Joe Dumars Company has outstanding 40,000 shares of $5 par common stock, which had been issued at $30 per share. Joe Dumars then entered into the following transactions. 1. Purchased 5,000 treasury shares at $45 per share.
2. Resold 2,000 of the treasury shares at $49 per share.
3. Resold 500 of the treasury shares at $40 per share.
Indicate the effect each of the three transactions has, assuming Joe Dumars Company uses the cost method.

Transaction 1

Assets - Decrease by $225,000

Cash was used to purchase the shares at = 5,000 * 45 = $225,000

Liabilities - No effect

Stockholders' equity - Decrease by $225,000

Treasury shares reduce the amount held by stockholders.

Paid In Capital - No effect

Retained Earnings - No Effect

Net Income - No Effect

Transaction 2

Assets - Increase by $98,000

The shares were sold for at = 2,000 * 49 = $98,000

Liabilities - No effect

Stockholders' equity - Increase by $90,000

= 2,000 * 45 = $90,000

Treasury shares sold increases the amount held by stockholders. As we are using the Cost method, this will be recorded at cost.

Paid In Capital - Increase by $8,000

Using the cost method, when stock is sold for more than it was bought, record the cost in the stock account and credit the remainder to this account.

Retained Earnings - No Effect

Net Income - No Effect

Transaction 3

Assets - Increase by $20,000

The shares were sold for at = 500 * 40 = $20,000

Liabilities - No effect

Stockholders' equity - Increase by $22,500

= 500 * 45 = $22,500

Treasury shares sold increases the amount held by stockholders. As we are using the Cost method, this will be recorded at cost.

Paid In Capital - Decrease by $2,500

Using the cost method, when stock is sold for less than it was bought, record the cost in the stock account and debit the remainder to this account to indicate a decrease.

Retained Earnings - No Effect

Net Income - No Effect

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