Now that Natalie is a shareholder of the bakery and the smoothies are becoming a significant portion of the business revenues, Natalie and her parents have changed the name of the company to Santé Smoothies & Sweets, Ltd.

Natalie is planning on completing college in April 2023. In the meantime, she tries to spend approximately 20 hours a week at Santé Smoothies & Sweets. She is developing an understanding of all of the business operations so she can step into her new position as administrator on May 1, 2023. There are challenges every day when operating a business and she is thrilled to be a part of the process. Janet and Brian are also excited to have Natalie on board and believe that Natalie’s input has been instrumental in helping make some of their critical business decisions.

To ensure that Natalie does not consider other business opportunities and leave the business, Janet and Brian would like to provide Natalie with a greater ownership interest in Santé Smoothies & Sweets, Ltd. One option that is being discussed is the buyback of shares by Santé Smoothies & Sweets, Ltd. from Janet and Brian to enable Natalie to hold a one-third ownership interest in the bakery without having to purchase additional shares.

Recall that on April 1, 2022, Natalie purchased 10 shares of Santé Sweets Ltd. for $1,200 per share and that Brian and Janet each own 100 of the remaining 200 shares. The shareholders’ equity accounts of Santé Smoothies & Sweets, Ltd. are as follows:

Common shares ............. $ 12,200
Retained earnings ........... 241,026

Janet and Brian are thinking that it might be best for all three of them to each own 10 shares of Santé Smoothies & Sweets, Ltd. They are confused, however, about the process of shares being reacquired and have come to you with the following questions:

1. If Santé Smoothies & Sweets, Ltd. reacquires the common shares we hold, how will a fair value for each common share reacquired be determined?

2. Natalie has recently purchased shares in Santé Smoothies & Sweets, Ltd. for $1,200 per share. Is this amount a fair value to use as a purchase price for reacquisition of the shares? Why or why not?

3. How much cash will Santé Smoothies & Sweets, Ltd. need to reacquire the shares that we hold if we assume a price of $1,200 per share?

4. Last year the business paid total dividends of $85,000. If our shares are reacquired, will Santé Smoothies & Sweets, Ltd. be able to pay a dividend next year? Do you think there will be enough in retained earnings to pay a dividend? Will the amount of the dividend we each receive change once Natalie owns a one-third interest in the company?

5. If we choose not to have the company reacquire our shares, then how can we ensure that Natalie stays on with us?

Instructions

a. Answer Janet and Brian’s questions.

b. Prepare the journal entry to record the reacquisition of shares by Santé Smoothies & Sweets, Ltd. from Janet and Brian assuming that $1,200 per share is a fair value.

c. Calculate the amount of share capital after the shares have been reacquired from Janet and Brian and the average per share amount.