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Dear sir,
this question says that in one proposal the share capital (40c at par) will reduce by 20m, the current market price of share is 3.2 dollars. i was able to get the decrease in share capital but i don’t understand why retained earnings would have to reduce as well?
it says the reduction in retained earnings is measured by 20m*2.8/3.2
my question is regarding the 2.8 (i’m guessing the difference between par value and market value)
what am i missing here?
thanksThey are repaying the shares and therefore share capital and reserves must fall by the same amount as the cash paid (as per basic financial accounts).
We credit cash with 20M, debit share capital with the nominal value of the shares repaid, and debit retained earnings with the difference between the 20M and the nominal value of the shares.
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