Skip to main content
Sign in Create a free account
Varsity Tutors
Sign in

Account For Treasury Stock Transactions - CPA Far

  1. Theta Corp. purchased 4,000 shares of its own $1 par common stock as treasury stock for $12 per share. The original issue price was $8 per share. Later, Theta retired 1,000 of these treasury shares. Under the cost method, what is the effect on total stockholders' equity from the retirement?
    Answer: Decrease of $12,000 representing the total cost of retired shares When treasury stock is retired under the cost method, the treasury stock account is eliminated and the difference between cost and par is typically charged to additional paid-in capital and/or retained earnings, but the net effect on total stockholders' equity is simply the elimination of the treasury stock cost. The 1,000 shares cost $12 each, so total equity decreases by $12,000. The original issue price and par value affect the allocation among equity accounts but not the total equity change. Choice B attempts to calculate net changes between accounts. Choice C only considers the excess over issue price. Choice D uses the original issue price rather than current cost.
  2. A company repurchases 3,000 shares at $25 per share using the cost method. It subsequently retires 1,000 of those treasury shares. The original issuance price was $18 per share ($1 par, $17 APIC). What journal entry records the retirement?
    Answer: Debit Common Stock $1,000; Debit APIC $17,000; Debit Retained Earnings $7,000; Credit Treasury Stock $25,000. When treasury stock is retired under the cost method: credit Treasury Stock at cost ($25,000). Debit Common Stock at par ($1,000), debit APIC at original premium ($17,000). Repurchase cost ($25,000) exceeds original issuance price ($18,000) by $7,000, charged to Retained Earnings. Answer D is correct. Answer A credits Retained Earnings rather than debiting it. Answer B reverses debits and credits on Treasury Stock. Answer C debits APIC-Treasury Stock for the excess rather than Retained Earnings - APIC-Treasury Stock is only used for differences arising from reissuances, not retirements.
  3. Phi Corporation repurchased 6,000 shares of its $3 par common stock at $16 per share. The shares were originally issued at $12 per share. Phi has $180,000 in Additional Paid-in Capital from Treasury Stock from previous transactions. If Phi subsequently sells 2,500 shares at $14 per share, what is the journal entry for this sale under the cost method?
    Answer: Dr. Cash $35,000, Dr. Additional Paid-in Capital from Treasury Stock $5,000, Cr. Treasury Stock $40,000 Under the cost method, treasury stock is carried at cost ($16 per share). When sold below cost, the deficit is first charged against any existing Additional Paid-in Capital from Treasury Stock before charging Retained Earnings. Cash received: 2,500 × $14 = $35,000. Treasury stock credit: 2,500 × $16 = $40,000. Deficit: 2,500 × ($16 - $14) = $5,000. Since there's existing APIC from treasury stock ($180,000), the $5,000 deficit reduces this account. Choice B would apply if no APIC from treasury stock existed. Choice C incorrectly treats this as an income statement item. Choice D treats this as a new stock issuance rather than treasury stock sale.
  4. A company repurchased treasury stock at $50 per share (cost method) and reissues the shares at $38 per share. There is no existing APIC-Treasury Stock balance. What account absorbs the $12 per share deficiency?
    Answer: Retained Earnings. When treasury stock is reissued below cost and no APIC-Treasury Stock balance exists to absorb the deficiency, the excess of cost over reissuance price is charged to Retained Earnings. No loss is recognized in the income statement for treasury stock transactions. Answer D is correct. Answer A records an income statement loss, which is not permitted for transactions in a company's own stock. Answer B uses APIC from original issuances, which is only used after APIC-Treasury Stock is exhausted - and APIC-Treasury Stock is the first account used, not APIC from original issuances. Answer C debits Common Stock at par, which is not affected by treasury stock reissuances under the cost method.
