| Course | MAT 201 Principles of Accounting II |
|---|---|
| Module | Module 2 |
| Paper type | Stock transactions paper |
| Length | About 1,002 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | Business Administration |
| Updated | October 2026 |
Free sample paper for MAT 201 Module 2
Selling Shares, Buying Them Back and Selling Them Again: Stock and Treasury Stock at a Creamery
Student Name
Business Administration Program, Aspen University
MAT 201: Principles of Accounting II
Instructor Name
Month Day, Year
Selling Shares, Buying Them Back and Selling Them Again: Stock and Treasury Stock at a Creamery
A year after incorporating, Cedar Valley Creamery needed more money to finish its yogurt line, and some of its new stockholders wanted out. This paper records three transactions: a second stock offering, a purchase of shares from retiring employees and a resale of some of those shares to new employees. It explains why each happened and what the research says about such transactions.
The Second Offering
The yogurt line cost $400,000 more than planned, and equipment delays added another $560,000 in costs. Rather than borrow the whole amount, the board approved a second offering of 60,000 shares at $16, a price set by an independent appraisal that reflected the first year's progress.
Entry: debit Cash $960,000; credit Common Stock $60,000 (60,000 shares at $1 par); credit Additional Paid-in Capital $900,000.
What Issuing Equity Can Signal
Myers and Majluf (1984) showed that when managers know more about a firm's value than outside investors, issuing new shares can send a signal. Managers loyal to current owners would rather sell stock when they think the market prices it too richly, and buyers who know this treat a new issue as a warning and pay less. As a result, firms may prefer internal funds and debt to new equity, a pattern later called the pecking order. At Cedar Valley, where most buyers are employees and suppliers who know the business well, the information gap is smaller, but the board still explained the reason for the offering in writing so investors would not read it as a sign of trouble.
Buying Back Shares From Retiring Employees
Ten employees who bought shares in the first offering retired and wanted cash, mostly to pay off mortgages or move closer to grandchildren. Cedar Valley's shares do not trade on any exchange, so the stockholder agreement gives the company the right to buy them back at an appraised price. The board bought all 10,000 shares at $18, the appraised value at the time, paying from cash the creamery had built up over its first profitable year.
Entry, cost method: debit Treasury Stock $180,000; credit Cash $180,000.
Treasury stock is not an asset. A company cannot own itself; the shares are deducted from stockholders' equity, and they carry no vote and receive no dividends while held. The 10,000 shares remain issued, because they were sold once, but they are no longer outstanding until the company sells them again or retires them.
What Repurchases Tell Investors
Grullon and Michaely (2004) studied firms announcing share repurchase programs. Contrary to the view that repurchases signal managers' confidence in higher future profits, they found that repurchasing firms did not show improved operating performance afterward. Instead, they experienced declines in systematic risk and cost of capital, consistent with firms returning cash as they matured and growth opportunities narrowed. Stephens and Weisbach (1998) examined how much firms actually repurchased after announcing open-market programs. Firms acquired most of the announced shares within three years, but completion varied, and repurchases were larger when prior stock returns had been weak, suggesting firms bought more when they believed shares were undervalued.
Cedar Valley's purchase had a narrower purpose: providing liquidity to employee owners in a company without a public market. Without that promise, employees would be reluctant to buy shares at all.
Reselling Treasury Shares
Six months later, the creamery sold 4,000 of the treasury shares to newly hired employees at $20, the price set in the new annual appraisal. Selling treasury shares rather than issuing new ones let the creamery offer stock to new employees without increasing the number of shares issued.
Entry: debit Cash $80,000; credit Treasury Stock $72,000 (4,000 shares at the $18 cost); credit Paid-in Capital from Treasury Stock $8,000.
The $8,000 is not income. Corporations do not earn profits by trading in their own shares; any excess goes to paid-in capital, and a shortfall would reduce paid-in capital from treasury stock or, if that is exhausted, retained earnings.
Setting the Price Without a Market
Because Cedar Valley's shares do not trade publicly, every transaction depends on an appraisal. The board hires an independent appraiser each year, who values the creamery using its earnings, comparable sales of dairy processors and its assets. Using the same appraised price for buybacks and new sales within a period treats departing and arriving owners consistently. If the board set prices itself, outside owners would reasonably worry that the family could buy low and sell high, which is exactly the kind of conflict that agency theory predicts.
Limits on Buybacks
Buybacks use cash that could fund operations, and state corporate law generally restricts repurchases that would leave a company unable to pay its debts. The stockholder agreement therefore caps buybacks at $250,000 a year without special board approval, and the creamery's loan agreement requires the bank's consent for larger amounts. Retained earnings also matter: a company with no accumulated profits has less room to return cash to owners.
