Final answer:
The sale of treasury stock above the acquisition cost by Duvet Co. increases paid-in capital within shareholders' equity and does not affect retained earnings. Excess from the sale is recorded as additional paid-in capital related to treasury stock, not as a gain in revenue. This enhances the company's equity without impacting accumulated profits.
Step-by-step explanation:
When Duvet Co. reissues treasury stock at a price higher than its acquisition cost, there are financial statement impacts to retained earnings and paid-in capital. Generally, treasury stock transactions are recorded by the cost method or the par value method, but when sold above cost, additional considerations apply. If the resale price is higher than the purchase cost, the excess is credited to a separate account within shareholders' equity typically referred to as paid-in capital from treasury stock. It is important to note, under the cost method, this transaction does not affect retained earnings.
The process of stock transactions follows a pattern: shares initially issued are recorded as paid-in capital. When a company buys back its own shares, these become treasury stock, and the cost of acquisition is recorded as a deduction from the total shareholders' equity. However, upon reissuing the shares, the amount received over the cost price is not recorded as revenue or gain but rather as additional paid-in capital related to treasury stock.
For example, if Duvet Co. purchased 1,000 shares as treasury stock at $10 per share and later sells them for $15 per share, the journal entry for the sale would debit cash for $15,000, credit treasury stock for $10,000 (the original cost), and the remaining $5,000 would be credited to 'Additional Paid-in Capital from Treasury Stock' (not retained earnings). Retained earnings would remain unaffected as they represent undistributed earnings of the company and are not directly impacted by treasury stock transactions. The sale above cost increases paid-in capital but does not affect the company's earnings or dividends. It represents the investment additional shareholders have made to the company upon purchasing the treasury stock at the higher sale price.
Overall, selling treasury stock above its acquisition cost improves the company's financial position by increasing its equity through additional paid-in capital. Retained earnings remain intact, ensuring the company preserves its accumulated profits.