Treasury Stock Transactions - Financial Accounting

1. Paxon Corp. repurchased 1,000 shares of its $1 par value common stock for $15,000. It later reissued all 1,000 shares for $19,000. Under the cost method, what is the impact of the reissuance transaction on Paxon's Additional Paid-in Capital?
   Answer: $4,000 increase Correct. The reissuance is recorded by debiting Cash for $19,000, crediting Treasury Stock for its cost of $15,000, and crediting Additional Paid-in Capital—Treasury Stock for the difference of $4,000. This increases total Additional Paid-in Capital by $4,000.
2. Under the cost method, when treasury stock is sold for less than its cost and the Additional Paid-in Capital—Treasury Stock account is not sufficient to absorb the entire 'loss', the excess is debited to Retained Earnings. What is the primary justification for this treatment?
   Answer: The excess is considered a distribution to shareholders, effectively a liquidating dividend that reduces retained earnings. Correct. Transactions in a company's own stock are viewed as capital transactions, not income-generating activities. A reissuance below cost is seen as a return of capital to the selling shareholder. Any 'loss' first reduces paid-in capital from previous treasury stock transactions. Any excess beyond that is treated as a reduction of the corporation's earned capital, i.e., retained earnings, conceptually similar to a dividend distribution.
3. What was Jenson's book value per share immediately after the treasury stock purchase?
   Answer: $14.47 Correct. First, calculate the new total stockholders' equity. Initial equity was $6,000,000. The purchase cost was $20,000 \times \$25 = \$500,000$. New equity is $\$6,000,000 - \$500,000 = \$5,500,000$. Second, calculate the new number of shares outstanding. Initial shares were 400,000. After the purchase, it is $400,000 - 20,000 = 380,000$. Book value per share is $\$5,500,000 / 380,000 \text{ shares} = \$14.47$.
4. What is the total stockholders' equity for Corbin Company immediately after the November 3, Year 1 transaction?
   Answer: $4,831,000 Correct. The initial purchase of 5,000 treasury shares at $25 per share decreased stockholders' equity by $5,000 \times \$25 = \$125,000$. The new total equity was $\$4,900,000 - \$125,000 = \$4,775,000$. The reissuance of 2,000 shares at $28 per share increased stockholders' equity by the cash proceeds of $2,000 \times \$28 = \$56,000$. Therefore, the final stockholders' equity is $\$4,775,000 + \$56,000 = \$4,831,000$.
5. A company has 1,000,000 shares of common stock issued. It holds 50,000 shares in its treasury. The company declares a cash dividend of $0.50 per share. What is the total amount of the cash dividend that will be paid?
   Answer: $475,000 Correct. Dividends are paid on shares that are outstanding, not on shares held in the treasury. The number of outstanding shares is the number of issued shares minus the number of treasury shares. Outstanding shares = $1,000,000 - 50,000 = 950,000$. Total dividend payment = $950,000 \text{ shares} \times \$0.50/\text{share} = \$475,000$.
6. Meridian Corp. uses the cost method for treasury stock. During 2024, the company had the following transactions: Repurchased 2,000 shares at $45 per share on March 1; Reissued 800 shares at $50 per share on July 15; Reissued 600 shares at $40 per share on November 30. What journal entry is required for the November 30 transaction?
   Answer: Debit Cash $24,000, Debit Paid-in Capital from Treasury Stock $3,000, Credit Treasury Stock $27,000 The November 30 transaction reissues 600 shares with treasury cost of $45 each for $40 each. Cash received: 600 × $40 = $24,000. Treasury stock reduced: 600 × $45 = $27,000. The $3,000 difference is a loss that should first be charged to Paid-in Capital from Treasury Stock Transactions (which has a $4,000 credit from the July transaction: 800 × ($50-$45)). Choice B incorrectly charges retained earnings when paid-in capital is available. Choice C ignores the cost difference. Choice D uses a non-specific account name.
7. What is the balance of Additional Paid-in Capital on August 11, assuming it was solely from the original stock issuance prior to the treasury stock transactions?
   Answer: $1,500,000 Correct. Under the cost method, transactions in treasury stock are recorded in separate equity accounts: Treasury Stock and Additional Paid-in Capital—Treasury Stock. The reissuance below cost, with no prior 'gains' on treasury stock, is debited to Retained Earnings. It does not affect the original Additional Paid-in Capital account from the issuance of stock. Therefore, the balance remains $1,500,000.