The Revised Equity Section
Retained earnings of $249,000 reflect the first year's net income, which Module 3 examines with the creamery's first dividend. Every change from the opening equity section in Module 1 can be traced to a transaction: the second offering added $960,000, the buyback removed $180,000, the resale returned $80,000 and the year's profit added $249,000. Together they take total equity from $7,800,000 to $8,909,000, which is a useful check that no entry was missed.
| Stockholders' equity | Amount |
|---|---|
| Common stock at $1 par, 580,000 shares issued and 574,000 outstanding | 580,000 |
| Additional paid-in capital | 8,180,000 |
| Paid-in capital from treasury stock | 8,000 |
| Retained earnings | 249,000 |
| Less treasury stock, 6,000 shares at cost | (108,000) |
| Total stockholders' equity | 8,909,000 |
Conclusion
The three transactions raised $960,000, returned $180,000 to retiring employees and brought back $80,000 from new ones. Myers and Majluf explain why equity issues need explanation, and Grullon and Michaely and Stephens and Weisbach show what repurchases mean. The cost method keeps treasury stock out of assets and out of income.
References
Grullon, G., & Michaely, R. (2004). The information content of share repurchase programs. The Journal of Finance, 59(2), 651-680. https://doi.org/10.1111/j.1540-6261.2004.00645.x
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221. https://doi.org/10.1016/0304-405X(84)90023-0
Stephens, C. P., & Weisbach, M. S. (1998). Actual share reacquisitions in open-market repurchase programs. The Journal of Finance, 53(1), 313-333. https://doi.org/10.1111/0022-1082.115194
Reading the MAT 201 Module 2 assignment instructions
Module 2 of MAT 201 usually covers issuing stock and treasury stock, asking students to record these transactions and explain their effects on stockholders' equity. Use your course's Module 2 page; the creamery and figures are invented. Record the issuance of common stock above par. Explain why a corporation buys back its own shares. Record the purchase of treasury stock using the cost method. Record the resale of treasury stock above cost. Present the revised equity section, and explain how prices are set when shares do not trade publicly. Cite research in APA 7 form.
Inside the MAT 201 Module 2 example
The second offering raises $960,000 to finish the yogurt line. Ten retiring employees ask to sell their 10,000 shares because there is no public market, and the board agrees to buy them at an independent appraisal of $18. Later, 4,000 of those shares are sold to new employees at $20. Myers and Majluf showed that when insiders know more than buyers, firms shy away from selling new shares and the market tends to mark them down when they do. Grullon and Michaely's Journal of Finance article examined the information in repurchase programs. Stephens and Weisbach's Journal of Finance article studied actual reacquisitions after open-market repurchase announcements. The entries record common stock at par with the excess in paid-in capital, treasury stock at its $180,000 cost and the $8,000 gain on resale in paid-in capital from treasury stock, never as income. The revised equity section shows 580,000 shares issued and 574,000 outstanding.
MAT 201 Module 2 rubric: what earns full marks
A strong stock transactions paper gets every entry right and explains the business reasons behind issuing and repurchasing shares. This example records the issuance at par and above, uses the cost method for treasury stock and records the resale gain in paid-in capital rather than income. Myers and Majluf, Grullon and Michaely and Stephens and Weisbach explain what these transactions mean to investors. The revised equity section distinguishes issued from outstanding shares. Explaining why a private company buys back shares from employees grounds the accounting in a real need. Addressing how prices are set without a market and what limits buybacks shows the paper treats equity transactions as decisions with consequences, not only entries.
MAT 201 Module 2 help from the desk
Stock papers often record treasury stock purchases as an asset or treat resale gains as income. Treasury stock reduces equity, and gains or losses on resale go to paid-in capital. Another weakness is confusing issued and outstanding shares after a buyback. Record common stock at par and the excess separately. Explain the reasons behind each transaction. Present the equity section with treasury stock deducted. Finally, check that total equity changes by exactly the cash received or paid. Explain how a private company sets the price of its shares.
Write yours, or have the desk draft it
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MAT 201 Module 2 questions, answered
What does MAT 201 Module 2 usually ask for?
Aspen's MAT 201 usually covers issuing stock and treasury stock in this module, so recording these transactions and their effects on equity is typical. Read your classroom prompt.
What is treasury stock?
Shares a corporation has issued and then bought back. Under the cost method, treasury stock is recorded at cost and deducted from stockholders' equity.
Is a gain on reselling treasury stock income?
No. Any excess over cost is credited to paid-in capital from treasury stock, because companies do not earn income by trading in their own shares.
Where can I find a free MAT 201 Module 2 sample paper?
The example above records a creamery's stock issuance, treasury stock purchase and resale with the revised equity section.
What does a share repurchase signal?
Grullon and Michaely found that firms announcing repurchases tended to see declines in risk and cost of capital, and Myers and Majluf showed why issuing equity can signal the opposite.