Illustration with assumed shares: | Common
assumed
shares
| Additional
stock at
$10 par
| Total
paid-in
capital
| Retained
earnings
| Stockholders'
Equity
|
|---|
Year 1 stock issued at $25 | 1,000 | 10,000 | 15,000 | 0 | 25,000 | Year 3 stock retired at $20 | (100) | (1,000) | (1,000) | 0 | (2,000) | | 900 | 9,000 | 14,000 | 0 | 23,000 |
Choice "A" is correct. Additional paid-in capital is decreased upon the acquisition and retirement of shares at a cost ($20) less than initial selling price ($25). Since 1/10 of the shares are assumed retired, 1/10 of common stock at par is retired. The difference between the cost of retirement ($2,000) and par retired ($1,000) is the decrease in additional paid-in capital.Choices "c" and "b" are incorrect. "Net income" is not affected, but net income per share is increased.
Choice "d" is incorrect. Retained earnings would be decreased for any amount more than initial selling price of $25.
|
