- September 6, 2023 at 8:52 am #691497naveed42927Participant
- Topics: 16
- Replies: 3
I was practicing a question (Sep/Dec 15) and I am stuck in one part for which I need your assistance.
The question mentions that Venture Capital Gupta made a 20% investment in Fluffort Co.
Then it mentions that if Flufftort Co’s
financial results do not improve, Gupte VC may exercise its right to compel Flufftort Co to
buy back its shares at par on 30 June 20X6.
The question has asked for projected statement of financial position if the shares are repurchased and cancelled.
When I checked the solution:
1) In the assets part they have mentioned cash as blank (as they have used it for repurchasing of shares). Total cash were 7.6m before.
2)In the Share capital part they have mentioned as 40m. Before it were 50m. So, 20% of 50 is 10 which has now been cancelled as per share repurchase. The nominal value for shares is 1$. Similarly they have mentioned about retained earnings as 5m before it was 2.6 but 2.4 was current year retained earnings.
All other things are same but only cash of 7.6m has been deducted to zero and retained earnings of 2.4m is added for this year.
The question states that share repurchase would for be par value. But here only cash reserves has been used which were 7.6m while shares are of 10m. Where is remaining 10-7.6= 2.4? I cannot see any effect SOFP. Neither loan has been increased nor retained earnings been reduced.
Thank you for your support.September 6, 2023 at 3:48 pm #691516John MoffatKeymaster
- Topics: 56
- Replies: 53169
The question says (under the heading ‘Note’) that the figure for retained earnings can be assumed to be the net increase in cash. So 7.6 + 2.4 = 10 🙂
- You must be logged in to reply to this topic.