[JBach85]

NINJA Question –

I’ve re-read both Wiley and Becker on this topic, and I think Ninja MCQ has the wrong answer. Please let me know if agree.

“At its date of incorporation, Glean, Inc., issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Glean acquired 30,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?”

Ninja MCQ says the answer is: “A decrease in both retained earnings and additional paid-in capital”. However, according to Wiley and Becker you can only debit APIC-Treasury Stock on a loss to the extent that it exists. The explanation to this question uses the initial $100,000 APIC-Common Stock to offset the excess of reaquired price less reissued price.

From Ninja MCQ, “When the initial issue of public stock was made, the 100,000 shares sold at $1 above the par value of $10. This resulted in a balance of $100,000 in the additional paid-in capital account. The $120,000 loss on sale should first be used to reduce additional paid-in capital to zero ($100,000) and debit the remainder (20,000) to retained earnings. Treasury stock transactions should never impact the net income for the current year.”

Am I misunderstanding something, or did Ninja MCQ get this one wrong? There shouldn’t be any reduction to APIC on the reissue because a credit balance in APIC-TS doesn’t exist, right?

FAR - 93
AUD - 96
REG - 83
BEC - 86

[Missy]

There, was a 100k debit balance in APIC from the original issue of stock at 11/share. The credit of 100k brings,the APIC balance,to zero.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[JBach85]

Right, there would be a $100,000 credit balance in APIC-Common Stock from the original issue of stock at $11/share. But both Wiley and Becker indicate you can only use APIC-Treasury Stock to offset a loss from the reissue of TS.

FAR - 93
AUD - 96
REG - 83
BEC - 86

[Oimie]

From Roger's review, what you said would be right. The only thing he mentioned was that we debit out APIC TS if there was originally a credit balance of APIC TS. Any excess, would then be taken out of R/E. A credit of APIC TS is a result from reselling TS at a higher price than we originally bought it back for under the cost method. But in this scenario, he never sold it back out for a higher price, so there should only be a debit to R/E.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[JBach85]

Thanks, Oimie. That's exactly what I thought. If I see a similar question come up on the exam I guess I'll go with what Wiley, Becker, and Rogers say.

FAR - 93
AUD - 96
REG - 83
BEC - 86

[Missy]

“you can only use APIC-Treasury Stock to offset a loss from the reissue of TS.”

If glean acquired 30k shares of its own stock at 16/share that is treasury stock. If it sells those very shares for $12/share you have a loss from the reissue of TS, and by your own understanding are using APIC to offset the loss.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[JBach85]

But the problem says Glean uses the cost method. This means when the shares were required Treasury Stock would be debited for $480,000, and cash credited for $480,000. APIC would not be affected by the reaquisition of shares. It would only be impacted by the initial issuance (APIC-Common Stock). Unless my understanding is wrong the loss should only be offset by R/E. Unless of course you can use APIC-Common stock to offset the loss. Ugh. Hopefully this question doesn't come up on the exam….

FAR - 93
AUD - 96
REG - 83
BEC - 86

[JBach85]

I copied the question and searched it in Google. I found a site called flashcardmachine.com that has the exact same question. I have no idea what this site is, but the answer they give agrees with mine. There would be a decrease to R/E and no effect on APIC. https://www.flashcardmachine.com/intermediate-ii2.html

FAR - 93
AUD - 96
REG - 83
BEC - 86

[jeff]

I am going to do some digging on this one…

[Oimie]

Under the cost method, the journal entries for this story should be:

Issuance date:

Cash __________11,000,000

_____ CS_____________10,000,000

_____ APIC-CS ________1,000,000

Buying back at $16

TS____________480,000

_____ Cash ____________480,000

Re-issuance of TS for $12

Cash __________360,000

R/E ___________120,000

_____ TS______________480,000

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Author]

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