My client issued 1,000,000 shares of nominal value £1 each for a consideration of £2 each. The amounts were fully paid. The balance sheet appeared as follows
Dr Bank - £2m
Cr Share Capital - £1m
Cr Share Premium £1m
During the year the company made £1m profit form trading activities hence the balance sheet now looked like this:
Dr Bank - £3m
Cr Share Capital - £1m
Cr Share Premium - £1m
Cr P&L Reserve - £1m
The company raised too much money from its initial subscription , £1.5m remained in the business savings account during the entire year hence the company would like to return £500k to the investors via a capital reduction.
What are the accounting treatments for this capital reduction?
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Replies (4)
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Think about it...
What will the bank and share capital numbers (including number of shares) be afterwards?
What about Capital Redemption Reserve
Sorry to be a pain. The reverse option makes sense i.e.
Cr Bank £500k
Dr Share Capital £250k
Dr Share Premium Account £250k
however I read a capital redemption reserve needs to be maintained, is that correct?
Capital Redemption Reserve
That is when there is a purchase of own shares, but not, I think, when there is a capital reduction. If you think about it, it would completely defeat the purpose of a capital reduction.