How Capital Reserves Are Derived

How Capital Reserves Are Derived

How capital reserves are derived

The sources of capital reserves are principally:

(i)Trading profits retained.

(ii)Profits from the sale of part of the fixed assets.

(ill) Profits made by a newly acquired subsidiary prior to its acquisition.

(iv)Profits from the sale of a subsidiary.

(v)Excess arising from revaluation of fixed assets.

(vi)Premiums received as a result of the company's issuing shares at a price above par value (e.g., say, £1m shares are issued at £10 each; the £25 excess per share, making £500,000, is placed to capital reserve). Any such excess of the share issue price over the par value must be recorded separately in the balance sheet as 'Share premium account'.

Capital redemption reserve fund- is a specific capital reserve, usually set aside over a period of years, for the purpose of repaying redeemable preference shares. Some of the profits retained are transferred to this reserve and, as it is a fund, an equal amount is set aside in liquid assets to meet the ultimate liability when it fails due.

Redemption of goodwill reserve: This is the provision made to 'write off' the amount originally paid for goodwill, because goodwill, being an intangible asset, is non-negotiable, except in the case of the sale of a subsidiary or of the whole company.

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