Capital Account
4. Securities Premium Account

Answer: A — Capital Redemption Reserve Account

Explanation. The transfer to CRR is credited to the Capital Redemption Reserve Account and debited to the free reserve (e.g., General Reserve). The other accounts are not credited for this transfer.

Where it goes wrong. Students often credit the general reserve or equity share capital instead of CRR.

Authority. Section 69(1) of Companies Act, 2013