Write A Response To The Following Scenario Chen Inc Purchase

Writea Response To The Following Scenariochen Inc Purchases 1000 S

Write a response to the following scenario: 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, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity? The treasury stock purchased in the above question was resold by Chen, Inc. for $15,000. What effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity? Format your response consistent with APA guidelines.

Paper For Above instruction

In the context of corporate finance and accounting, transactions involving treasury stock – specifically, repurchasing and reselling shares – significantly influence a company's financial statements. This paper analyzes the effects of such transactions on net income, total assets, paid-in capital, and stockholders' equity, using the scenario of Chen, Inc. purchasing and subsequently reselling 1,000 shares of its own stock.

Impact of Purchase of Treasury Stock

The initial transaction involves Chen, Inc. repurchasing 1,000 shares of its common stock at a total cost of $12,000. These shares had a par value of $5 each, implying a total par value of $5,000 (1,000 shares × $5). The purchase price exceeds the par value, indicating the payment includes additional paid-in capital, but since treasury stock is recorded at cost, the excess over par is not directly reflected in the common stock account.

Effect on net income: This transaction does not directly impact net income. Treasury stock transactions are equity transactions and are recorded within the shareholders’ equity section, not impacting profitability or net income—unless the treasury stock is retired or resold at a gain or loss, which affects net income indirectly through changes in retained earnings or other comprehensive income.

Impact on total assets: The purchase of treasury stock reduces total assets by $12,000 because cash (an asset) decreases as the company spends money acquiring the shares. Consequently, the total assets on the balance sheet decline by this amount.

Impact on total paid-in capital: The purchase of treasury stock does not alter paid-in capital. It is recorded as a contra-equity account—"Treasury Stock"—which reduces total shareholders’ equity but does not affect paid-in capital directly.

Impact on total stockholders’ equity: Total stockholders’ equity decreases by $12,000. Treasury stock is recorded as a deduction under shareholders’ equity, reducing overall equity on the balance sheet.

Impact of Reselling Treasury Stock

Subsequently, Chen, Inc. resells the 1,000 treasury shares at a total of $15,000. This sale increases cash (an asset) by $15,000 and reduces the treasury stock account by $12,000 (the cost of the treasury shares), resulting in a net increase of $3,000.

Effect on net income: Reselling treasury stock at a gain influences net income if the treasury stock is resold at a price higher than its cost. In this case, since the shares are resold at $15,000 (cost $12,000), the company realizes a gain of $3,000. This gain is recognized in net income, increasing the company's net income for the period.

Impact on total assets: Total assets increase by $15,000 due to the cash received from the sale. The decrease in treasury stock (a contra-equity account) of $12,000 is offset by the increase in assets, leading to a net increase in total assets.

Impact on total paid-in capital: The gain on resale, if accounted for as an excess over cost, is typically credited to additional paid-in capital rather than recognized directly as income. The excess of sale proceeds over the cost ($3,000) increases paid-in capital—specifically, the additional paid-in capital account—assuming the company reports gains from treasury stock transactions in this manner.

Impact on total stockholders’ equity: The resale results in a net increase in stockholders’ equity by $3,000, reflecting the realized gain. The treasury stock account is reduced by its cost, and the excess over cost is credited to the paid-in capital account, thereby increasing total equity.

Conclusion

In conclusion, treasury stock transactions have notable effects on a company's financial statements. The repurchase of shares at a higher cost reduces assets and equity but does not impact net income directly. Reselling these shares at a profit increases assets, stockholders' equity, and net income (if gains are recognized), and the adjustments are reflected in the shareholders' equity accounts. Proper accounting for these transactions ensures accurate financial reporting and compliance with standards such as the Generally Accepted Accounting Principles (GAAP).

References

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