Accounting for share repurchase and cancellation*

Iris Company started a courier service in year 5 (see P12.1). Following a reappraisal of the company’s investment opportunities in year 9, management decide to return some of its capital to the owners.

After obtaining shareholder approval, they buy back 50,000 shares at a price of A19 a share and cancel them.

Assume the cost of the shares bought back is A13.6 a share. Iris’s shareholders’ equity just before the share repurchase stands at A7.7 million. It consists of 440,000 issued ordinary shares (with a par value of A5/share), share premium of A4 million and retained profits of A1.5 million.

Required Show the effect of the share repurchase and cancellation on Iris’s year 9 accounts, using journal entries or the balance sheet equation. Assume the company establishes a non-distributable reserve,

‘Reserve for own shares’, in order to maintain its permanent capital.

* Assignment draws on material in section 2 of this chapter.

AppenedixLO1