Buy Back of Shares – Corporate and Management Accounting MCQ

Students should practice Buy Back of Shares – Corporate and Management Accounting CS Executive MCQ Questions with Answers based on the latest syllabus.

Buy Back of Shares – Corporate and Management Accounting MCQ

Question 1.
Provisions relating to buying back securities are contained in the Companies Act, 2013.
(A) Section 77
(B) Section 77A
(C) Section 68
(D) Section 63
Answer:
(C) Section 68

Question 2.
A company may purchase its own shares or other specified securities out of
A. Free reserves
B. Securities premium account
C. Proceeds of issue of any shares
D. Proceeds of issue of specified securities.
Select the correct answer from the options given below.
(A) A and C only
(B) A, B, and C only
(C) A, C, and D only
(D) A or B or C or D
Answer:
(D) A or B or C or D

Question 3.
Section 68 of the Companies Act, 2013 provides that no buy-back of any kind of shares or other specified securities shall be made out of the
(A) Securities premium balance as it stood before buy-back.
(B) Proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
(C) General reserve in excess of 15% balance as per latest audited balance sheet.
(D) Proceeds of issue of specified securities.
Answer:
(B) Proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Question 4.
Provisions of Section 68 relating to buy-back of shares are applicable to –
(A) Private companies
(B) Public companies
(C) Listed companies
(D) All of the above
Answer:
(D) All of the above

Question 5.
No company shall purchase its own shares or other specified securities unless buy-back is authorized by its –
(A) Memorandum of Association
(B) Registrar of Companies
(C) Shareholders agreement
(D) Article of Association
Answer:
(D) Article of Association

Question 6.
The maximum permissible buy-back under the Companies Act, 2013 is
(A) 10% of paid-up capital with Board resolution.
(B) 25% of paid-up capital with Board resolution.
(C) 25% of the aggregate of paid-up capital and free reserves of the company with a special resolution of shareholders.
(D) 25% of the aggregate of paid-up capital and free reserves of the company with an ordinary resolution of shareholders.
Answer:
(C) 25% of the aggregate of paid-up capital and free reserves of the company with a special resolution of shareholders.

Question 7.
Which of the following is the correct journal entry for the ‘Amount due on buyback of shares?
Buy Back of Shares – Corporate and Management Accounting MCQ 1
Answer:
(C)

Question 8.
For buy-back up to of the company, Board resolution is sufficient.
(A) 10% of paid-up capital
(B) 10% of free reserves
(C) 10% of paid-up capital or free reserves
(D) 10% of paid-up capital and free reserves
Answer:
(D) 10% of paid-up capital and free reserves

Question 9.
Buy-back of equity shares in any financial year should not exceed –
(A) 10% of net worth
(B) 25% of the aggregate of paid-up capital and free reserves of the company
(C) 25% of the paid-up equity capital
(D) 25% of the aggregate of paid-up equity capital and preference capital
Answer:
(C) 25% of the paid-up equity capital

Question 10.
As per Section 68 of the Companies Act, 2013, the post-buy-back debt-equity ratio should not exceed –
(A) 1
(B) 1.5
(C) 2
(D) 3
Answer:
(C) 2

Question 11.
For the purpose of calculating the debt-equity ratio which of the following debts are considered –
(A) Secured debts
(B) Unsecured debts
(C) Current liabilities
(D) All of the above
Answer:
(D) All of the above

Question 12.
Companies are allowed to buy back shares which are:
(A) Partly paid-up
(B) Fully paid-up
(C) Partly paid-up or fully paid-up at the option of the company
(D) Fully paid-up and partly paid-up with the permission of Central Government
Answer:
(B) Fully paid-up

Question 13.
The buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the –
(A) SEBI (Buy-Back of Securities) Regulations, 2018
(B) SEBI (Buy-Back of Securities) Regulations, 2014
(C) SEBI (Buy-Back of Securities) Regulations, 1992
(D) SEBI (Buy-Back of Securities) Regulations, 1994
Answer:
(A) SEBI (Buy-Back of Securities) Regulations, 2018

Question 14.
No offer of buy-back shall be made within a period of reckoned from the date of the closure of the preceding offer of buy-back
(A) 6 months
(B) 1 year
(C) 2 years
(D) 10 months
Answer:
(B) 1 year

