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Hello Sir
I can not figure it out in part a) of answer how company could buyback shre ofGupte with below accounting recordsShare buyback ( euity)Debit of 10
Cash Credit 7.6
Retained earnig Credit 2.4I meant how Retained earning could increase for profit of the year? could you please explain this?
Thank you
RegardsThis is actually financial accounts rather than financial management 🙂
The profit for the year does not increase. The ‘profit’ on the buyback of the shares goes straight to retained earnings.
Hello Sir;
Sorry posting twice was a connection mistake ?
Thank you for your quick reply . However based on the question there is no profit on the buyback of share .
Gupte co had 20% of share (10 M @1$ par value ) . My understanding is it has been bought back at the same par value without profit . It is not clear from the question if there were a profit on the transaction. Am I wrong?Regards
Sorry – ignore my previous reply!!
The double entry for buying back the sales at par is Cr Cash 10M and Dr Share Capital 10M.
The cash at 2015 was 7.6M. The question says to assume that the retained earnings at 2016 (which are 2.4M) are the net increase in cash for 2016. So the cash prior to buying back the shares was 10M. They pay our 10M which leaves the cash balance at zero.
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