[mikecuh]

I can’t seem to understand the answer for this question.

Kuchman Kookware issued 40,000 shares of its $8.00 par value common stock for $9 on January 1, Year 1. Kuchman repurchased 1,000 shares at $8 per share on April 1, Year 2, resold 500 shares at $9 per share on July 1, Year 2, and, on October 1, Year 2, resold the final 500 shares at $5 per share. Assuming Kuchman uses the par value method of accounting for its treasury stock, retained earnings at December 31. Year 2 would be reduced by:

a. $0

b. $1,000

c. $500

d. $1,500

Explanation

Choice “c” is correct. Using the par value method, the company effectively retires reacquired stock at the time of repurchase and accounts for any gain through Additional Paid-in Capital–Treasury Stock and any loss through retained earnings. Resale of stock above par results in elimination of the related treasury stock amount and in the recording of Additional Paid-in Capital. Resale of stock significantly below par results in recording a loss in retained earnings to the extent the loss exceeds the previously recorded Additional Paid-in Capital–Treasury Stock. The fact pattern above is displayed below: