Question

Lem Co., which accounts for treasury stock under the par-value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem’s additional paid-in capital from common stock decrease as a result of the acquisition?

Answer 1

Answer:

$100

Explanation:

As we know that:

Paid-in Capital = Amount Received  -  Common stock at par value

During the issuance of common shares:

Here the par value given is $6 per share, so the total common stock value for 100 shares is $600 (100 shares * $6 per share) and the amount received is $700 when the common stock was issued.

So by putting the value in the above equation we have:

Paid in Capital = $700 - $600 = $100

Entry of issuance of shares:

Dr Cash $700

Cr Common stock $600

Cr Paid in capital   $100

So now remember that the maximum decrease in paid in capital to repurchase of common stock would be by $100 because this is the amount that is related to purchased common stock of 100 quantity.

So if the company purchases its common stock higher than the value it was issued before then it will decrease the paid in capital by the amount that is related to the stocks that have increased paid in capital (100 shares increased the paid in capital by $100) and the resultant would be deducted from the retained earnings.

The journal entry of Purchase of Treasury

Dr Common Stock $600 .... Decrease in Com.Stock at par value ($6*100)

Dr Paid in Capital $100 .... Decrease in APIC at associted share ($7-$6)

Dr Retained Earnings 300 .... Remainder ($1000-$600at par - $100Paid In)

Cr Cash                              $1,000