FAR 15 - STOCKHOLDERS EQUITY

Question 1

FAR 15.04 - RETAINED EARNINGS AND DIVIDENDS

In 20X9, Elm Corp. bought 10,000 shares of Oil Corp. at a cost of $20,000. On January 15, 20X10, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, 20X10, payable on February 15, 20X10. During 20X10, the Oil stock had the following market values:

January 15 $25,000
February 1 $26,000
February 15 $24,000

The net effect of the foregoing transactions on retained earnings during 20X10 should be a reduction of…

$20,000
$24,000
$26,000
$25,000

Answer 1

$20,000

EXPLANATION:

The liability for a property dividend is recorded at the declaration date.

Its distribution is recorded with a charge to retained earnings for the fair value of the property, a credit to the property for the carrying value and the recognition of a gain or loss as if the property had been sold at its fair value.

Since the gain or loss on the property is ultimately closed into retained earnings, the net effect on retained earnings will be the cost of the property, or $20,000 in this case.

Any change in the fair value of the property between the dates of declaration and distribution is ignored.

Question 2

FAR 15.01 - STOCKHOLDER’S EQUITY

Jay & Kay partnership’s balance sheet at December 31, 20X0, reported the following:

Total assets = $100,000
Total liabilities = $20,000
Jay, capital = $40,000
Kay, capital = $40,000

On January 2, 20X1, Jay and Kay dissolved their partnership and transferred all assets and liabilities to a newly formed corporation.

At the date of incorporation, the fair value of the net assets was $12,000 more than the carrying amount on the partnership’s books, of which $7,000 was assigned to tangible assets and $5,000 was assigned to goodwill.

Jay and Kay were each issued 5,000 shares of the corporation’s $1 par value common stock.

Immediately following incorporation, additional paid-in capital in excess of par should be credited for

$68,000
$77,000
$82,000
$70,000

Answer 2

$82,000

EXPLANATION:

Upon incorporation, the assets and liabilities are recorded at their fair market values.

The assets would be recorded at $112,000 and the liabilities at $20,000 indicating a net amount recorded in stockholders’ equity of $92,000.

Since a total of 10,000 shares of $1 par common stock are being issued, the difference of $82,000 would be recorded as additional paid-in capital.

Question 3

FAR 15.01 - STOCKHOLDER’S EQUITY

On April 1, 20X3, Hyde Corp., a newly formed company, had the following stock issued and outstanding:

Common stock, no par, $1 stated value, 20,000 shares originally issued for $30 per share.

Preferred stock, $10 par value, 6,000 shares originally issued for $50 per share.

Hyde’s April 1, 20X3, statements of stockholders’ equity should report

Common stock: $600,000
Preferred stock: $60,000
Additional paid-in capital: $240,000

Common stock: $20,000
Preferred stock: $60,000
Additional paid-in capital: $820,000

Common stock: $20,000
Preferred stock: $300,000
Additional paid-in capital: $580,000

Common stock: $600,000
Preferred stock: $300,000
Additional paid-in capital: $0

Answer 3

Common stock: $20,000
Preferred stock: $60,000
Additional paid-in capital: $820,000

EXPLANATION:

Common and preferred stock are always reported at their par or stated value, when there is one.

In this case there are 20,000 shares of common shares with a stated value of $1, for a total of $20,000, and 6,000 shares of $10 preferred shares for a total of $60,000.

The remainder of the proceeds would be reported in additional paid-in capital, which is:
(20,000 x $30) - $20,000 
\+ (6,000 x $50) - $60,000 
=  $580,000 
\+ $240,000 
= $820,000.

Question 4

FAR 15.04 - RETAINED EARNINGS AND DIVIDENDS

At December 31, 20X2 and 20X3, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock
outstanding. No dividends were in arrears as of December 31, 20X1. Apex did not declare a dividend during 20X2.

During 20X3, Apex paid a cash dividend of $10,000 on its preferred stock. Apex should report dividends in
arrears in its 20X3 financial statements as a (an)

Disclosure of $15,000.
Accrued liability of $15,000.
Disclosure of $20,000.
Accrued liability of $20,000.

Answer 4

Disclosure of $20,000.

EXPLANATION:

The normal dividend on preferred stock is 3,000 x $100 x 5% or $15,000 per year.

