Question

At its date of incorporation, Coronado Industries issued 120000 shares of its $10 par common stock at $12 per share. During the current year, Coronado acquired 21200 shares of its common stock at a price of $17 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $13 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?

	Retained Earnings				Additional Paid-in Capital
Decrease			No effect

No effect		No effect
No effect		Decrease

Decrease

Decrease

Answer 1

Answer

• Correct Answer = Option #1: Retained earnings will Decrease, Additional Paid in Capital will have no effect.
• 21200 shares have been re acquired at $ 17 per share
• However, they were re issued at $ 13.
• There’s a loss of $ 4 per share ($ 17 – 13) on these re issued shares.
• Total loss = 21200 shares x $ 4 = $ 84,800
• This loss will reduce the Retained earnings balance.