On January 1, Vermont Corporation had 39,000 shares of $12 par value common stock issued and outstanding. All 39,000 shares had been issued in a prior period at $20 per share. On February 1, Vermont purchased 900 shares of treasury stock for $28 per share and later sold the treasury shares for $22 per share on March 1. The journal entry to record the purchase of the treasury shares on February 1 would include a
a.credit to Treasury Stock for $25,200
b.debit to Treasury Stock for $25,200
c.debit to a loss account for $7,200
d.credit to a gain account for $7,200
Before we explain the journal entry treatment for purchase of Treasury Stocks, lets explain what is a treasury stock which is nothing but the difference between shares issued by a company and shares outstanding.
On February 1 Vermont Corporation purchased 900 shares of Treasury Stock for $28 per share amounting to Rs $25200 (900 shares * $28 per share).
Journal entry to record the above is as follows:
Debit Treasury Stock $25200
Credit Cash $25200
Note the above method is also called Cost Method of recording Treasury Stock.
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