Question 15.
The notice of the meeting at which the special resolution is proposed to be passed relating to buy-back of shares shall be accompanied by an explanatory statement stating
(A) Full and complete disclosure of all material facts
(B) Analysis of debt-equity
(C) Gross profit ratio before buy-back
(D) Chairman’s view on buy-back
Answer:
(A) Full and complete disclosure of all material facts

Question 16.
Which of the following method of the buyback is allowed under the Companies Act, 2013?
(I) Buy-back from the existing shareholders or security holders on a proportionate basis.
(II) Buy-back from the promoters of the company only on a selective basis.
(Ill) Buy-back from the open market.
Select the correct answer from the options given below.
(A) (I) only
(B) (I) and (II) only
(C) (I) and (III) only
(D) (I), (II) and (Ed)
Answer:
(C) (I) and (III) only

Question 17.
Where a company proposes to buy-back its own shares or other specified securities, it shall, before making such buy-back, file with the ROC and the SEBI, a declaration of solvency signed by –
(A) at least 2 directors of the company, one of whom shall be the managing director.
(B) at least 2 directors, managing director, and Chief Financial Officer, if any.
(C) at least 2 directors of the company and Company Secretary, if any.
(D) at least 3 directors of the company, one of whom shall be the managing director.
Answer:
(A) at least 2 directors of the company, one of whom shall be the managing director.

Question 18.
A company used a balance of ‘General Reserve’ and ‘P & L A/c’ for buy-back of equity shares. Which of the following is the correct journal entry for this transaction?
Buy Back of Shares – Corporate and Management Accounting MCQ 2
Answer:
(C)

Question 19.
Declaration of solvency in relation to buyback of shares has to be filed in
(A) Form SH-6
(B) Form SH-9
(C) Form SH-4
(D) Form SH-8
Answer:
(B) Form SH-9

Question 20.
As per Section 68(6) of the Companies Act, 2013, declaration of solvency should be verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of_____from the date of the declaration adopted by the Board.
(A) 6 months
(B) 1 year
(C) 2 years
(D) 10 months
Answer:
(B) 1 year

Question 21.
Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within the last date of completion of buy-back.
(A) 3 days
(B) 8 days
(C) 7 days
(D) 9 days
Answer:
(C) 7 days

Question 22.
Where a company completes a buyback of its shares or other specified securities, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares u/s 62( 1 )(a) [i. e. right issue] or other specified securities within a period of –
(A) 6 months
(B) 1 year
(C) 2 years
(D) 10 months
Answer:
(A) 6 months

Question 23.
Which of the following is allowed within the next 6 months after the buyback of share?
(A) Bonus issue
(B) Conversion of warrants
(C) Stock option schemes
(D) All of the above
Answer:
(D) All of the above

Question 24.
Which of the following is allowed within the next 6 months after the buyback of share?
(A) Stock option schemes
(B) Sweats equity
(C) Conversion of preference shares or debentures into equity shares
(D) All of the above
Answer:
(D) All of the above

Question 25.
Which of the following method of buy-back is allowed under the Companies Act, 2013?
(I) Buy-back by way of purchasing the securities issued to employees of the company pursuant to a scheme of stock option.
(II) Buy-back by way of purchasing the securities issued to employees of the company pursuant to a scheme of sweat equity.
Select the correct answer from the options given below:
(A) (I) only
(B) (II) only
(C) Both (I) and (II)
(D) Neither (I) nor (II)
Answer:
(C) Both (I) and (II)

Question 26.
The Paid-up equity shares capital of ABC Ltd. is ₹ 50,00,000 having a face value of ₹ 10 each fully paid-up. Other details:
General Reserve = ₹ 15,00,000
Capital Redemption Reserve = ₹ 4,00,000
Profit & Loss Account = ₹ 1,00,000
Statutory reserve = ₹ 6,40,000
Securities Premium = ₹ 1,00,000
The Board of Directors passed a resolution in a Board meeting to buy back a maximum number of shares as allowed by law. Maximum No. of shares that can be brought back =?
(A) 55,000 shares
(B) 67,000 shares
(C) 1,25,000 shares
(D) 78,000 shares
Hint:
Where buy-back is up to 10% of paid-up capital and free reserves of the company Board resolution is sufficient.
(50,00,000 + 15,00,000 + 1,00,000 + 1,00,000) × 10% = 6,70,000 6,70,000/10 = 67,000
Answer:
(B) 67,000 shares

