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Hello!
Under part (a) there are 2 options needed to be adjusted to the statement of financial position provided.
Under option 1: we deduct 1231 [ 50% * 2297 + 50% * 165] from the PPE given to get the remaining PPE after sale.
But where does adding additional 871 amount come from? Can you please explain on this?Under option 2: why was the called up share capital deducted by 54? Where does it come from? And the retained earnings deducted by 817?
Can you please specify the confusions?
Thank you so much in advance.
Under option 1, they receive $1,231 from the sale (so more cash and less PPE). They then use the $1,231 partly to repay loan-notes of $360, which leaves $871 (1231 – 360) to reinvest.
Under option 2, the $871 is not reinvested but is used to buy back shares at $4 each (so 217.75 shares). You should know from earlier financial accounts exams, that in the SOFP this results in the equity falling by the nominal value of the shares (217.75 x 25c = 54), and retained earnings falling by the remainder of $817 (871 – 54).
This part of the question was more testing financial accounting rather than financial management 🙂
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