Question

The Basu Group reacquired 4 million of its shares at $64 per share as treasury stock. Last year, for the first time, Basu sold 2 million treasury shares at $65 per share. If Basu now sells the remaining 2 million treasury shares at $61 per share, by what amount will retained earnings decline?

Answer 1

When Basu Group sells the remaining 2 million treasury shares at $61 per share, retained earnings will decline by $6,000,000, which is the loss realized from selling the shares below the repurchase price.

Step-by-step explanation:

When the Basu Group sells the remaining 2 million treasury shares at $61 per share, which is less than the cost at which they were repurchased ($64 per share), this will result in a debit to retained earnings for the loss on the sale of the shares.

To calculate the amount by which retained earnings will decline, we must consider the loss per share, which is the difference between the repurchase price and the selling price, and then multiply it by the number of shares sold.

The calculation is as follows: (Repurchase price - Sale price) x Number of shares = ($64 - $61) x 2,000,000 = $3 x 2,000,000 = $6,000,000.

Therefore, the retained earnings will decline by $6,000,000 when the Basu Group sells the remaining treasury stock at $61 per share.