Question 27.
N Ltd. had 90,000 equity shares of ₹ 100 each, fully paid up. The company decided to buy back 10% shares at par by the issue of the sufficient number of preference shares. N Ltd. does not have any reserves.
How many preference shares are required to be issued if new preference shares are to be issued at ₹ 10 each?
(A) 9,00,000 shares
(B) 90,000 shares
(C) 1,00,000 shares
(D) 1,20,000 shares
Hint:
Amount due to equity shareholders on buy-back = 90,000 × 100 × 10% = 9,00,000
No. of shares to be issued = \(\frac{9,00,000}{10}\) = 90,000
Answer:
(B) 90,000 shares

Question 28.
S Ltd. decided to buy back 2,000 equity shares of ₹ 100 each at a premium of 10%. For the purpose of redemption, the company issued 15,0 10% Preference shares of ₹ 10 each at a premium of 20%. Company has sufficient balance in Profit & Loss A/c. At the time of buy-back shares, the amount to be transferred by the company to the Capital Redemption Reserve Account =?
(A) ₹ 20,000
(B) ₹ 50,000
(C) ₹ 1,50,000
(D) ₹ 2,00,000
Hint:
Buy Back of Shares – Corporate and Management Accounting MCQ 4
Note 1: It is noted that in case of redemption of preference shares securities premium balance cannot be utilized for repayment of the ‘preference share capital’ amount. However, this condition is not applicable for buy-back of equity shares because as per Section 68 of the Companies Act, 2013, Securities Premium has to be treated as ‘free reserve’. Thus, securities premium collected on the issue of shares can be utilized in repayment of Equity Capital Amount.

Note 2: Total amount collected on the issue of preference shares is ₹ 1,80,000 whereas the amount payable on buy-back of shares is ₹ 2,00,000. Thus, a shortage of ₹ 20,000 will be taken from the profit & loss account because Section 68 of the Companies Act, 2013 allows buy-back

  1. Out of proceeds of fresh issue of securities
  2. Free Reserve and
  3. Securities premium.

Note 3: As per Section 69, where a company purchases its own shares out of free reserves or securities premium account, a sum equal to the nominal value of the shares so purchased shall be transferred to the Capital Redemption Reserve (CRR) account. Since in the given case amount of ₹ 20,000 utilized from the profit & loss account a sum of ₹ 20,000 must be transferred to the Capital redemption amount.

Note 4: It is not possible to give such a detailed explanation for each MCQ, so students are advised to apply all the provisions of Section 68 & Section 69 before arriving at any conclusion as to the final answer of any MCQ. However, relevant calculations are given in short for other MCQs in this chapter.
Answer:
(A) ₹ 20,000

Question 29.
During the year 2018-2019, T Ltd. buy-back 20,000 equity shares of ₹ 100 each at a premium of 5%. During the year 2018-2019, as the company did not have sufficient cash resources to buy back equity shares, it issued ₹ 1,00,000, 12% Preference shares of ₹ 10 each at a premium of 15%. The company has sufficient balance in general reserve. At the time of buy-back equity shares, the amount to be transferred to capital redemption reserve =?
(A) ₹ 10,00,000
(B) ₹ 9,50,000
(C) ₹ 12,00,000
(D) ₹ 15,00,000
Hint:
Buy Back of Shares – Corporate and Management Accounting MCQ 5
Answer:
(B) ₹ 9,50,000

Question 30.
Equity shares amounting to ₹ 2,00,000 are brought back at a premium of 5%, by the issue of preference shares amounting to ₹ 1,00,000 at a premium of 10%. The amount to be transferred to capital redemption reserve =?
(A) ₹ 1,00,000
(B) ₹ 90,000
(C) ₹ 1,50,000
(D) ₹ 50,000
Hint:
Buy Back of Shares – Corporate and Management Accounting MCQ 6
Answer:
(A) ₹ 1,00,000