Since no dividends were declared in 20X2, the $10,000 paid in 20X3 would all be applied to the preferred dividends in arrears, leaving $5,000 still in arrears for 20X2.

In addition, as of 12/31/X3, the 20X3 dividend of $15,000 was unpaid resulting in total dividends in arrears of $20,000.

Dividends in arrears on preferred stock are disclosed but not accrued.

Question 5

FAR 15.04 - RETAINED EARNINGS AND DIVIDENDS

When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the date of…

Record.
Declaration.
Declaration or record, whichever is earlier.
Payment.

Answer 5

Declaration.

EXPLANATION:

Dividends are recorded with a reduction to retained earnings on the date of declaration.

Question 6

FAR 15.04 - RETAINED EARNINGS AND DIVIDENDS

A retained earnings appropriation can be used to…

Absorb a fire loss when a company is self-insured.

Smooth periodic income.

Provide for a contingent loss that is probable and reasonable.

Restrict earnings available for dividends.

Answer 6

Restrict earnings available for dividends.

EXPLANATION:

An appropriation of retained earnings is a means of communicating to financial statement users that, despite the existence of retained earnings and, perhaps, the availability of cash, the company is anticipating a need that will prevent the distribution of dividends.

Question 7

FAR 15.03 - PREFERRED STOCK, APIC AND STOCK OPTION

In connection with a stock option plan for the benet
of key employees, Ward Corp. intends to distribute treasury shares when the options are exercised.

These shares were bought in 20X9 at $42 per share. On January 1, 20X10, Ward granted stock options for 10,000 shares at $38 per share as additional compensation for services to be rendered over the next three years.

The options are exercisable during a 4-year period beginning January 1, 20X13, by grantees still employed by Ward. Market price of Ward’s stock was $47 per share at the grant date.

No stock options were terminated during 20X10. Ward uses the intrinsic method of accounting for stock option plans.

In Ward’s December 31, 20X10, income statement, what amount should be reported as compensation
expense pertaining to the options?

$30,000
$40,000
$90,000
$0

Answer 7

$30,000

EXPLANATION:

Since the options were granted at an exercise price of $38 when the market value of the shares was $47, total compensation under the intrinsic method would be $9 per share on 10,000 shares, or $90,000.

With a service period of three years, the amortized compensation expense for 20X10 would be 1/3 of $90,000 or $30,000.

Question 8

FAR 15.08 - STOCKHOLDER’S EQUITY UNDER IFRS

There are a variety of ways to account for treasury stock under IFRS. Which of the following is NOT a method that may be used to account for treasury stock under IFRS?

Par value method.
Constructive retirement method.
Retained earnings method.
Cost method.

Answer 8

Retained earnings method.

Under IFRS, treasury stock may be accounted for under the cost method, the par value method, or the constructive retirement method.

There is no retained earnings method for accounting for treasury stock under IFRS.

Question 9

FAR 15.02 - TREASURY STOCK

Posy Corp. acquired treasury shares at an amount greater than their par value, but less than their original issue price. Compared to the cost method of accounting for treasury stock, does the par value method report a greater amount for additional paid-in capital and a greater amount for retained earnings?

I. Additional paid-in capital
II. Retained earnings

I only.
Neither I nor II.
II only.
Both I and II.

Answer 9

Neither I nor II.

EXPLANATION

Under the cost method, the purchase of the treasury shares would be recorded in a treasury stock account at cost.

There would be no effect on additional paid-in capital or retained earnings. Under the par value method, treasury stock would be recorded at par value.

There would be a debit to additional paid-in capital for the original additional paid-in capital amount.

Since the shares were reacquired for an amount lower than the original issue price but more than par value, the difference would be a credit to additional in capital from treasury stock.

It would be for an amount lower than the debit to additional paid-in capital, resulting in a net decrease.

As a result, under the par value method, additional paid-in capital would be lower than under the cost method and retained earnings, which is not affected by such a transaction under either method, would be the same amount.

Neither account, then, would be greater under the par value method for such a transaction.

Question 10

FAR 15.04 - RETAINED EARNINGS AND DIVIDENDS

East Corp., a calendar-year company, had sucient
retained earnings in 20X3 as a basis for dividends, but was temporarily short of cash.