8. What is the balance in the Additional Paid-in Capital—Treasury Stock account after this transaction?
   Answer: $0 Correct. The cost per share is $\$60,000 / 2,000 = \$30$. The shares were sold for $26, a 'loss' of $4 per share. The total 'loss' is $2,000 \times \$4 = \$8,000$. The company had a $5,000 credit balance in APIC-TS. This balance is used to absorb the first $5,000 of the 'loss', reducing the APIC-TS balance to zero. The remaining $\$8,000 - \$5,000 = \$3,000$ is debited to Retained Earnings.
9. What is the total debit to Retained Earnings resulting from the November 5 treasury stock transaction?
   Answer: $0 Correct. The APIC-TS account had a beginning balance of $12,000. The July 22 transaction added $1,000 \times (\$30 - \$25) = \$5,000$ to this balance, making the total APIC-TS available $17,000. The 'loss' on the November 5 transaction was $1,500 \times (\$25 - \$18) = \$10,500$. Since the available balance in APIC-TS ($17,000) is greater than the 'loss' ($10,500), the entire amount is absorbed by APIC-TS. There is no debit to Retained Earnings.
10. Based on the T-account, which of the following statements is a correct interpretation of the year's events?
    Answer: Transaction (2) represents the sale of 4,000 treasury shares, which would be recorded with a debit to Cash. Correct. A credit to the Treasury Stock account under the cost method represents the reissuance of shares at their original cost. Transaction (2) is a credit of $120,000. Since the cost per share is $30, this represents the reissuance of $\$120,000 / \$30 = 4,000$ shares. The corresponding entry would include a debit to Cash for the proceeds.
11. When a company using the cost method purchases its own shares on the open market, which of the following statements correctly describes the immediate impact?
    Answer: The number of shares outstanding decreases, and total stockholders' equity decreases. Correct. Purchasing treasury stock involves an outflow of cash, which decreases total assets. The Treasury Stock account is a contra-equity account, so its increase causes a decrease in total stockholders' equity. The shares are still considered issued but are no longer outstanding. Therefore, the number of shares outstanding decreases.
12. Mesa Corp. holds 10,000 shares of treasury stock that was purchased at $16 per share. The company has a credit balance of $30,000 in Additional Paid-in Capital—Treasury Stock. What is the maximum number of these treasury shares Mesa can reissue at $12 per share without having to reduce its Retained Earnings?
    Answer: 7,500 shares Correct. The 'loss' per share upon reissuance at $12 is $\$16 - \$12 = \$4$. The company has a $30,000 balance in APIC-TS available to absorb this 'loss'. The maximum 'loss' that can be absorbed is $30,000. Therefore, the maximum number of shares that can be sold at a $4 'loss' per share is $\$30,000 / \$4/\text{share} = 7,500$ shares.
13. Quantum Industries has 80,000 shares of $15 par common stock outstanding. The company repurchases 6,000 shares at $42 per share and later reissues 4,000 shares at $38 per share. Assuming no previous treasury stock transactions and no existing balance in paid-in capital from treasury stock, what amount will be debited to Retained Earnings in the reissuance transaction?
    Answer: $16,000 Reissuance of 4,000 shares at $38 vs. cost of $42 creates a $16,000 loss (4,000 × $4). Since there is no existing credit balance in Paid-in Capital from Treasury Stock Transactions, the entire $16,000 loss must be charged to Retained Earnings. Choice A incorrectly assumes no loss. Choice C doubles the loss amount. Choice D uses an irrelevant calculation.
14. What is the balance in Roro's Additional Paid-in Capital from Common Stock account at the end of Year 3?
    Answer: $50,000 Correct. The APIC from common stock is created at the original issuance and is not affected by treasury stock transactions under the cost method. The original issuance was 10,000 shares at $15, with a par of $10. The APIC per share was $\$15 - \$10 = \$5$. Total APIC from common stock is $10,000 \text{ shares} \times \$5/\text{share} = \$50,000$. The 'loss' on the treasury stock sale affects Retained Earnings (since there was no APIC-TS), not the original APIC from common stock.
15. A corporation purchased 10,000 shares of its own common stock at $20 per share and later sold 8,000 of the treasury shares at $28 per share. On the statement of cash flows, how would the net effect of these two transactions be reported?
