Question

Agee Storage issued 40 million shares of its $1 par common stock at $15 per share several years ago. Last year, for the first time, Agee reacquired 1 million shares at $13 per share. Assuming that Agee retires shares it reacquires (restores their status to that of authorized but unissued shares), by what amount will Agee’s total paid-in capital decline if it now reacquires 1 million shares at $18 per share? (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Answer:

Agee’s total paid-in capital will decline by $17 million.

Explanation:

Stock Repurchase is a method to reduce the outstanding shares and equity value of the company in the market, company pays the stockholder and purchases own shares, which can be reissued or cancelled later on.

Common stock value = 40 million shares x $1 per share = $40 million

Additional Paid-in-Capital = 40 million shares x ( $15-$1)per share = $560 million

Stock was repurchased and recorded as follow

Dr. Treasury Shares  $18 million

Cr. Cash                     $18 million

Retirement of Shares will reduce the values as follow

Common stock value = 1 million shares x $1 per share = $1 million

Additional Paid-in-Capital = 1 million shares x ( $18-$1)per share = $17 million

Journal Entry on retirement of shares

Dr. Common stock    $1 million

Dr. Paid-In-Capital     $17 million

Cr. Treasury Shares  $18 million

The paid in capital will reduce by $17 million