Question

Exercise 15-07 Joe Dumars Company has outstanding 40,000 shares of $5 par common stock which had been issued at $30 per share. Joe Dumars then entered into the following transactions. 1. 2. 3. Purchased 5,000 treasury shares at $45 per share. Resold 2,000 of the treasury shares at $49 per share. Resold 500 of the treasury shares at $40 per share. Indicate the effect each of the three transactions has on the financial statement categories listed in the table below, assuming Joe Dumars Company uses the cost method. #1 - Stockholders' Paid-in Retained Net Assets Liabilities Equity Capital Earnings Income 1. A Increase Decrease 3. DACA DA CACA No effect ni

Answer 1

Solution

#	Assets	Liabilities	Stockholder's equity	Paid in capital	Retained earnings	Net income
1	Decrease		Decrease
2	Increase		Increase	Increase
3	Increase		Increase	Decrease

Leave blank spaces as it is.

When treasury stock are purchased cash decreases and stockholder equity decrease because treasury stock have a debit balance and is a contra equity account.

When treasury stock are sold in transaction 2 , there is a profit so treasury stock paid in capital increase. The increase in stockholder's equity is because the treasury stock decrease and since treasury stock have debit balance, the decrease in treasury stock increase overall equity.