Question

Bailey Inc.issues 100,000 shares at $11/ share in January.Later that year the company is able to repurchase 9,000 of these shares at $10 per share. The effect of this is

O a decrease to the share capital account of $90,000.
O an increase to the contributed surplus account of $9,000.
O a decrease to total shareholders' equity of $99,000.
O an increase in retained earnings by $9,000.

Answer 1

The repurchase of 9,000 shares at $10 per share by Bailey Inc. will result in a decrease to the share capital account of $90,000, as the shares are cancelled upon repurchase. The correct answer is option: a decrease to the share capital account of $90,000.

Step-by-step explanation:

• When Bailey Inc. issued 100,000 shares at $11 per share, the company's share capital increased by $1,100,000. Later, repurchasing 9,000 shares at $10 per share would result in the company spending $90,000 to buy back the shares.
• The effect of this transaction is a decrease to the share capital account of $90,000 because the shares are being bought back from the shareholders and cancelled.
• It should be noted that any difference between the repurchase price and the original issue price does not affect retained earnings or contributed surplus directly.
• Also, it does not increase or decrease the total shareholders' equity by $99,000 as the money spent to repurchase shares is already accounted for in the shareholder’s equity.