[AlexCPA]

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?

Incorrect A.

A decrease in both retained earnings and additional paid-in capital

B.

No effect on retained earnings and a decrease in additional paid-in capital

C.

A decrease in retained earnings and no effect on additional paid-in capital

D.

No effect on retained earnings or additional paid-in capital

The Correct answer is D. I don’t understand why you can’t debit both Retained Earnings AND APIC using the cost method. The pool for APIC is 100,000 and the total loss is 120,000. Why can’t you debit 100,000 for APIC and then 20,000 for Retained Earnings?

Page 163 of Ninja Book- Financial Statements gives an example where APIC is used for reissuing at a loss. In the footnote it says, the maximum debt at the time is equal to total APIC. This is assuming there is no distinction between APIC-common and APIC-treasury.

Any help would be appreciated, thanks.

AUD - 88
BEC - 81
FAR - 89
REG - 85

CA Candidate

FAR - 89
AUD - 88
REG - TBD
BEC - TBD

Using Becker and Ninja MCQ

[Jamessemma]

Relook at page 163, it sounds like you were looking at the PAR method, it asked for the cost method and you dont debit APIC-C/S and R/E like you do on the PAR method

BEC: 82
FAR: 80
REG: 81
AUD: Last exam, end of may 2016.

Key to passing the exam is understanding the topic chapter and sections, not just memorizing what you read. The more you practice multiple choice, the greater chance you have to passing the exam.

[AlexCPA]

Hiya Jamessemma. Thanks for the response. The PAR value method uses APIC and retained earnings when the treasury stock is purchased.

I'm talking about when treasury stock is reissued. On the ninja book page 163 (164 on the side panel) there is an illustration of the cost method using two assumptions: one with APIC with no distinction, and one with APIC with distinction. When treasury stock is reissued, under assumption 1, APIC is used as long as there remains a debit balance (see footonote).

In the above problem, I don't understand why retained earnings is used when there is still a debit balance in APIC to deduct from.

AUD - 88
BEC - 81
FAR - 89
REG - 85

CA Candidate

FAR - 89
AUD - 88
REG - TBD
BEC - TBD

Using Becker and Ninja MCQ

[Author]

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