  5. Which of the following correctly describes how treasury stock is presented on the balance sheet?
    Answer: As a contra-equity account deducted from total stockholders' equity. Treasury stock represents a company's own shares that have been repurchased. It is presented as a contra-equity account - a deduction from total stockholders' equity - at cost (under the cost method). It is never presented as an asset, since a company cannot own itself. Answer B is correct. Answer A incorrectly classifies treasury stock as an asset. Answer C treats it as an investment at fair value. Answer D reduces only Retained Earnings rather than appearing as a separate contra-equity line item.
  6. Which of the following correctly states the effect of treasury stock transactions on net income?
    Answer: Treasury stock transactions have no effect on net income; they are equity transactions. Transactions in a company's own equity instruments - including repurchase and reissuance of treasury stock - do not produce gains or losses in the income statement. All differences between cost and reissuance price are recorded in equity accounts (APIC-Treasury Stock or Retained Earnings). Answer B is correct. Answers A and C both record income statement effects, which are prohibited for treasury stock transactions. Answer D treats the repurchase premium as a loss, which is also incorrect.
  7. A company repurchased 1,000 shares at $40 each (cost method) and later reissues all 1,000 shares at $55 per share. What is the journal entry to record the reissuance?
    Answer: Debit Cash $55,000; Credit Treasury Stock $40,000; Credit APIC-Treasury Stock $15,000. When treasury stock is reissued above cost under the cost method, Cash is debited for proceeds received, Treasury Stock is credited at cost, and the excess goes to APIC-Treasury Stock. No gain is recognized - treasury stock transactions are equity transactions. Answer A is correct. Answer B treats the reissuance as a new stock issuance rather than a treasury stock transaction. Answer C credits Treasury Stock at the reissuance price rather than cost. Answer D records a gain, which is not permitted for equity transactions.
  8. A company repurchased 4,000 shares at $20 per share (cost method). It later donates 500 of these treasury shares to a charitable organization. The fair value of the shares on the donation date is $22 per share. How should the donation be recorded?
    Answer: Debit Charitable Contribution Expense $11,000; Credit Treasury Stock $10,000; Credit APIC-Treasury Stock $1,000. When treasury shares are donated, the donation is recorded at the fair value of the shares given ($22 x 500 = $11,000), which is the amount of the charitable contribution expense. Treasury Stock is removed at cost ($20 x 500 = $10,000), and the $1,000 excess of fair value over cost is credited to APIC-Treasury Stock. No gain is recorded. Answer C is correct. Answer A records the expense at cost rather than fair value. Answer B records a gain rather than crediting APIC. Answer D omits the required expense recognition.
  9. A company repurchases 2,000 shares of its own $1 par value common stock at $35 per share using the cost method. What is the journal entry to record the repurchase?
    Answer: Debit Treasury Stock $70,000; Credit Cash $70,000. Under the cost method, treasury stock is recorded at the full repurchase price. The entry is: Debit Treasury Stock $70,000 (2,000 x $35); Credit Cash $70,000. No allocation between par value and APIC is made at repurchase under the cost method. Answer D is correct. Answer A describes the par value method. Answer B records only the par value. Answer C debits Retained Earnings, which is incorrect for the cost method repurchase entry.
  10. What is the balance in Omega's Additional Paid-in Capital from Treasury Stock account at December 31, 2024, assuming the company uses the cost method for treasury stock transactions?
    Answer: $7,000 credit balance after netting gains and losses on treasury transactions Under the cost method, when treasury stock is sold above cost, the excess goes to Additional Paid-in Capital from Treasury Stock. When sold below cost, the deficit reduces this account (or Retained Earnings if insufficient APIC). June 20 sale: 2,000 shares × ($35 - $30) = $10,000 credit. September 10 sale: 1,500 shares × ($28 - $30) = $3,000 debit. Net balance: $10,000 - $3,000 = $7,000 credit. Choice A ignores the loss transaction. Choice B incorrectly adds both transactions without considering the loss. Choice D only considers the first sale.
