Choice "C" is correct. Under the par value method, when the shares are (re)acquired by Lem, the treasury stock is recorded at par value ($6/share) and additional paid-in-capital is reduced by the $100 recorded when the shares were originally issued. The difference, in this case between the $10 buy-back price and the $7 initial issuance price, or $3/share, is assigned to retained earnings as a reduction.
Here are the journal entries for additional clarification:
At issuance: | Debit (Dr) | Credit (Cr) |
|---|
| Cash | $ 700 | |
| Common Stock | | $ 600 |
| Add'l Paid-In-Capital | | 100 |
At (re)acquisition: | Debit (Dr) | Credit (Cr) |
|---|
| Treasury Stock | $ 600 | |
| Add'l Paid-In-Capital | 100 | |
| Retained Earnings-plug | 300 | |
| Cash | | $ 1,000 |
Choice "d" is incorrect. Under the par value method, the acquisition of treasury stock is recorded by reducing additional paid in capital by the amount recorded when the shares were originally issued to investors.Choice "b" is incorrect. The $300 difference between the $1,000 paid by the company to reacquire the shares and the $700 originally received when the shares were issued to investors is recorded as a reduction to retained earnings.
Choice "a" is incorrect. The $400 is the amount of both the debit to APIC and the debit to retained earnings. This question asks only for the reduction in APIC.
