Question

At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts

Answer 1

The retained earnings will be decrease as the re-issued value is less than the cost at which they were acquired and it is debited.

Step-by-step explanation:

Re-issuance of the stock:

A company has the ability to reissue shares of treasury stock as a way of raising capital for the company’s business activities.

As Sauder acquired 20,000 shares of its common stock at a price of $16 per share so

Formula for Amount:

Amount = Acquired no. of shares * cost

As Acquired no. of shares = 20000

Cost = $16

therefore by putting the values in the above formula, we get

Amount = 20000 * 16

Amount = $320,000

As these shares were reissued at a price of $12 per share so

Re issued no. of shares = 20000

Cost = $12

therefore by putting the values in the above formula, we get

Amount = 20000 * 12

Amount = $240,000

Now we need to analyze the condition of various accounts.

Cash Accounts:

Debit = $240,000

Retained Earning Account:

Debit = $320,000 - $240,000

Debit = $80,000

Treasury Stock Account:

Credit = $320,000

Effect on the re-issuance of the stock:

The retained earnings will be decrease as the re-issued value is less than the cost at which they were acquired and it is debited.