Question

As of December 31, 2018, Warner Corporation reported the following:
  

Dividends payable	$	24,000
Treasury stock		640,000
Paid-in capital—share repurchase		24,000
Other paid-in capital accounts		4,400,000
Retained earnings		3,400,000

  
During 2019, half of the treasury stock was resold for $248,000; net income was $640,000; cash dividends declared were $1,540,000; and stock dividends declared were $540,000.
  
The 2019 sale of half of the treasury stock would:

Multiple Choice

• Increase total shareholders' equity by $320,000

• Reduce retained earnings by $72,000

• Reduce income before tax by $72,000

• Reduce retained earnings by $48,000

Already got it wrong once by answering, reduce retained earnings by $72,000, so it is not that answer

Answer 1

Answer is “Reduce retained earnings by $48,000”

Company re-issued half of the treasury stock for $248,000

Value of treasury stock re-issued = (1/2) * $640,000
Value of treasury stock re-issued = $320,000

Cash proceed from re-issuance of treasury stock = $248,000

Journal entry to record reissuance of treasury stock would include increase in cash by $248,000, decrease in treasury stock by $320,000, decrease in paid-in capital – share repurchase by $24,000 and decrease in retained earnings by $48,000 ($320,000 - $248,000 - $24,000).