East declared a dividend of $100,000 on April 1, 20X3, and issued promissory notes to its stockholders in lieu of cash.

The notes, which were dated April 1, 20X3, had a maturity date of March 31, 20X4, and a 10% interest rate. How should East account for the scrip dividend and related interest?

Debit retained earnings for $110,000 on April 1, 20X3.

Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $7,500 on December 31, 20X3.

Debit retained earnings for $110,000 on March 31, 20X4.

Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $10,000 on March
31, 20X4.

Answer 10

Debit retained earnings for $100,000 on April 1, 20X3, and debit interest expense for $7,500 on December 31, 20X3.

EXPLANATION:

A scrip dividend will be recorded on the declaration date of April 1, 20X3, based on the $100,000 face amount of the promissory notes.

Interest will be recognized in 20X3 for the period from 4/1 through 12/31 at the rate of 10% resulting in interest expense of $100,000 x 10% x 9/12 or $7,500.

Additional interest will be recognized for the period from 1/1/ to 3/31/X4 when the notes are due.

Question 11

FAR 15.05 - PRESENTATION

On January 2, 20X1, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation
arrangement. Air should have recorded this expense in 20X0 but did not do so.

Air’s reported income tax expense would have been $70,000 lower in 20X0 had it properly accrued this deferred compensation.

In its December 31, 20X1, financial statements, Air should adjust the beginning balance of its retained earnings by a…

$230,000 credit.
$370,000 debit.
$300,000 credit.
$230,000 debit

Answer 11

$230,000 debit

EXPLANATION:

The improper recording of the president’s compensation is an error that is corrected with an adjustment to beginning retained earnings in the amount of the error, net of its tax effect.

As a result of the error, 20X0 compensation was understated by $300,000, but taxes were overstated by $70,000.

The correction will be recorded with a charge to beginning retained earnings the net amount of $230,000.

Question 12

FAR 15.01 - STOCKHOLDER’S EQUITY

Baker Co. issued 100,000 shares of common stock in the current year. On October 1, Baker repurchased 20,000 shares of its common stock on the open market for $50.00 per share.

At that date, the stock’s par value was $1.00 and the average issue price was $40.00 per share. Baker uses the cost method for treasury stock transactions.

On December 1, Baker reissued the stock for $60.00 per share. What amount should Baker report as treasury stock gain at December 31?

$980,000
$200,000
$0
$400,000

Answer 12

$0

EXPLANATION:

No gain or loss is recognized on the purchase, reissue or retirement of treasury stock.

Question 13

FAR 15.02 - TREASURY STOCK

Asp Co. was organized on January 2, 20X4, with 30,000 authorized shares of $10 par common stock. During 20X4 the corporation had the following capital transactions.

January 5 –issued 20,000 shares at $15 per share
July 14 –purchased 5,000 shares at $17 per share
December 27–reissued the 5,000 shares held in treasury at $20 per share

Asp used the par value method to record the purchase and reissuance of the treasury shares. In its December 31, 20X4, balance sheet, what amount should Asp report as additional paid-in capital in excess of par?

$150,000
$100,000
$125,000
$140,000

Answer 13

$125,000.

EXPLANATION:

Under the par value method, treasury stock purchased for more than the original issuance price will be recognized with a debit to treasury stock for the par value, 5,000 shares x $10 or $50,000, paid-in capital is decreased for the original amount, 5,000 shares x $5 or $25,000, and the remainder reduces retained earnings, 5,000 shares x $2 or $10,000.

When the shares are subsequently reissued, similarly to new shares, treasury stock is decreased with a credit for the par value, 5,000 shares x $10 or $50,000, and additional paid-in capital is increased for the difference, 5,000 shares x $10 or $50,000.

As a result, additional paid-in capital would consist of the original amount of 20,000 shares x $5 or $100,000 - $25,000 + $50,000 or $125,000.

Question 14

FAR 15.02 - TREASURY STOCK

What are the two methods of treasury stock repurchasing methods?

