Question

At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts? Explain and show your work.Retained Earnings Additional Paid-in Capitala. Decrease Decreaseb. No effect Decreasec. Decrease No effect
d. No effect No effect

Answer 1

Answer:

Sauder Inc.

The answer is d.

The effect of the reissuance of the stock on:

1)Retained Earnings - No effect

2) Additional Paid-in Capital: No effect

Using the cost method or the par value method, there is no effect on Retained Earnings by the reissuance of stock.

Using the cost method, there is no effect on the Additional Paid-in Capital.  Every treasury stock transaction is recorded in the Treasury Stock account without reference to the Additional Paid-in Capital.

Using the par value method, there is an effect on the Additional Paid-in Capital for reissuance of stock at more than the par value.

Workings:

The reissuance would be recorded as follows, using the costing method:

Debit Cash with $240,000

Credit Treasury Stock with $240,000

To record the reissuance of 20,000 shares at $12 per share.

The reissuance would be recorded as follows, using the par value method:

Debit Cash with $240,000

Credit Treasury Stock with $200,000

Credit Additional Paid-in Capital with $40,000

To record the reissuance of 20,000 shares at $12 per share.

Explanation:

Treasury Stock account is a contra account to the Common Stock account.  There are two methods for recording treasury stock transactions: the costing method and the par value method.

Under the costing method, every treasury stock transaction is recorded in the Treasury Stock account.  Under the par value method, the above or below par value elements of treasury stock transactions are recorded in the Additional Paid-in Capital account.