Equity

A company decided to repurchase 20% o f its ordinary shares under a buy-back scheme for $5.6 per share. At the date of the buy-back, the equity of the company consisted of

Share capital 4 million shares fully paid $4,000,000

General reserve 600,000

Retained earnings 1,100,000

The cost of the buy-back scheme amounted to $3,500

Required:

1. Prepare the journal entries to account for the buy-back. Explain the reasons for the entries made

2. Assume that the buy-back price per share was equal to $0.8 per share. Prepare journal entries to record the buy-back and explain our answer

3. Assume that, instead of the share capital shown above, the company had issued 1 million shares at a par value of $1 and a share premium of $3 per share. Rework your answer to (a) assuming the repurchased shares were subsequently cancelled (ignore costs of buy-back scheme)