A corporation purchases 20,000 shares of its own $20 par ordinary shares for $35 per share, recording it at cost. What will be the effect on total equity?

Question

Quizplus · Accepted Answer

When a corporation purchases its own shares, it reduces the amount of outstanding shares in the market, but the total equity remains the same. However, since the corporation purchased the shares for a price higher than their par value, the excess paid (in this case, $15 per share) is recorded as a reduction in total equity. Therefore, the total equity will decrease by 20,000 shares x $15 excess paid per share = $300,000. Additionally, the remaining shares' book value will increase by the same amount per share (i.e., $15), so the per-share book value of the ordinary shares will increase to $35 par value + $15 excess/20,000 shares = $50 per share.

A Corporation Purchases 20,000 Shares of Its Own $20 Par