You are the manager of Synlait. Your accountant has indicated that one of the milking machines worth $1m needs to be replaced. You as the manager are required to agree to and sign off the purchase of a replacement machine priced at $25m. Before you make the decision, you need to understand the impact of the purchase and its financing on the financial statements. The milking machine will be financed by paying 20% in cash and the balance as a signed note agreeing to pay the balance at the end of the year. Interest of 5% p.a. will start accruing in the month following the purchase. The old machine will be sold for cash of $1m.

1. b. Explain what impact these transactions would have on Shareholders Equity? Explain the difference between share capital and retained earnings. (Word limit - 80 words)