  11. Which of the following transactions would decrease both total assets and total stockholders' equity by the same amount?
    Answer: Repurchasing treasury stock for cash. Repurchasing treasury stock for cash reduces Cash (an asset) and increases Treasury Stock (a contra-equity account), thereby reducing both total assets and total stockholders' equity by the repurchase price. Answer B is correct. Declaring a cash dividend (A) creates a liability (Dividends Payable) and reduces equity, but assets are not yet reduced until paid. A stock dividend (C) reclassifies within equity with no asset change. A stock split (D) has no effect on assets or total equity.
  12. A company has the following equity balances: Common Stock $10,000; APIC $90,000; Retained Earnings $150,000. It repurchases 500 shares at $60 per share using the cost method. What is total stockholders' equity after the repurchase?
    Answer: $220,000 Total equity before repurchase = $10,000 + $90,000 + $150,000 = $250,000. Treasury stock repurchased = 500 x $60 = $30,000. Treasury stock is a contra-equity account, reducing total equity. Total equity after = $250,000 - $30,000 = $220,000. Answer A is correct. Answer B is the pre-repurchase balance. Answer C deducts $60,000 (twice the repurchase amount). Answer D adds treasury stock to equity rather than subtracting.
  13. Using the FIFO cost flow assumption for treasury stock under the cost method, what is the balance in the Treasury Stock account at December 31, 2024?
    Answer: $27,000 based on FIFO cost flow for remaining inventory Under FIFO, shares sold come from oldest purchases first. Starting: 2,000 @ $25. March sale: 800 @ $25 (1,200 @ $25 remain). May purchase: adds 1,200 @ $30. August sale: 1,000 from oldest costs (1,000 @ $25, leaving 200 @ $25 + 1,200 @ $30). October sale: 500 from oldest remaining (200 @ $25 + 300 @ $30, leaving 900 @ $30). Final balance: 900 × $30 = $27,000. Choice A uses weighted average method. Choice C assumes all remaining shares are from newest purchases. Choice D incorrectly mixes cost layers.
  14. A company's board of directors votes to formally retire 2,000 treasury shares that were repurchased at $40 each under the cost method. The shares had an original issuance price of $35 ($5 par, $30 APIC). Which accounts are debited in the retirement entry?
    Answer: Common Stock $10,000, APIC $60,000, and Retained Earnings $10,000. Retirement of treasury stock (cost method): Remove Treasury Stock at cost (credit $80,000). Debit Common Stock at par: 2,000 x $5 = $10,000. Debit APIC at original premium: 2,000 x $30 = $60,000. Cost exceeds original issuance price by: $80,000 - $70,000 = $10,000. This excess is charged to Retained Earnings. Answer D is correct. Answer A debits Treasury Stock rather than crediting it. Answer B omits the $10,000 excess charge. Answer C records a gain rather than charging Retained Earnings - gains are never recognized on treasury stock retirement.
  15. Which of the following correctly describes the effect of formally retiring treasury stock on total stockholders' equity, assuming retirement cost equals the original repurchase cost?
    Answer: Total stockholders' equity is unchanged; retirement reclassifies amounts within equity. Retiring treasury stock eliminates the Treasury Stock contra-equity balance and reduces Common Stock and APIC by corresponding amounts. Because the reduction in positive equity accounts equals the elimination of the contra-equity balance, total stockholders' equity is unchanged - it is a reclassification within equity components. Answer C is correct. Answer A incorrectly implies equity increases when a contra-equity account is removed. Answer B focuses only on par value. Answer D incorrectly suggests equity increases when APIC is debited (reduced) in the retirement entry.
  16. A company uses the cost method for treasury stock. It repurchases 1,000 shares at $30 each. The original issuance data is: $2 par, $28 APIC per share. Which of the following correctly states the balance sheet impact at repurchase?
