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Tandy Co. Ltd was set up with a share capital of $2 000 000. In year 1 a loss of $400 000 was recorded. In year 2 Tandy recorded a profit of $70 000 and in year 3 a profit of $550 000. Also in year 3 a dividend of 2% of paid-up capital was paid to shareholders and $50 000 was transferred from retained earnings to a general reserve. The shareholders' equity of Tandy Co. Ltd at the end of year 3 was:

Question

Tandy Co. Ltd was set up with a share capital of 2000000.Inyear1alossof2 000 000. In year 1 a loss of 400 000 was recorded. In year 2 Tandy recorded a profit of 70000andinyear3aprofitof70 000 and in year 3 a profit of 550 000. Also in year 3 a dividend of 2% of paid-up capital was paid to shareholders and $50 000 was transferred from retained earnings to a general reserve. The shareholders' equity of Tandy Co. Ltd at the end of year 3 was:

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Solution

To calculate the shareholders' equity of Tandy Co. Ltd at the end of year 3, we need to follow these steps:

  1. Start with the initial share capital: $2,000,000.

  2. Adjust for the loss in year 1: 2,000,000−2,000,000 - 400,000 = $1,600,000.

  3. Add the profit from year 2: 1,600,000+1,600,000 + 70,000 = $1,670,000.

  4. Add the profit from year 3: 1,670,000+1,670,000 + 550,000 = $2,220,000.

  5. Subtract the dividend paid to shareholders in year 3. The dividend is 2% of the paid-up capital, which is 2,000,000,sothedividendis2,000,000, so the dividend is 2,000,000 * 0.02 = 40,000.Aftersubtractingthis,wehave40,000. After subtracting this, we have 2,220,000 - 40,000=40,000 = 2,180,000.

  6. Subtract the amount transferred to a general reserve: 2,180,000−2,180,000 - 50,000 = $2,130,000.

So, the shareholders' equity of Tandy Co. Ltd at the end of year 3 was $2,130,000.

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