Answer 14

COST METHOD (cost in, cost out -> until retire):

1. Example: ISSUE 20,000 shares@ $5par C/S @$25/share:
   Cash 500,000
   _____C/S (20($5))———– 100,000
   _____APIC - C/S (20($20))-400,000
2. REPURCHASE 2000 @ $19
   Treasury Stock - Cost 38,000
   _________Cash————–38,0000

3. RESELL 700 @ $22
Cash  15,400
APIC - TS/RE----X
\_\_\_\_\_T/S ($19(700)---13,300
\_\_\_\_\_APIC - TS--------2,100

4. RETIRE 300 - No longer Issued or Outstanding
C/S (300($5))-----------  1,500
APIC C/S (300$20))--  6,000
\_\_\_\_\_\_\_T/S (300($19))-------5,700
\_\_\_\_\_\_\_APIC -T/S-------------1,800

PAR VALUE METHOD (Legal method) (par in, par out)

1. ISSUE
   Cash 500,000
   _____C/S (20($5))———– 100,000
   _____APIC - C/S (20($20))-400,000

2. REPURCHASE 2000 @ $19
APIC - C/S (2000($20)) 40,000
T/S- (2000($5))------------ 10,000
\_\_\_\_\_\_\_\_\_Cash-----------------38,0000
\_\_\_\_\_\_\_\_\_APIC-T/S-----------12,000

3. Resell 700 @ $22 (Like a new issuance)
   Cash 15,400
   _____T/S (500($5)—-3,500
   _____APIC- C/S——–11,900
4. Retire 300 - No longer Issued or Outstanding
   C/S ———– 1,500
   ___T/S————- 1500

Question 15

TREASURY STOCK:

Under Cost method, T/S is considered what kind of account

Under the Par value method, T/S is considered what kind of account?

Answer 15

Cost Method: CONTRA EQUITY

If one share of $10 par value stock that was originally issued for $13 was reacquired under the Par Value Method @ $12, the entry would be:

T/S —-12
___Cash 12

Resale at $18:

Cash—-18
____T/S———12
____APIC-T/S–6

Par Value: CONTRA C/S

If one share of $10 par value stock that was originally issued for $13 was reacquired under the Par Value Method @ $12, the entry would be:

T/S —-10
APIC-C/S—3
_____APIC-T/S 1
_____Cash —— 12

If reacquired at $15, the entry would be:

T/S ———10
APIC-C/S 3
Ret.Earn 2
______Cash 15

Question 16

FAR 15.02 - TREASURY STOCK

Edge Company has 500,000 shares of no par common stock with a stated value of $8 per share issued and outstanding as of January 1, 2015, originally issued for $14 per share.

During 2015, Edge Company had the following transactions involving its own stock:

—On March 6, acquired 12,000 shares of treasury stock at a cost of $12 per share

—On April 18, resold 4,000 shares of treasury stock at $15 per share.

—On June 11, resold an additional 2,000 shares of treasury stock at $18 per share

If Edge uses the cost method of accounting for treasury stock, what will be the balance in additional paid in capital from treasury stock (APIC-T/S) as a result of these transactions?

$24,000
$12,000
$72,000
$0

Answer 16

$24,000

EXPLANATION:

Under the cost method, the acquisition of treasury stock will be recognized with an increase to treasury stock for the cost of 12,000 x $12 or $144,000.

The shares resold at $15 will reduce treasury stock for the cost of $12 per share with the remaining $3 per share, or $12,000, reported in additional paid in capital from treasury stock.

The shares resold at $18 will reduce treasury stock for the
cost of $12 per share with the remaining $6 per share, or $12,000, reported in additional paid in capital from treasury stock.

As a result, additional paid in capital from treasury stock will be $24,000.

JOURNAL ENTRIES:
6 March – acquired 12,000 shares of treasury stock at a cost of $12 per share
————————
Treasury stock $144 000
CR-Cash (12,000 x $12,000) $144,000
————————
18 April – resold 4,000 shares T/S@$15 per share
————————
Cash $60,000
CR- Treasury stock (4,000 at $12/share) $48,000
CR- APIC - T/S $12,000
————————
11 June - resold an additional 2,000 shares of treasury stock at $18 per share
————————
Cash$36,000
CR- Treasury stock (2,000 at $12/share) $24,000
CR - APIC - T/S $12,000

Question 17

FAR 15.04 - RETAINED EARNINGS AND DIVIDENDS

On September 30, 2015, Saucier Company declared a 5% stock dividend when its stock was selling for $10 per share. As a result, Saucier Company will issue 20,000 additional shares of its $2 par value common stock. All outstanding shares were originally issued for $6 per share.

