Question

Mr. Zaidi, a new and inexperienced accountant for Dairy Corporation, made the following entries in the books of the company: Sept. 1 Share Capital–Ordinary 36,000(Debit), Retained Earnings 24,000 (Debit); Cash 60,000 (Credit) (Purchased 4,000 shares issued on July 1 for the treasury at $15 per share) You are required to review the above entry and answer:

A. Correct
B. Incorrect

Answer 1

• Treasury stock is the company's issued stock that has been bought back from the shareholders.
• Purchasing treasury stock may stimulate trading, and, will increase earnings per share without changing net income.
• The cost method of accounting for treasury stock records the amount paid to repurchase stock as an increase (debit) to treasury stock and a decrease (credit) to cash.
• The above entry made my Mr. Zaidi is incorrect.

The correct entry looks like the following:

Treasury Stock Dr $60,000

To Cash $60,000

(To record Purchase of 4,000 shares issued on July 1 for the treasury at $15 per share)

Answer is B. Incorrect.