    Answer: Treasury Stock increases by $30,000; Cash decreases by $30,000; no change to Common Stock or APIC. Under the cost method, the repurchase is recorded entirely as Treasury Stock at cost. Common Stock and APIC are not adjusted at repurchase - those accounts are only affected if the shares are later retired or reissued. Cash decreases by $30,000 and Treasury Stock (contra-equity) increases by $30,000. Answer A is correct. Answer B describes the par value method retirement entry. Answer C incorrectly adjusts APIC at repurchase under the cost method. Answer D charges Retained Earnings, which is not the cost method entry.
  17. Which of the following correctly describes the difference between the cost method and the par value method of accounting for treasury stock?
    Answer: The cost method records treasury stock at the full repurchase price; the par value method treats repurchased shares as constructively retired at the time of repurchase. The cost method records Treasury Stock as a single contra-equity amount at the repurchase price, with no adjustment to Common Stock or APIC at that time. The par value method treats the repurchase as a constructive retirement, immediately removing the shares from Common Stock and APIC. Answer B is correct. Answer A reverses the definitions. Answer C is incorrect - the methods produce different account balances within equity, though total equity is the same when repurchases equal reissuances. Answer D is incorrect; both methods are acceptable under U.S. GAAP.
  18. Under the par value method of accounting for treasury stock, when shares are repurchased above their original issuance price, which of the following accounts is debited?
    Answer: Common Stock at par, APIC for the original premium, and Retained Earnings for any excess of repurchase price over original issuance price. Under the par value method, repurchased shares are treated as if retired. The entry debits Common Stock at par, debits APIC for the original premium per share, and debits Retained Earnings for any excess of the repurchase price over the original issuance price. Treasury Stock is debited only at par value. Answer B is correct. Answer A describes the cost method. Answer C charges the full repurchase price to Retained Earnings regardless of original issuance price. Answer D debits Treasury Stock at par with APIC for the remainder, which is not the par value method entry.
  19. A company has 100,000 shares authorized, 60,000 shares issued, and 8,000 shares held as treasury stock. The board authorizes a cash dividend of $2 per share. What is the total dividend declared?
    Answer: $104,000 Dividends are paid on outstanding shares only, not treasury shares. Shares outstanding = 60,000 issued - 8,000 treasury = 52,000. Total dividend = 52,000 x $2 = $104,000. Answer C is correct. Answer A applies $2 to all authorized shares. Answer B applies $2 to all issued shares without deducting treasury shares. Answer D applies $2 to 58,000 shares, which does not correspond to any correct share count.
  20. What is the net effect on Kappa's total stockholders' equity from this share retirement transaction?
    Answer: Decrease of $144,000 representing the full cash payment for retired shares When a company retires shares rather than holding them as treasury stock, you need to understand that this permanently removes the shares from existence, which directly reduces total stockholders' equity by the full cash payment made. The correct approach is straightforward: Kappa paid $144,000 cash (8,000 shares × $18 per share) to retire the shares. This cash outflow reduces assets by $144,000, and since the shares are permanently retired, stockholders' equity decreases by the same $144,000 amount. The accounting entries remove the original par value and additional paid-in capital from the books, with any difference flowing through retained earnings, but the net effect on total equity is simply the cash paid. Choice A incorrectly focuses only on the $16,000 par value (8,000 shares × $2 par), ignoring that the company actually paid much more than par value. Choice B represents the original issue value of $120,000 (8,000 shares × $15 original issue price), but this misunderstands that the current transaction's impact depends on what Kappa actually paid now, not what investors originally paid years ago. Choice C calculates the $24,000 excess over original issue price ($144,000 - $120,000), which might be relevant for detailed journal entries but doesn't represent the net equity impact. Remember this key principle: when shares are retired (not just repurchased as treasury stock), total stockholders' equity decreases by the full cash payment made, regardless of the original issue price or par value. The retirement permanently removes both the shares and the cash from the company.

Start this quiz