Zaata Ltd decided to repurchase 500,000 of its ordinary shares under a buy-back scheme for $5.70 per share. At the date of the buy-back, the equity of the company consisted of:

Share capital (6,000,000 shares fully paid)

General reserve

Retained earnings

$

12,000,000

1,360,000

2,460,000

The costs of the buy-back scheme amounted to $7,600.

Instructions:

A.Prepare the journal entries to account for the buy-back, assuming:

(i)that the original amount of the shares is eliminated from Share Capital, and then any remaining buy-back price adjusted equally against the General Reserve and Retained Earnings accounts.

(ii)that the buy-back is not adjusted against share capital, but is adjusted firstly against the General Reserve account, then any remaining against the Retained Earnings account.

B.Assume now that the buy-back price per share was equal to $2.40 and that the company had no General Reserve account, and retained earnings of only $1,040,000. Further, assume that the company accounts for share buy-backs against retained earnings first.

Prepare journal entries to record the share buy-back.