Question

In 20X3, Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, 20X5, when Fogg acquired some of the issued shares for $20 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement?a) 20X5 net income is decreased.
b) 20X5 net income is increased.
c) Additional paid-in capital is decreased.
d) Retained earnings is increased.

Answer 1

Answer:

C) Additional paid-in capital is decreased.

Explanation:

In 20X3 when Fogg issued stocks, it recorded each stock sold as follows:

Dr Cash 25

    Cr Common stock 10

    Cr Additional paid-in capital in excess of par value 15

In March 31, 20X5, when Fogg repurchased some stock, the journal entry per stock should be:

Dr Treasury stock 10

Dr Additional paid-in capital in excess of par value 10

    Cr Cash 20

Treasury stock is a contra equity account that reduces common stock account.