If a corporation repurchases 500 shares of its previously-issued common stock th

ID: 2472494 • Letter: I

Question

If a corporation repurchases 500 shares of its previously-issued common stock then retires these shares, which of the following is true?

a. Approval from the state is required for this type of transaction. b. A gain or loss must be recorded, depending on the difference between the repurchase cost and the original issue price. c. A new class of stock must be issued in place of the 500 retired shares. d. The common stock and paid-in capital accounts must be decreased by the amount of the original issue price

Explanation / Answer

d. The common stock and paid-in capital accounts must be decreased by the amount of the original issue price

The board of directors of Armadillo Industries authorizes the repurchase of 100,000 shares of its stock, which has a $1 par value. The company originally sold the shares for $12 each, or $1,200,000 in total. Armadillo pays $1,500,000 to repurchase the shares. The controller records the transaction with this journal entry:

Debit

Credit

Common stock, $1 par value

100,000

Additional paid-in capital

1,100,000

Retained earnings

300,000

Cash

1,500,000

In the journal entry, the controller is eliminating the $100,000 originally credited to the common stock account and associated with its par value. There is also an elimination from the additional paid-in capital account of the $1,100,000 originally paid into that account. The excess expenditure over the original proceeds is charged to the retained earnings account.