Question

Carbide Corporation purchased 20,000 shares of its own stock from investors for $45 per share. The next year, the company resold 5,000 of the repurchased shares for $50 per share, and the following year it resold 10,000 of the repurchased shares for $37 per share. Determine the impact (increase, decrease, or no change) of each of these transactions on the following: (Enter a positive value for increase and a negative value for decrease. If no change, leave cell blank.)

Answer 1

Carbide Corporation's initial purchase of its own shares had a neutral effect on equity but decreased cash. The resale of shares at a higher and then at a lower price affects the cash, treasury stock, and possibly 'paid-in capital from treasury stock' or retained earnings accounts, depending on whether the resale was at a gain or loss.

Step-by-step explanation:

When Carbide Corporation purchased shares of its own stock, it executed a treasury stock transaction. The initial purchase would decrease the company's cash by the cost of the shares (20,000 shares at $45 each) and increase treasury stock by the same amount, which has an overall neutral effect on equity because it's a transaction within equity.

When the company resold 5,000 shares at $50 per share, it increased cash by $250,000 and decreased treasury stock by the cost of those shares. If the original purchase price per share was less than $50, this transaction would also create a 'paid-in capital from treasury stock' account to reflect the gain. However, the following year, when it resold 10,000 shares at $37 per share, the cash would increase by $370,000, and if $37 is less than the original cost ($45), the company would decrease 'paid-in capital from treasury stock' or retained earnings if the former is insufficient, reflecting a loss.