What will be the decrease to stockholders’ equity as a result of the declaration and distribution of the stock dividend?

$60,000
$200,000
$20,000
$0

Answer 17

$0

EXPLANATION:

A stock dividend is recorded with a decrease to retained earnings and a corresponding increase to common stock and additional paid in capital.

As a result, there is no change to stockholders’ equity

Question 18

FAR 15.04 - RETAINED EARNINGS AND DIVIDENDS

What are the three most common type of dividends and what are the journal entries?

Answer 18

CASH DIVIDEND, SCRIP, STOCK DIVIDEND

CASH DIVIDEND:
RE- 25
____(CR) Cash- 25

Property:
RE - 25
____(CR) Asset - 20
____(CR) Gain - 5

STOCK DIVIDEND: (doesn't reduce equity)
Small < 20 - 25% -FMV
RE - 25
\_\_\_\_(CR) C/S - 20
\_\_\_\_(CR) APIC- 5

Large > 20 - 25% - Par
RE - 20
____(CR) C/S - 20
____(CR) APIC - 5

Split - double shares, half par
C/S (10(10)) - 100
____(CR) C/S (20(5)) - 100

Question 19

FAR 15.01 - STOCKHOLDER’S EQUITY

The following is the stockholders’ equity section of Harbor Co.’s balance sheet at December 31:

Common stock $10 par, 100,000 share authorized,
50,000 shares issued of which 5,000 have been reacquired, and are held in treasury = $450,000
Additional paid-in capital common stock = $1,100,000
Retained earnings = $800,000
Subtotal = $2,350,000
Less treasury stock = ($150,000)
Total stockholders’ equity = $2,200,000

Harbor has insignificant amounts of convertible securities, stock warrants, and stock options.

What is the book value per share of Harbor’s common stock?

$46
$31
$49
$44

Answer 19

$49

EXPLANATION:

The book value per share of Harbor’s common stock is calculated by dividing total stockholder’s equity ($2,200,000) by the total number of shares outstanding (45,000).

This calculation gives an approximate value per share of $49 (2,200,000 / 45,000 = 48.89).

Question 20

FAR 15.01 - STOCKHOLDER’S EQUITY

Hoyt Corp.’s current balance sheet reports the following stockholders’ equity:

5% cumulative preferred stock, par value $100/share; 2,500 shares issued and outstanding = $250,000

Common stock, par value $3.50 per share; 100,000 shares issued and outstanding = $350,000

Additional paid-in capital in excess of par value of common stock= $125,000

Retained earnings= $300,000

Dividends in arrears on the preferred stock amount to $25,000. If Hoyt were to be liquidated, the preferred
stockholders would receive par value plus a premium of $50,000.

The book value per share of common stock is

$7.75
$7.25
$7.50
$7.00

Answer 20

$7.00

EXPLANATION:

Total stockholders’ equity is $1,025,000.

The preferred stockholders have claims that include the $250,000 par value of their shares, dividends in arrears of $25,000, and a liquidation preference of $50,000 for a total of $325,000.

This leaves a balance of $700,000 attributable to common shareholders.

With 100,000 shares of common stock outstanding, the book value per share is $7.00.

Question 21

FAR 15.01 - STOCKHOLDER’S EQUITY

Earl was engaged by Farm Corp. to perform consulting services. Earl’s compensation for these services consisted of 1,000 shares of Farm’s $10 par value common stock, to be issued to Earl on completion of Earl’s services.

On the execution date of Earl’s employment contract, Farm’s stock had a market value of $40 per share. Six months later, when Earl’s services were completed and the stock was issued, the market value was $50 per share.

Farm’s management estimated that Earl’s services were worth $100,000 in cost savings to the company.

As a result of this transaction, additional paid-in capital should increase by…

$40,000
$100,000
$90,000
$30,000

Answer 21

$30,000

EXPLANATION:

Services received are accounted for at the fair value of property (stock) given in exchange for the services. At the time the arrangement was made, the fair value of the stock was $40 per share.