    Answer: Cash outflow for financing activities of $200,000 and cash inflow from financing activities of $224,000. Correct. Transactions involving a company's own equity, including treasury stock, are classified as financing activities. The purchase of treasury stock is a cash outflow of $10,000 \times \$20 = \$200,000$. The sale of treasury stock is a cash inflow of $8,000 \times \$28 = \$224,000$. Both of these should be reported separately (or netted, but the components are key) in the financing activities section.
16. A company reacquires 5,000 shares of its own stock for $100,000 and properly records the transaction using the cost method. If these shares were subsequently reissued for $85,000, which of the following would be part of the journal entry for the reissuance, assuming the company has a zero balance in Additional Paid-in Capital—Treasury Stock?
    Answer: A debit to Retained Earnings for $15,000. Correct. The reissuance entry is: Debit Cash for $85,000. Since there is no APIC-TS balance, the $15,000 'loss' (difference between cost of $100,000 and proceeds of $85,000) is debited to Retained Earnings. Treasury Stock is credited for its original cost of $100,000 to remove it from the books. The entry is: Dr. Cash $85,000; Dr. Retained Earnings $15,000; Cr. Treasury Stock $100,000.
17. Quincy Inc. engaged in two treasury stock transactions. First, it acquired 2,000 shares of its $1 par value stock at $20 per share. Second, it reissued 1,200 of these shares at $25 per share. Which of the following correctly describes the net effect of these two transactions on Quincy's financial statements?
    Answer: A net decrease in stockholders' equity of $10,000 and no effect on net income. Correct. The purchase of treasury stock decreased equity by $2,000 \times \$20 = \$40,000$. The reissuance increased equity by the proceeds of $1,200 \times \$25 = \$30,000$. The net effect on total stockholders' equity is a decrease of $\$40,000 - \$30,000 = \$10,000$. Transactions involving a company's own stock are capital transactions and do not affect net income. The 'gain' on reissuance is credited to APIC-TS.
18. On June 1, a company with 500,000 shares of common stock issued and outstanding purchased 30,000 shares of its own stock for the treasury at $40 per share. On September 15, the company reissued 10,000 of these treasury shares for $47 per share. On November 30, the company reissued another 15,000 treasury shares for $36 per share. What is the balance in the Treasury Stock account as of December 31?
    Answer: $200,000 Correct. The Treasury Stock account is maintained at cost. The initial purchase was $30,000 \text{ shares} \times \$40 = \$1,200,000$. The first reissuance reduced the account by the cost of the shares sold: $10,000 \text{ shares} \times \$40 = \$400,000$. The second reissuance further reduced the account by the cost of the shares sold: $15,000 \text{ shares} \times \$40 = \$600,000$. The ending balance is $\$1,200,000 - \$400,000 - \$600,000 = \$200,000$. This represents the cost of the remaining 5,000 shares $(5,000 \times \$40)$.
19. On January 15, Year 2, Newport reissued 5,000 shares of its treasury stock for $20 per share. What is the carrying value of total stockholders' equity immediately after this transaction?
    Answer: $2,370,000 Correct. The reissuance of treasury stock increases total stockholders' equity by the amount of cash proceeds received. The proceeds are $5,000 \text{ shares} \times \$20/\text{share} = \$100,000$. The new total stockholders' equity is the previous balance plus the proceeds: $\$2,270,000 + \$100,000 = \$2,370,000$. The gain or loss on the reissuance affects components within equity (APIC-TS or Retained Earnings) but does not change the total impact, which is simply the cash inflow.
20. Phoenix Corp. has the following treasury stock activity during the year: January 15: Purchased 1,000 shares at $50 per share; March 20: Sold 400 shares at $45 per share; June 10: Purchased 500 shares at $55 per share; September 5: Sold 600 shares at $60 per share. Using the cost method with FIFO for reissuances, what is the balance in the Treasury Stock account at year-end?
    Answer: $27,500 debit balance Purchases: 1,000 × $50 = $50,000 + 500 × $55 = $27,500, total $77,500. Sales using FIFO: First 400 shares from January lot at $50 = $20,000 removed. Next 600 shares: 600 remaining from January lot at $50 = $30,000 removed. Total removed: $50,000. Remaining treasury stock: $77,500 - $50,000 = $27,500 (500 shares from June purchase at $55). Choice B incorrectly uses average cost. Choice C fails to remove the second sale. Choice D assumes all sales were from the June purchase.

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