BBS stores (June 2009, amended – BPP Revision Kit)

[cys94]

Dear John,

For question a ii):

I don’t understand why the retained earnings are reduced by 817. Is it just to balance the accounts?

At the SOFP, the share capital is always at par. Out of the question, for example if the par value per share is $1 and we have 1 million shares, so now we have $1 million share capital. If the market price of shares increased to $2 per share, this makes the total shares to worth $2 million. Does that mean the retained earnings will be increased by $1 million since the share capital will be still at par (as the share capital does not increase with the rise of share price)?

I am giving the above example because I don’t understand why the buy back of shares will decrease the retained earnings. Will the increased/decreased in share price or number of shares affect the retained earnings?

[John Moffat]

The market value of the shares is not reflected at all in the SOFP.

The SOFP shows the nominal/par value of the shares. The retained earning are the reported profits, and again are nothing to do directly with the market value of the shares on the stock exchange.

[cys94]

So for BBS stores (June 2009), questions a ii), why are the retained earnings reduced by 817?

[John Moffat]

They are paying $871M to buy back the shares, and the sales being bought back have a nominal value in total of $54.44M

So the double entry is to credit cash with 871, debit share capital with 54.44 and debit reserves with the balance of 816.56 (817).

[cys94]

Ok, understood. Thank You John 🙂

[John Moffat]

You are very welcome 🙂

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