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Hi
I can see how people fail this exam. You can sit pondering over impossibilities set by the examiner and incorrect. a. You are buying back $10 m of shares with $7.6m cash and retained earnings for last year of 2.4. Choice1. Use the 7.6 plus profit from 2005 to make 10m and then you have 40 share capital and still 2.6 as retained earnings……therefore it doesn’t balance without some extraordinary happening we are supposed to dream up. RE cannot be transferred without coming out of other comprehensive income
There is nothing impossible or incorrect in the question!!
What you are asking about is basic accounting. You don’t repay shares with retained earnings – you need cash.
The question specifically says that the figure for retained earnings in 20X6 can be assumed to be in the net increase in cash (which you would assume anyway!).
So cash goes up by 2.4M and retained earnings increase by 2.4M – it balances.
The now have 10M cash (7.6 + 2.4) and they repay the shares. So cash goes down by 10M and share capital goes down by 10M.
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