Chen Inc Purchases 1000 Shares Of Its Own Previously Issued

Chen Inc Purchases 1000 Shares Of Its Own Previously Issued 5 Per

Chen, Inc. purchases 1,000 shares of its own previously issued $5 per common stock for $12,000. Assuming the shares are held in the treasury, determine the effects of this transaction on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity. Subsequently, the treasury stock purchased is resold by Chen, Inc. for $15,000. Analyze the effects of this resale on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity.

Paper For Above instruction

In corporate finance, treasury stock transactions are vital actions that influence a company's financial structure, particularly its stockholders’ equity and overall financial health. The described scenario involves Chen Inc. first purchasing its own shares and subsequently reselling them, and understanding the effects of these transactions on financial statements requires a comprehensive understanding of accounting principles related to treasury stock.

Initially, Chen Inc. acquires 1,000 shares of its own stock, which had been previously issued and at a par value of $5 per share. The purchase price is $12 per share, totaling $12,000 (1000 shares x $12). Since these shares are held as treasury stock, they are recorded as a contra-equity account on the balance sheet, reducing total stockholders’ equity. This transaction does not affect net income because it is a capital transaction, not an operational one. Regarding total assets, the cash paid for purchasing treasury stock decreases the asset account Cash by $12,000. Total paid-in capital remains unaffected because treasury stock transactions are recorded directly against the equity account and do not influence the paid-in capital account. Consequently, total stockholders’ equity decreases by $12,000, reflecting the reduction in equity caused by repurchasing shares.

When Chen Inc. resells its treasury stock for $15,000, the company gains a $3,000 excess over the purchase cost of $12,000 (resale price of $15,000 minus cost of $12,000). This gain does not impact net income because gains or losses on treasury stock are accounted directly within equity, not through the income statement. The cash receipt increases total assets by $15,000. The treasury stock account, a contra-equity account, decreases by the cost basis of $12,000, effectively removing the treasury shares from the balance sheet, while the excess of $3,000 is credited to additional paid-in capital from treasury stock transactions. This increases total paid-in capital, reflecting the gain realized. Overall, total stockholders’ equity increases by $3,000 because the sale restores part of the previous reduction caused by the buyback and recognizes the gain on resale.

In conclusion, the initial purchase of treasury shares decreases both total assets and stockholders’ equity without affecting net income or paid-in capital. The resale increases assets and paid-in capital, with a corresponding increase in stockholders’ equity, also without affecting net income. These transactions exemplify how treasury stock operations influence a company's financial position and stockholders’ equity, highlighting their importance in corporate financial management and strategic financial planning.

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