A company resells 400 shares of its own common stock for $20 per share. The company had acquired these shares two months before for $15 per share. The resale of this stock would be recorded with a:Multiple ChoiceCredit to Treasury Stock for $8,000.Debit to Common Stock for $8,000.Debit to Additional Paid-in Capital for $2,000.Credit to Additional Paid-in Capital for $2,000.
Question
A company resells 400 shares of its own common stock for 15 per share. The resale of this stock would be recorded with a:Multiple ChoiceCredit to Treasury Stock for 8,000.Debit to Additional Paid-in Capital for 2,000.
Solution
The correct answer is: Credit to Additional Paid-in Capital for $2,000.
Here's the step-by-step explanation:
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The company initially bought back its own shares (treasury stock) for 15 * 400 = $6,000.
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The company then resold these shares for 20 * 400 = $8,000.
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The difference between the resale price and the repurchase price is 6,000 = $2,000. This is a gain for the company.
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This gain is recorded as a credit to Additional Paid-in Capital. This account is used to record any money received from the sale of stock that is above the par value of the stock. In this case, the company received $2,000 more from the resale of the stock than it paid to repurchase the stock, so this amount is credited to Additional Paid-in Capital.
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