I’m currently working on bookkeeping for a corporate entity and I have some questions regarding share buybacks. Specifically, I’m wondering how to record the journal entries for a scenario where the corporation buys back a class of preferred shares from a shareholder for $10,000, even though its PUC was only $1 and a deemed dividend is declared (with a T5 issued). In the accounting records, the class of preferred shares was recorded at $9,000 (book value). I’m also unsure about how to properly record the deemed dividend on the financial statements and in the books. Any insights or suggestions would be greatly appreciated.
You would have to know more about the share provisions and the buy-back. Normally, preferred/special shares have a fixed value so the company can’t pay more than the redemption amount for those shares. The excess could be a dividend. Normally, the entry (assuming a $9,000 share redemption) would be
DR Share capital $1
DR Dividend $8,999
CR Cash (I assume) $9,000
For better clarification, I want to provide my bookkeeping.
Based on the fact that the corporate paid $ 10,000 for a preferred share to shareholder for redemption, let’s say Class 1 at par value $ 0.9 per share ( a total 10,000 shares). On the book, the Class 1 preferred share was recorded $ 9,000 credit. Its total PUC for this share is $ 1.00.
So I made the journal entry as below on the book.
Debit: Class 1 Preferred share $ 9,000
Debit: Share redemption 1,000 <- not sure about this.
Credit: Cash $10,000
My question is
Did I record the above entries correctly?
a deemed dividend was paid as $ 9,999 ($10,000-$1)
And how I account this in the journal entry? Or should I just report this in T2 only?
If I understand you correctly that the redemption amount of the shares is $10,000 (total) and the stated capital is $1,000 (total) then your entry is more or less correct. The dividend would be the $9,000 and the $1,000 debit would be to the share capital account.
I’m still confused that you’ve said in your point 2 that a deemed dividend of $9,999 was paid ($10,000-$1). Why are you using $1 as the paid-up capital for the deemed dividend but $1,000 in your accounting entry? Although not required, the PUC and the stated capital are the same in most cases. Are these the only “Class 1 Preferred” shares issued and outstanding?
Pretty much correct, but the typical account used here is “Contributed Surplus”, unless the transaction would reduce the credit balance to zero - any additional debit should be posted directly to retained earnings.
@kevin
A deemed dividend is a tax effect - it doesn’t usually get recorded in the accounting records at the same value.