Question

At its date of incorporation, Sheffield Corp. issued 111000 shares of its $10 par common stock at $13 per share. During the current year, Sheffield acquired 21000 shares of its common stock at a price of $18 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $14 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

Answer 1

Answer:

Retained Earnings decreases by $84,000

There would be a no effect in the  Additional Paid-in Capital

Explanation:

The journal entry to record the retained eaning would be as follows:

                   Debit             Credit

Cash                       $294,000

Retained earnings $84,000  

       Treasury stock  $378,0000

Retained Earnings decreases by $84,000

Cash= 21,000 shares*14=$294,000

Retained earnings=21,000 shares*(18-14) =$84,000

Treasury stock=21,000 shares*18=$378,0000

There would be a no effect in the  Additional Paid-in Capital

So Retained Earnings decreases by $84,000