Question

The ABC Corporation presented the following information in its statement of financial position:
Common shares outstanding, 5,000 shares, $ 30 par value per share $ 150,000
Paid-in capital in excess of par value 80,000
Retained Earnings 100,000

1. The company purchased 120 of its own shares to be held as treasury stock, at a cost of $ 60 per share. If the company uses the cost method, the “Treasury stock” account:

a. It will be presented as an asset and will have a balance of $ 7,200.
b. It will be presented as an asset and will have a balance of $ 3,600.
c. It will be presented as an equity reduction in the amount of $ 3,600.
d. It will be presented as an equity reduction in the amount of $ 7,200.


2. If the company reissues 100 of the 120 treasury stocks of the previous question at a price of $ 65 each, it will credit:

a. “Paid-in capital from treasury stock” for $ 500
b. "Gain on sale of treasury stock" for $ 500
c. Retained earnings of $ 500
d. Retained earnings of $ 6,500

3. Assume that the 100 treasury stocks o were reissued at a price of $ 55 each. The company will debit:

a. “Paid-in capital from treasury stock” for $ 500
b. "Loss on sale of treasury stock" for $ 500
c. Retained earnings of $ 500
d. Retained earnings of $ 5,500

Answer 1

Q1.
Answer is d. It will be presented as equity reduction in the amount of $7200.
Explanation:
Treasury stock purchased at a cost of $7200 (i.e. 120 shares @60)
These will be shown as deduction from the equity section.
Q2.
Answer is a. Paid in capital from treasury stock for $500.
Explanation:
Gain on reissue (65-60)*100 = 500
Q3.
Answer is c. retained earnings $500.
Explanation:
Loss on reissue (60-55)*100 = 500