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In previous years, Cox Transport reacquired 3 million treasury shares at $22 per share and, later, 2 million treasury shares at $27 per share. What amount will Cox’s paid-in capital—share repurchase increase if it now sells 2 million treasury shares at $30 per share and determines the cost of treasury shares by the FIFO method?

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sharry187

Answer:

increase in paid in capital = $16 million

Cost of treasury shares = $44 million

Explanation:

Cox transport required $66 million (3 million shares x $22 per share) worth of shares in the first transaction and $54 million (2 million shares x $27 per share) worth of shares in the second transaction.

Following is the shares balance

1st transaction = 3 million shares

2nd transaction = 2 million shares

Now, if we use FIFO method then we will first sell the shares from the first transaction then move on to the second one once we have sold 3 million shares (entire number of shares in first transaction)

Revenue / Value of sale = $60 million (2 million shares x $30 per share)

Cost of shares = $44 million (2 million shares x $22 per share)

Capital gain = Revenue - cost of shares

Capital gain = $60 million - $44 million

Capital gain/increase in paid in capital = $16 million

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