In 1994, Butler Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, 1996, 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?
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A. B. C. D. E.B
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.