Treasury Stock Flashcards
The acquisition of treasury stock will cause the number of shares outstanding to decrease if the treasury stock is accounted for by the
The acquisition of treasury stock reduces the number of shares of stock outstanding, regardless of the method used to account for the treasury stock.
Shares in the treasury are considered issued, but not outstanding.
is treasury stock on balance sheet
A firm’s treasury stock is not an asset of that firm. A firm cannot own its own stock.
under the cost method how is net income effected
it is not. there is no gain or loss recorded under this method
If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be credited to
additional paid in capital
In 2003, Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, 2005, when Fogg acquired some of the issued shares for $20 per share and retired them.
Which of the following statements correctly states an effect of this acquisition and retirement?
A. 2005 net income is decreased. B. 2005 net income is increased. C. Additional paid-in capital is decreased
C. Additional paid-in capital is reduced when stock is retired because the additional paid-in capital from treasury stock transactions is closed.
The other three alternative answers cause income to change or retained earnings to increase. Retained earnings can never be increased through transactions with owners, nor can income be affected by such transactions.
On December 1, 2004, Line Corp. received a donation of 2,000 shares of its $5 par value common stock from a stockholder. On that date, the stock’s market value was $35 per share. The stock was originally issued for $25 per share.
By what amount would this donation cause total stockholders’ equity to decrease?
A. $70,000 B. $50,000 C. $20,000 D. $0
D. The shares are considered donated treasury shares. Treasury stock and a gain or revenue account are increased by the market value of the stock received in donation (FAS 116). The increase in the treasury stock account decreases the owners’ equity, but the gain or revenue increases the owners’ equity by the same amount. Therefore, there is no net effect on the owners’ equity.
On December 31, 2004, Pack Corp.’s Board of Directors canceled 50,000 shares of $2.50 par value common stock held in treasury at an average cost of $13 per share. Before recording the cancellation of the treasury stock, Pack had the following balances in its stockholders’ equity accounts:
Common stock $540,000 Additional paid-in capital 750,000 Retained earnings 900,000 Treasury stock, at cost 650,000 In its balance sheet at December 31, 2004, Pack should report common stock outstanding of
A. $0 B. $250,000 C. $415,000 D. $540,000
c, When treasury stock is cancelled (retired), the common stock account is reduced by the par value of the common stock cancelled. The ending common stock account balance is $415,000 = $540,000 - 50,000($2.50).
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?
Additional paid-in capital Retained earnings
Yes Yes
Yes No
No No
No Yes
NO, NO. Under the cost method, when treasury stock is purchased for an amount less than original price, the treasury stock account is debited. This is a contra OE account.
Additional paid-in capital and retained earnings are unaffected. Under the par method, the treasury stock account is debited for par value, and additional paid-in capital is debited for the amount in proportion to the original issue price. Because less was paid for the treasury stock than was received on original issuance, retained earnings is unaffected. Rather, additional paid-in capital from treasury stock is credited for the difference, but not by as much as the debit to the original issuance additional paid-in capital account.
On balance, additional paid-in capital decreases under the par method relative to the cost method, but there is no difference in the effect on retained earnings (neither method affects retained earnings under the conditions in the problem).
On incorporation, Dee Inc. issued common stock at a price in excess of its par value. No other stock transactions occurred except treasury stock was acquired for an amount exceeding this issue price.
If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?
Net common stock Add PIC Retained earnings No effect Decrease No effect Decrease Decrease Decrease Decrease No effect Decrease No effect Decrease Decrease
decrease, decrease, decrease. Under the par value method, when treasury stock is purchased and retired at a price exceeding the original issue price, the following entry is made. No additional paid-in capital from treasury stock transactions exists. Therefore, retained earnings is debited. Common stock par Additional paid-in capital original issue price - par Retained earnings acquisition price - original issuance price Cash acquisition price. Thus, all three accounts listed in the question are decreased.
