Final answer:
The Basu Group will experience a decline in retained earnings by $4 million after selling the remaining treasury shares at $61 per share due to selling them below the reacquisition cost after accounting for prior gains.
Step-by-step explanation:
According to accounting principles, if a company sells treasury stock for less than its reacquisition cost, the loss is first deducted from any gains on prior treasury stock transactions. If these are insufficient, the excess loss is then deducted from retained earnings. In the case of the Basu Group, no loss or gain is recognized on the income statement for treasury stock transactions.
The Basu Group reacquired 4 million shares at $64 per share ($256 million total cost), and sold 2 million shares at $65 per share ($130 million). This resulted in a gain of $2 million. The remaining 2 million shares were sold at $61 per share, totaling $122 million. Since they were reacquired at $128 million, this results in a loss of $6 million. As they had a gain of $2 million from the first sale, they can offset the loss, leading to a net loss of $4 million which must be subtracted from the retained earnings ($6 million loss - $2 million gain).