If a corporation repurchases 500 shares of its previously-issued common stock for $5,000 and then reissues it for $4,000, which of the following statements is true regarding the difference in the amounts of the repurchase and reissuance?

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Quizplus · Accepted Answer

When a corporation repurchases its own stock, the shares bought back are referred to as treasury stock. The accounting for treasury stock transactions follows specific rules that differ from those for the sale of stock to the public.
In the scenario provided, the corporation repurchased 500 shares of its previously-issued common stock for $5,000 and then reissued those shares for $4,000. The difference between the repurchase price ($5,000) and the reissuance price ($4,000) is $1,000. This difference is not reported as a gain or a loss on the income statement because gains and losses are not recognized for transactions involving treasury stock.
Instead, the $1,000 difference is accounted for directly in the equity section of the balance sheet. Since the corporation received less money upon reissuance than it paid to repurchase the shares, this results in a decrease in stockholders' equity. The decrease is typically recorded in the additional paid-in capital account if there is a balance available from previous issuances above par value. If not, it may be deducted from retained earnings.
Therefore, the correct statement regarding the difference in the amounts of the repurchase and reissuance is:
c. It is a decrease in stockholders' equity.
This decrease reflects the fact that the corporation has effectively "lost" $1,000 in the process of repurchasing and then reissuing its shares at a lower price.

If a Corporation Repurchases 500 Shares of Its Previously-Issued Common