Since Earl received 1,000 shares of $10 par common stock, $10,000 will be recorded as an increase to common stock with the excess of $30 per share or $30,000 to additional paid-in capital.

Question 22

FAR 15.01 - STOCKHOLDER’S EQUITY

The condensed balance sheet of Adams & Gray, a partnership, at December 31, 20X2, follows:

Current assets  $250,000
Equipment (net)   $30,000
---- Total assets = $280,000
Liabilities  $20,000
Adams, capital  $160,000
Gray, capital  $100,000
---- Total liabilities and capital= $280,000

On December 31, 20X2, the fair values of the assets and liabilities were appraised at $240,000 and 20,000, respectively, by an independent appraiser.

On January 2, 20X3, the partnership was incorporated and 1,000 shares of $5 par value common stock were issued. Immediately after the incorporation, what amount should the new corporation report as additional paid-in capital?

$260,000
$215,000
$275,000
$0

Answer 22

$215,000

EXPLANATION:

Upon incorporation of the partnership, the assets will be recorded at their fair value of $240,000 and the liabilities at $20,000 for total stockholders’ equity of $220,000.

Since 1,000 shares of $5 par stock are being issued, common stock must be equal to $5,000, leaving $215,000 as additional paid-in capital.

Question 23

FAR 15.01 - STOCKHOLDER’S EQUITY

On March 1, 20X2, Rya Corp. issued 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par value convertible preferred stock for a total of $80,000.

At this date, Rya’s common stock was selling for $36 per share, and the convertible preferred stock was selling for $27 per share.

What amount of the proceeds should be allocated to Rya’s convertible preferred stock?

$60,000
$44,000
$54,000
$48,000

Answer 23

$48,000

EXPLANATION:

The $80,000 in proceeds would be allocated to the common and preferred stock based on their relative market values.

The common stock consisted of 1,000 shares with a market price of $36 per share for a total of $36,000.

The preferred stock consisted of 2,000 shares with a market price of $27 per share for a total of $54,000.

The total of the market values is $90,000.

The preferred stock makes up 60% of the total market value of the stock (54,000 / 90,000 = 0.6).

Therefore, 60% of the par value proceeds, or $48,000, must be allocated to Rya’s convertible preferred stock ($80,000 x 60% = $48,000).

Question 24

FAR 15.01 - STOCKHOLDER’S EQUITY

Arp Corp.’s outstanding capital stock at December 15, 20X0, consisted of the following:

—30,000 shares of 5% cumulative preferred stock, par value $10 per share, fully participating as to dividends.
No dividends were in arrears.

—200,000 shares of common stock, par value $1 per share.

On December 15, 20X0, Arp declared dividends of $100,000. What was the amount of dividends payable to Arp’s common stockholders?

$34,000
$40,000
$47,500
$10,000

Answer 24

$40,000

EXPLANATION:

Since the preferred shares are fully-participating, the preferred stockholders will first get their normal dividend of 30,000 x 5% x $10 or $15,000.

Next, the common stockholders will get a comparable dividend of 200,000 x $1 x 5% or $10,000.

The remaining $75,000 will be allocated proportionately between the preferred and common stockholders on the basis of their relative total par values.

The preferred shareholders will receive $300,000/$500,000 or 60% of the remainder amounting to $45,000.

The common shareholders will receive $200,000/$500,000 or 40% of the remainder amounting to $30,000.

In total, the common stockholders will receive $10,000 + $30,000 or $40,000.

Question 25

FAR 15.04 - RETAINED EARNINGS AND DIVIDENDS

The following information pertains to Meg Corp.:
Dividends on its 1,000 shares of 6%, $10 par value cumulative preferred stock have not been declared or
paid for 3 years.

Treasury stock that cost $15,000 was reissued for $8,000.

What amount of retained earnings should be appropriated as a result of these items?

$1,800
$0
$8,800
$7,000

Answer 25

$0

EXPLANATION:

Appropriations of retained earnings are used to indicate needs that are anticipated that may prevent the payment of dividends.

Dividends on cumulative preferred stock are discretionary and retained earnings would not be appropriated for dividends in arrears.

When treasury stock costing $15,000 is resold for$8,000, additional paid-in capital from treasury stock, retained earnings, or some combination will be reduced.

Retained earnings would not, however, be appropriated for this purpose.