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Hi
On Fluffort Co it says retained earnings for 2016 are 2.4 + 2.6 = 5m
However, the 2.4 was used to buy the shares back from Gupte at a cost of 10m
So cash is 7.6 from 2015 + 2.6 – 10m = 0.
I dont understand how we have the $2.4m available to add to retained earnings if we have already used it to buy back the shares above?
Also, im confused as to why Gupte would allow the use of cash within the company to be used by the Patel family to rebuy their shares?
My understanding is their are entitled to value of 20% of assets which would include cash already so why would they allow they other shareholders to use 100% of this to fund the repurchase of shares?
Many thanks for your help
These are both financial accounts matters (rather than financial management).
The retained earnings arise because they have made profit. Given that the question says the retained earnings are equal to the increase in cash, the double entry is debt cash and credit retained earnings. What they then decide to do with the cash has no affect at all on the retained earnings.
It is Gupte’s shares that are being repurchased – the question says that they hold the right (presumably as part of the original agreement) to compel Flufftort to buy back their shares at par. If they hold that right, then they are entitled to use the right (and would do so if they decided that the worth of their investment was falling).
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