Issue of Shares to Vendor

Sometimes, company purchases assets and makes the payment to the vendor, in the form of fully paid shares of the company. These shares can also be issued either at par, at premium or at discount, and the number of shares to be issued will depend upon the price at which the shares are issued and the amount payable to the vendor.

No. of shares to be issued to the vendor = Amount Payable/ Issue Price per share.

Issue Price per share =Face Value+ Premium

Journal Entries to be passed in this case can be shown as:

No. Transaction Journal Entry Amount
1. When assets are purchased. Assets A/c                        Dr.

To Vendor

 Purchase price of assets.
2. Issue of Shares to the vendor. Vendor A/c                       Dr.

To Share Capital A/c

To Sec.Prem.Reserve A/c*

 Purchase Price.

Share Capital.

Premium.

 

If the shares are issued to the promoters for their services, Goodwill account is to be debited instead of Assets account.

Buy-Back of Shares

When a company purchased its own shares, it is called ‘Buy- Back of Shares’. The company can buy back its own shares either from the free reserves, securities premium or from the proceeds of any shares or other specified securities.

Conditions for buy-back of shares:

(a) Authorized by the Articles of the Association.

(b) A special resolution must be passed in the companies’ AGM meeting.

(c) The amount of buy-back does not exceed 25% of the paid-up capital and free reserves.

(d) The debt-equity ratio should not be more than a ratio of 2:1 after the buyback.

(e) All the shares of buy-back should be fully paid-up.

(f) The process should be completed within one year from the date of passing the SR.

(g) The company should file a solvency declaration with the Registrar and SEBI.

 

Test Your Understanding - Share Capital 4