A parent company bought 100% of the shares in a company some years ago and immediately hived up the assets into the parent company. The subsidiary now dormant with only a debit balance for amount receivable from the parent company from the hive up. This balance equals the share capital of the company less the retained losses.
The parent company now wishes to wind up the subsidiary company, but wishes to reduce the share capital prior to winding up. To illustrate, the balance in the subsidiary is:
Amount Receivable from Parent Company - Dr £100,001
Retained Losses - Dr £100,000
Share Capital - Cr £200,001
The intention is to reduce share capital in 2 stages. The First stage is to reduce the share capital by £100,000 (being the excess of share capital over value of assets) as the share capital is no longer supported by the company's assets. The Second stage will repay £100,000 share capital not required back to the parent company (Dr share capital, Cr amount receivable from parent) before cancelling the shares leaving just £1 share remaining for the winding up which the liquidator advises is required.
The accounting entries for the second stage I understand, but I can't see what the entries would be where the shares are cancelled in the fist stage due to no longer being supported by the companies assets. It would make sense for these entries to all occur within equity (Dr Share Cap, Cr Retained earning for example) but I can't seem to find much guidance relevant to this scenario (where share values are not supported by the assets of the company).
Has anyone processed this kind of transaction before and have any advice on what the entries would be or know of any guidance available for this scenario (as opposed to general capital reduction/share buy back guidance which seems to be covered by most guidance).