Question

At its date of incorporation, Glean, Inc., issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Glean acquired 30,000 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?
1. A decrease in both retained earnings and additional paid-in capital
2. No effect on retained earnings and a decrease in additional paid-in capital
3. A decrease in retained earnings and no effect on additional paid-in capital
4. No effect on retained earnings or additional paid-in capital

Answer 1

Answer:

Option C A decrease in retained earnings and no effect on additional paid-in capital

Explanation:

According to the cost method, the additional paid in capital must be accounted for as these were not purchased before and the net effect will go to retained earnings.

When we purchased the shares the entry was (For 30,000 shares):

Dr Treasury Stock $480,000

Cr                             Cash $480,000

Now we will reverse the debit entry of paid in capital against the amount received by selling the stock at $12 and the balancing figure adjusted in the retained earnings.

Dr Cash (At the rate $12) $360,000 .........Cash received

Cr Treasury Stock (With same amount) $480,000

Cr R.Earnings (Balancing figure) $40,000...... Loss $4*30000 shares

As we can see that the retained earnings has been reduced by the loss per share which is $4 per share ($16-$12) whereas the paid in capital remains the same so the correct answer is option C.

Answer 2

Answer:

3) A decrease in retained earnings and no effect on additional paid-in capital

Explanation:

Since the company uses the cost method to record repurchases and resales of stock, the journal entries should be:

when the company issues stocks for the first time

Dr Cash 1,100,000

    Cr Common stock 1,000,000

    Cr Additional paid-in capital (common stock) 100,000

then when the company repurchased 30,000 stocks at $16

Dr Treasury stock 480,000

    Cr Cash 480,000

when the company resold the 30,000 stocks

Dr Cash 360,000

Dr Retained earnings 120,000

    Cr Treasury stock 480,000

Only retained earnings account was affected by this transaction, while additional paid-in capital remained the same.