Explanation Cost Method of Reissuance: When a firm holding a treasury stock reissues these shares at a selling price that is different from the acquisition cost, then it is known as cost method of reissuance. If the company is selling at a price above the cost, then it is classified as excess over cost as additional paid-in capital and should not be reported on the income statement because it resulted from a capital transaction. Retained Earnings : Retained earnings represent the cumulative earnings of the firm that it has not distributed as dividends therefore these are the amounts earned by the firm and invested by the equity holders of the firm. In the provided case, it is being given that the company has issued at $11 per share having par value of $10 per share. The company repurchased 30,000 shares of its common stock at $16 per share. The shares repurchased are now being sold at a price of $12 per share. Option c: Retained earnings are getting decreased as the company is reissuing the repurchased common stock at a loss of $120,000, and there is no additional paid-in capital from the transaction of treasury stock. Additional paid-in capital occurred at the time of incorporation when the shares were issued therefore it is being noted that there is no effect on it. Hence, this option is correct. Option a: In the provided case, there is a decrease in the retained earnings because there was no additional paid-in capital from the transaction of treasury stock. Since no additional paid-in capital was there, no decrease in that can be there. Hence, this option is incorrect. Option b: Retained earnings are getting decreased as the company is reissuing the repurchased common stock at a loss of $120,000 therefore it cannot be said that there is no effect on retained earnings. Since no additional paid-in capital was there, no decrease can be there in that. Hence, this option is incorrect. Option d: Retained earnings are getting decreased as the company is reissuing the repurchased common stock at a loss of $120,000 therefore it cannot be said that there is no effect on retained earnings. Additional paid-in capital occurred at the time of incorporation when the shares were issued therefore it is being noted that there is no effect on it. Hence, this option is incorrect. Working Note: In the provided case, it is being given that the company has issued at $11 per share having par value of $10 per share. Following is the journal entry passed for recording the same: Date Account Title & Explanation Post ref. Debit ($) Credit ($) Cash 1,100,000 Common stock 1,000,000 Additional paid-in capital 100,000 ( being issuance of common stock recorded ) Table (1) Cash is an asset for the company...

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ISBN: 9780132162302

Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella

Publisher: PEARSON

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Stockholder's Equity

The stockholders’ equity (often referred to as the book value of the company) is the number of assets available to the stockholder after its entire liabilities is paid off. The stockholders’ equity is also sometimes referred to as owner's equity. The sto…

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Ch. 15 - Prob. 15.1Q Ch. 15 - What are the retained earnings of a firm?Ch. 15 - Prob. 15.3Q Ch. 15 - Prob. 15.4Q Ch. 15 - Does an entity have to legally dissolve treasury...Ch. 15 - Prob. 15.6Q Ch. 15 - Prob. 15.7Q Ch. 15 - Prob. 15.8Q Ch. 15 - Prob. 15.9Q Ch. 15 - Prob. 15.10Q

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