Buyback of shares refers to that process by which the company buys shares from the market at a premium to the current market price, buyback is done by companies that have excess cash and wants to give confidence to shareholders as well as give a signal to the market that its stock price is undervalued. Buyback has advantages as well as disadvantages but in the post, we will be discussing the various journal entries which are passed when a company decides to do a buyback of stocks –
Buyback Journal Entries Example
Suppose company XYZ has paid-up capital of 10 million shares having $10 face value and it decides to buyback 10 percent of equity shares that is 1 million shares from the market at $14 when stock is trading at $11 in the stock market and the company decides to utilize general reserve for buyback of shares and use securities premium account for adjustment of $4 premium payable on buyback of shares than following three journal entries will be passed in the books of account of the company
1st Journal Entry
General Reserve account Dr $1000000
To Capital Redemption Reserve Account $1000000
This entry is passed to account for 1 million shares bought at face value that is $10
2nd Journal Entry
Equity share capital account Dr $1000000
Securities Premium account Dr $400000
To Shareholders Account $1400000
This entry is passed for cancellation of 10 percent stocks which the company has decided to buyback from the market and securities premium account is debited to account $4 per share of premium which company has decided to give to its shareholders and total of $1400000 is credited to shareholders account.
3rd Journal Entry
Shareholders Account Dr $1400000
To Bank Account $1400000
This entry is passed for the accounting of money paid to shareholders of the company for shares bought back by the company.
The above case was a simple example of buyback of stocks taking into account the face value of stocks, general reserve, and securities premium account but in real life, this is not easy as the market price of stock keeps fluctuating and does not remain the same and sometimes the market price goes over and above the buyback price leading to failure of buyback exercise done by the company.