CFA Practice Question

CFA Practice Question

In 2009, Butler Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, 2011, when Butler acquired some of the issued shares for $20 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement?
A. Additional paid-in capital is decreased.
B. Additional paid-in capital is increased.
C. 2011 net income is increased.
Explanation: When common shares are reacquired and retired, common stock par value is decreased by $10 per share and additional paid-in capital is decreased by $15 per share, cash is decreased by $20 per share, and $5 per share increases additional paid-in capital. Accounting rules do not allow a firm to record a gain or loss when it buys back treasury stock because the transaction is viewed as an equity transaction. Therefore, the effect is to decrease additional paid-in capital.

User Contributed Comments 3

User Comment
danlan Additional paid-in capital changes from $15 to $10 so decreased.
george2006 additional paid-in capital will be reduced by $10 per share =
1st decrease by $15
then increase $5
jpducros Additional Paid-in capital represent the premium investors pays over par value; i e originally 25-10 = 15. It is part of Shareholder's equity. When the company buys back its shares, it decreases the additional-paid in capital account since the value of the shares has decreased. This adjustment is only made when there is movement of shares.
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