Question

In previous years, Cox Transport reacquired 3 million treasury shares at $22 per share and, later, 2 million treasury shares at $27 per share. What amount will Cox’s paid-in capital—share repurchase increase if it now sells 2 million treasury shares at $30 per share and determines the cost of treasury shares by the FIFO method?

Answer 1

Using the FIFO method, Cox Transport's paid-in capital—share repurchase will increase by $16 million when 2 million treasury shares are sold at $30 per share, based on their previous reacquisition cost of $22 per share.

Step-by-step explanation:

The question pertains to the increase in paid-in capital—share repurchase when selling treasury shares and determining the cost using the FIFO method. Cox Transport previously reacquired 3 million treasury shares at $22 per share and 2 million at $27 per share. If the company now sells 2 million treasury shares at $30 per share using the FIFO method, the cost will be based on the first shares repurchased, which are the ones at $22 per share.

Thus, for 2 million shares sold at $30 each, the proceeds will be $60 million. The cost being $22 per share, the total cost is $44 million. The excess of $60 million over the cost ($44 million), which is $16 million, will be credited to additional paid-in capital since the selling price is higher than the cost.

Answer 2

increase in paid in capital = $16 million

Cost of treasury shares = $44 million

Step-by-step explanation:

Cox transport required $66 million (3 million shares x $22 per share) worth of shares in the first transaction and $54 million (2 million shares x $27 per share) worth of shares in the second transaction.

Following is the shares balance

1st transaction = 3 million shares

2nd transaction = 2 million shares

Now, if we use FIFO method then we will first sell the shares from the first transaction then move on to the second one once we have sold 3 million shares (entire number of shares in first transaction)

Revenue / Value of sale = $60 million (2 million shares x $30 per share)

Cost of shares = $44 million (2 million shares x $22 per share)

Capital gain = Revenue - cost of shares

Capital gain = $60 million - $44 million

Capital gain/increase in paid in capital = $16 million