← Company financial statement preparation
2025 (asymmetric): 25 000 shares originally issued at $2.00 repurchased at $2.20 fair value. Contributed equity falls by 25 000 × $2.00 = $50 000; the $5 000 excess (25 000 × $0.20) is debited to retained earnings; bank falls by the full $55 000.
2023 (matching, by contrast): 50 000 shares repurchased at exactly their original average issue price of .80 ($90 000 total). Here contributed equity absorbs the whole amount and retained earnings is untouched — because the repurchase price happened to equal the issue price.
Always check whether the repurchase price and the original issue price are the SAME before assuming contributed equity takes the full hit. Real paper — 2025 "Your friend says report retained earnings of $219 000. Explain why they are wrong." Trial balance retained earnings is $219 000 (an OPENING balance). Profit for the year is 21 500. A final dividend (2024) of $50 000 and an interim dividend (2025) of $42 000 were both declared and paid during the year. Retained earnings $219 000 in the trial balance is the OPENING balance at the start of the year, not the closing figure to report. Add profit for the year: $219 000 + 21 500 = $340 500. Subtract both dividends declared during the year: $340 500 − $50 000 − $42 000 = $248 500. Report $248 500 as retained earnings in equity at balance date — the friend has reported the opening balance untouched. ✓ Closing retained earnings = $248 500. Opening balance + profit − dividends declared, always — a trial balance figure is never the answer on its own. Real paper — 2023 Gain on revaluation of land Land carrying amount was $200 000; the land revaluation surplus in equity was 0 000. A revaluation gain of $40 000 is recognised. The PPE note: land's carrying amount rises from $200 000 to its new valuation of $240 000 — the $40 000 gain. The land revaluation surplus in equity rises from 0 000 to $50 000 by the same $40 000. Net assets and equity both rise by $40 000 — the two sides of the statement move together, which is the balance check a schedule looks for. ✓ Land: $200 000 → $240 000 in the PPE note. Revaluation surplus: 0 000 → $50 000 in equity. Never through profit. Real paper — 2023 A final dividend proposed last year, closed this year A final dividend (2022) of 12c per share, $42 000, was disclosed in last year's notes as proposed but not yet declared. It was disclosed last year because at LAST balance date no present obligation existed — the directors had only proposed it. During this year it was formally declared and paid: debit Final dividend (2022) $42 000, credit Bank $42 000. At THIS balance date it is closed to retained earnings: retained earnings falls by $42 000. ✓ The $42 000 reduces THIS year's retained earnings, even though the dividend is labelled "2022" — follow the declaration date, not the label.
Equity, dividends and the notes (every paper, Q2)
The equity section plus the contributed-equity and distributions notes — then an "explain in detail why your friend is wrong".The equity section, in order
- Contributed equity = opening + shares issued (net of costs) − share repurchases (at ORIGINAL issue price). From the contributed equity note.
- Retained earnings = opening + profit for the year − dividends declared − excess of any share repurchase over its original issue price. Other comprehensive income does NOT pass through here.
- Revaluation surplus = opening + revaluation gains recognised in OCI. Unrealised, so kept out of profit.
- Total equity = contributed equity + retained earnings + reserves. Must equal net assets.
A share repurchase does not always come entirely out of contributed equity
Contributed equity falls by the shares' original issue price — not by whatever was paid to buy them back. If the repurchase price is HIGHER, the excess comes out of RETAINED EARNINGS as well.2025 (asymmetric): 25 000 shares originally issued at $2.00 repurchased at $2.20 fair value. Contributed equity falls by 25 000 × $2.00 = $50 000; the $5 000 excess (25 000 × $0.20) is debited to retained earnings; bank falls by the full $55 000.
2023 (matching, by contrast): 50 000 shares repurchased at exactly their original average issue price of .80 ($90 000 total). Here contributed equity absorbs the whole amount and retained earnings is untouched — because the repurchase price happened to equal the issue price.
Always check whether the repurchase price and the original issue price are the SAME before assuming contributed equity takes the full hit. Real paper — 2025 "Your friend says report retained earnings of $219 000. Explain why they are wrong." Trial balance retained earnings is $219 000 (an OPENING balance). Profit for the year is 21 500. A final dividend (2024) of $50 000 and an interim dividend (2025) of $42 000 were both declared and paid during the year. Retained earnings $219 000 in the trial balance is the OPENING balance at the start of the year, not the closing figure to report. Add profit for the year: $219 000 + 21 500 = $340 500. Subtract both dividends declared during the year: $340 500 − $50 000 − $42 000 = $248 500. Report $248 500 as retained earnings in equity at balance date — the friend has reported the opening balance untouched. ✓ Closing retained earnings = $248 500. Opening balance + profit − dividends declared, always — a trial balance figure is never the answer on its own. Real paper — 2023 Gain on revaluation of land Land carrying amount was $200 000; the land revaluation surplus in equity was 0 000. A revaluation gain of $40 000 is recognised. The PPE note: land's carrying amount rises from $200 000 to its new valuation of $240 000 — the $40 000 gain. The land revaluation surplus in equity rises from 0 000 to $50 000 by the same $40 000. Net assets and equity both rise by $40 000 — the two sides of the statement move together, which is the balance check a schedule looks for. ✓ Land: $200 000 → $240 000 in the PPE note. Revaluation surplus: 0 000 → $50 000 in equity. Never through profit. Real paper — 2023 A final dividend proposed last year, closed this year A final dividend (2022) of 12c per share, $42 000, was disclosed in last year's notes as proposed but not yet declared. It was disclosed last year because at LAST balance date no present obligation existed — the directors had only proposed it. During this year it was formally declared and paid: debit Final dividend (2022) $42 000, credit Bank $42 000. At THIS balance date it is closed to retained earnings: retained earnings falls by $42 000. ✓ The $42 000 reduces THIS year's retained earnings, even though the dividend is labelled "2022" — follow the declaration date, not the label.