Treasury Stock Principles, Cost Method

Question 1

Why would a firm buy it’s own stock?

Answer 1

1. ) To offset dilution from issuance of stock in stock-based comp agreements
2. ) To provide shares to meet stock-based comp agreements
3. ) To distribute “profits” without paying dividends.
4. ) To combat hostile takeovers
5. ) To take advantage of temporarily low stock price
6. ) To establish market price for the stock
7. ) To increase EPS
8. ) To reduce future cash dividends

Question 2

What are some Characteristics of Treasury Stock?

Answer 2

1. ) No one owns it - no shareholders
2. ) It is not an asset
3. ) Firm cannot record any income in a treasury stock transaction
4. ) Firm cannot profit from Treas Stock transaction
5. ) The treasury stock account is debited upon purchase. The account is a contra OE account, not asset. Common stock unaffected
6. ) Reduces number of shares outstanding, but not issued
7. ) When it is purchased, EPS increases
8. ) Net assets and OE decrease by cost of treasury shares purchased
9. ) RE can be decreased in some cases, but never increased.

Question 3

What are the 2 methods to account for Treasury Stock?

Answer 3

1. ) Cost Method - records treasury stock at cost of shares reacquired
2. ) Par Value - records Treasury Stock at the par value of the shares reacquired

Question 4

Will OE be reduced by the same amount under both the cost and par value method of accounting for Treasury Stock?

Answer 4

Yes, balances of certain other OE accounts are different.

Question 5

What is the cost method of accounting for Treasury Stock?

Answer 5

At purchase, TS is debited at cost. The contributed capital in excess of par account that was credited when stock was issued is unaffected. Treasury stock is recorded at the very bottom of the OE section of the BS

Question 6

What is the Par Value Method when accounting for Treasury Stock?

Answer 6

At purchase, TS is debited for Par Value, and APIC is debited for the original amount recorded. Reissuances are treated as a regular issuance, except TS is credited rather than common stock. Subtracted from Common Stock on the balance sheet

Question 7

What accounts may reflect different balances under the cost and par method for the same firm?

Answer 7

Treasury stock, paid in capital in excess of par-common, paid in capital from treasury stock, retained earnings

Question 8

When is paid in capital from treasury stock decreased under the cost method?

Answer 8

When treasury stock is reissued for less than cost.

Question 9

What is the effect on the treasury stock account under the par method when donated stock is received?

Answer 9

Effect on the treasury stock account is an increase for the par value of the stock received.

Question 10

When is paid in capital from treasury stock increased under the par method?

Answer 10

When treasury stock is purchased for less than original issue price

Question 11

What is the effect on the treasury stock account under the cost method when donated stock is received?

Answer 11

Effect on the treasury stock account is an increase for the fair value of the stock received.

Question 12

What is the effect on owners’ equity when treasury stock is purchased and subsequently reissued at a price in excess of cost (using the cost method)?

Answer 12

Increase owners’ equity by the difference in purchase cost and reissuance price

Question 13

Can RE be increased in a Treasury Stock transaction?

Answer 13

No, only decreased

Question 14

When cash is paid for Treasury Stock, what happens to total Stockholder’s Equity?

Answer 14

It decreases by the amount of cash paid