I think some schools do it differently, but the most common setup is that if you retake a class, the new grade completely replaces the old one. So if someone failed a class, it would go down as an F on the transcript. The class will stay there, even after it's retaken, but once the class has been retaken the old score won't count towards the GPA points anymore. So people looking at the transcript will still be able to see that the class was taken and failed, but the GPA itself will only reflect the new grade.
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