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Accounting for a Capital Reduction?

Accounting for a Capital Reduction?

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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29th Feb 2016 19:36

Think about it...
What will the bank and share capital numbers (including number of shares) be afterwards?

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01st Mar 2016 11:02

Engage reverse gear

It's a reversal of previous entries.

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By Numan
01st Mar 2016 12:04

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?

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01st Mar 2016 12:51

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.

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