Question 31.
ABC Ltd. has paid-up equity capital of 10,00,000 equity shares of ₹ 10 each fully paid-up. The position of reserves is as follows:
General Reserve = ₹ 30,00,000
Profit & Loss Account = ₹ 2,00,000
Securities Premium = ₹ 2,00,000
The company decided to buy back 2,00,000 equity shares of ₹ 10 each at 25% premium. For this purpose, the company sold the entire investments at ₹ 12,00,000 (book value ₹ 10,00,000) and made a fresh issue of 10% preference shares of ₹ 100 each to the extent minimum after utilizing the securities premium account and half of the general reserve. How many preference shares must be issued by the company so that provisions of the Companies Act, 2013 get complied with?
(A) 20,000 preference shares
(B) 40,000 preference shares
(C) 1,000 preference shares
(D) 4,000 preference shares
Answer:
(A) 20,000 preference shares

Question 32.
Following is the extract of the balance sheet of Light Co. Ltd.

 
Equity Shares of ₹ 10 each 10,00,000
Securities Premium 2,40,000
Reserves 7,50,000
Proht & Loss Account 2,80,000
Bank 9,10,000
Non-Trading Investments 4,20,000

The company bought back 15,000 shares at ₹ 40 each. The transaction in respect of buy-back was financed by the sale of 2/3rd of non-trade investment for ₹ 5,90,000.
Amount to be transferred to capital redemption reserve =?
(A) ₹ 6,00,000
(B) ₹ 1,00,000
(C) ₹ 4,50,000
(D) ₹ 1,50,000
Hint:
15,000 × 10 = 1,50,000
Answer:
(D) ₹ 1,50,000

Question 33.
Following is the extract of the balance sheet of Tube Ltd.

 
Equity Shares of ₹ 10 each 20,00,000
Securities Premium 4,80,000
Reserves 15,00,000
Profit & Loss Account 5,60,000
Bank 18,20,000
Non-Trading Investments 8,40,000

The company bought back 30,000 shares at ₹ 40 each. The transaction in respect of buyback was financed by the sale of 2/3rd of non-trade investment for ₹ 11,80,000.
Bank balance after buy-back will be –
(A) ₹ 12,00,000
(B) ₹ 16,00,000
(C) ₹ 14,50,000
(D) ₹ 18,00,000
Hint:
Buy Back of Shares – Corporate and Management Accounting MCQ 7
Answer:
(D) ₹ 18,00,000

Question 34.
The following information is available from the audited balance sheet of TH Ltd.:

  (₹ in lakhs)
Equity Share Capital (3,000 lakh Shares of ₹ 10 each) 30,000
Securities Premium A/c 3,000
General Reserve 10,000
Secured Loans 40,000
Unsecured Loans 22,000

Compute the maximum limit up to which buy-back is permitted in the financial year 2018-2019.
(A) 800 lakh shares
(B) 600 lakh shares
(C) 500 lakh shares
(D) 400 lakh shares
Hint:
(1) The buy-back of equity shares in any financial year should not exceed 25% of its total paid-up equity capital in that financial year. [₹ 30,000 × 2596 = ₹ 7,500]

(2) 25% of the aggregate of paid-up capital and free reserves of the company. [(30,000 + 3,000 + 10,000) × 25% = ₹ 10,750]

(3) The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves.

Let the amount of buy-back be ‘x’
Buy Back of Shares – Corporate and Management Accounting MCQ 8
Since, out of the above three calculations, the minimum amount is 6,000; hence maximum face value of shares that can be bought is ₹ 6,000 lakhs i.e. 600 lakh shares. (6,000/10 = 600)
Answer:
(B) 600 lakh shares

Question 35.
X Ltd. proposes to buy back ₹ 6,00,000 equity capital at 50% premium by issuing 2,000 14% preference shares of ₹ 100 each at 20% premium. It has balance in Securities Premium, General Reserve and P & L A/c of ₹ 3,50,000; ₹ 9,30,000 & ₹ 48,000 f respectively. For this purpose, it sold all of its investments of ₹ 1,48,000 for ₹ 1,50,000. The company wants to keep the balance of 6,00,000 in general reserve. What are the balances of (i) Securities Premium A/c and (ii) Capital Redemption Reserve A/c after giving effect to the above transactions?
Buy Back of Shares – Corporate and Management Accounting MCQ 3
Hint:
Buy Back of Shares – Corporate and Management Accounting MCQ 9
Answer:
(C)

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