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In P1, while calculating Retained Earnings, the examiner has deducted 17.5m. Why is it happening?
I read your previous asnwer at https://opentuition.com/topic/ennea-co-jun-12-2/ but I’m confused on the fact that if we are taking a loan to buy back the share capital, why would we need to reduce the retained earnings at all? As the buyback would be performed by the borrowed amount itself. How are we falling short of 17.5m that we need to deduct it from the RE?It is because they are buying back shares. The shares have a nominal value of 0.40 per share but they having to pay the market. value of 3.20 per share. The nominal value is debited to the share capital account and the extra 2.80 is debited to retained earnings. This is a financial accounting point.
Yes, I get the deduction from the share capital.
But why is the extra 2.8 deducted from retained earnings, when we have taken a debt specifically for that purpose?
The Share Capital is decreasing by 0.4 per share as we are buying back the shares, that is logical to me. I can’t find any logic behind the deduction of 17.5m from retained earnings, even after going through Financial Accounting once again!
It is nothing to do with where the money was raised from.
They are paying out cash of $3.20 per share and then cancelling the shares. The double entry is to credit cash with the $3.20, debit share capital with the nominal value of $0.40, and debit retained earnings with $2.80. It is perfectly logical – where else are we going to debit the $2.80?
Sir, what would be the journal entries for the Loan taken? And the payment of the Extra 2.8?
I wrote the journal entries for the buying back of the shares in my previous reply.
The entry for taking the loan is Dr Cash Cr Loan, with the amount borrowed.
It is higher up this page!! But here it is again:
It is nothing to do with where the money was raised from.
They are paying out cash of $3.20 per share and then cancelling the shares. The double entry is to credit cash with the $3.20, debit share capital with the nominal value of $0.40, and debit retained earnings with $2.80. It is perfectly logical – where else are we going to debit the $2.80?
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