Capital redemption and permissible payment

Gill Gittings

Hi Everyone.
Wow a nice new forum look I hope someone can help. I've got a situation were a client has done a redemption of shares out of capital using a permissible payment. Before I go and make a total fool out of myself with my boss has anyone ever come across these and how do you account for it.
Sorry for the question but I'm clueless with these. Thanks in advance x

Steve Collings

Hi

You'll need to determine whether the permissible capital payment, plus the proceeds of any fresh issue of sahres is less or more than the nominal amount of the shares redeemed. If the permissible capital payment + the proceeds of any fresh issue of shares is less than the par value of the shares redeemed the difference will be transferred to a capital redemption reserve in the equity section of the balance sheet. If it is more the difference is deducted from capital redemption reserve, the share premium account, share capital or revaluation reserve.

If this is your bal sheet:

Net assets........................10,000

Ordinary shares..................4,000
Redeemable shares.............4,000
P&L account.......................2,000
......................................10,000

and the client redeems all shares at par the journals will be:

DR redeemable shares............4,000
DR P&L account.....................2,000
CR cash..............................(4,000)
CR capital redemption reserve (2,000)

leaving the following bal sheet:

Net assets............................6,000

Ordinary shares....................4,000
Capital redemption reserve....2,000
..........................................6,000

If the permissible capital repayment is less than par value of the shares redeemed you take the diff to capital redemption reserve - so assume co redeems the shares for £3k, it's going to be:

DR redeemable shares.............4,000
DR P&L account.......................2,000
CR cash.................................(3,000)
CR capital redemption reserve..(3,000)

leaving you with the following bal sheet:

Net assets..............................7,000
Ordinary shares......................4,000
Capital redemption reserve......3,000
............................................7,000

If the permissible payment is higher than the par value of the shares, the excess is deducted from the other reserves/capital accounts - so assume shares are redeemed at £5k, the entries will be:

DR redeemable shares............4,000
DR profit and loss a/c.............2,000
CR cash...............................(5,000)
CR capital redemption reserve.(1,000)

This leaves you with the following bal sheet:

Net assets.............................5,000

Ordinary shares......................4,000
Capital redemption reserve.......1,000
.............................................5,000

Hope that helps.

Cheers
Steve

Gill Gittings

Thanks Steve this is really helpful.