Final answer:
The sale of treasury stock by Palomino Enterprises for $20,000, after buying it back for $16,000, results in a $4,000 gain. This gain is reflected in the accounting equation as a $16,000 increase in stockholders' equity, which includes the recovery of the cost and the additional gain.
Step-by-step explanation:
When Palomino Enterprises purchased 2,000 shares of its own stock for $8 a share, they paid a total of $16,000 (2,000 shares × $8 per share). Later, when the company reissued these shares for a total of $20,000, they sold them at a higher price than the cost at which they were bought back.
The effect of this transaction on the accounting equation is to increase the stockholders' equity by the difference between the sale price and the cost of the treasury stock.
The original purchase cost (2000 shares × $8 per share) was $16,000. The sale (reissue) brought in $20,000. The increase in equity is therefore the difference between the sale price and the cost price, which is $20,000 - $16,000, resulting in a $4,000 gain.
This gain is credited to the stockholders' equity, reflecting an increase in the net worth of the company due to the transaction. The correct answer to the effect on the accounting equation is a $16,000 increase in stockholders' equity because it incorporates the $4,000 gain on top of the original $16,000 investment.