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Hello, sir.
Which of the following is NOT a valid method that a company may use to reduce its share capital according to the Companies Act 2006?
A Pay off part of paid-up share capital out of surplus profits
B Extinguish liability on partly paid shares
C Buy back fully paid up share capital from shareholders using cash not surplus profit
D Cancel paid-up share capital that is no longer represented by assetsIn this question, what does A mean by “out of surplus profits”? Because I cannot imagine how the accounting entry goes with it. (Dr. Capital Cr. ???) Also, the textbook says that “Pay off part of paid-up share capital out of surplus assets” which is surplus assets explained there rather than surplus profits in the question. What is the difference between the two?
That’s a fun idea! Dr Capital and Cr some profits that are surplus to the company’s requirements.
I love it 🙂
Here I am, a shareholder in a company that has achieved surplus profits and, one day, a brown paper envelope arrives through my letter box. On opening it, I find a small bag of surplus profits from the company.
What wonderful imagery 🙂
It’s a good question Mel C. Back to basic bookkeeping course, capital and reserves equals net assets. So as Retained Earnings figure rises, following the achievement of surplus profits, so too does the net assets figure.
And out of those increased net assets, the company chooses to pay cash to buy back some of its share capital.
Does that make sense?
Similarly, assets that are surplus to the company’s requirements arrive from the making of profits. Where the company’s board decides that the company does not need such wealth in assets (I’ve never understood this sentiment!) it may make the decision to reduce its share capital by the route of paying off some shareholders out of those surplus-to-requirement assets.
OK?
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