Question

A corporation reacquires 60,000 shares of its own $10 par common stock for $3,000,000, recording it...

A corporation reacquires 60,000 shares of its own $10 par common stock for $3,000,000, recording it at cost.

  1. What effect does this transaction have on revenue or expense of the period?
  2. What effect does it have on stockholders' equity?
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Answer #1

Answer a. Effect on revenue or expense of the period - NO effect

Answer b. Effect on stockholders' equity - The transaction results in a reduction in stockholders' equity by $3,000,000.

Explanation:

Journal entry for reacquisition of own shares is as follows -

Accounts titles Debit Credit
Treasury stock 3,000,000
Cash 3,000,000
(To reacquisition of own shares)

Thus the transaction does not impact any item of revenue or expense but decreases the assets (cash A/c) & stockholders' equity (Treasury stock A/c) by $3,000,000

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