CPA Financial Accounting and Reporting Far Quiz: Account For Treasury Stock Transactions

What this quiz covers

This quiz focuses on Account For Treasury Stock Transactions, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Debit Cash $55,000; Credit Treasury Stock$40,000; Credit APIC-Treasury Stock $15,000. (correct answer)
2. Debit Cash $55,000; Credit Common Stock$1,000; Credit APIC $54,000.
3. Debit Cash $55,000; Credit Treasury Stock$55,000.
4. Debit Cash $55,000; Credit Gain on Sale of Treasury Stock$15,000; Credit Treasury Stock $40,000.

Explanation: 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.

Question 2

1. EPS increases because the repurchase reduces the weighted-average shares outstanding in the denominator. (correct answer)
2. EPS is unaffected because treasury stock is not a liability.
3. EPS decreases because net income is reduced by the repurchase cost.
4. EPS decreases because total equity is reduced, lowering book value per share.

Explanation: Treasury stock repurchases reduce the number of shares outstanding, which decreases the weighted-average shares outstanding used in the EPS denominator. With the same net income spread over fewer shares, EPS increases. Answer A is correct. Answer B is incorrect - while the repurchase is not a liability, it does affect EPS through the denominator. Answer C is incorrect - the repurchase does not reduce net income; it is an equity transaction with no income statement effect. Answer D confuses book value per share with EPS; reducing total equity lowers book value per share but does not decrease EPS.

Question 3

1. As an asset, since the company holds the shares and can resell them.
2. As a contra-equity account deducted from total stockholders' equity. (correct answer)
3. As a long-term investment at fair market value.
4. As a reduction of retained earnings only.

Explanation: 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.

Question 4

1. $200,000
2. $120,000
3. $104,000 (correct answer)
4. $116,000

Explanation: 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.

Question 5

1. Debit Charitable Contribution Expense $10,000; Credit Treasury Stock$10,000.
2. Debit Charitable Contribution Expense $11,000; Credit Treasury Stock$10,000; Credit Gain $1,000.
3. Debit Charitable Contribution Expense $11,000; Credit Treasury Stock$10,000; Credit APIC-Treasury Stock $1,000. (correct answer)
4. No entry; donated shares are removed from treasury stock with no expense.

Explanation: 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.

Question 6

1. Treasury Stock increases by $30,000; Cash decreases by$30,000; no change to Common Stock or APIC. (correct answer)
2. Common Stock decreases by $2,000; APIC decreases by$28,000; Cash decreases by $30,000.
3. Treasury Stock increases by $2,000; APIC decreases by$28,000; Cash decreases by $30,000.
4. Retained Earnings decreases by $30,000; Cash decreases by$30,000.

Explanation: 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.

Question 7

1. Gains on treasury stock reissuance above cost increase net income.
2. Treasury stock transactions have no effect on net income; they are equity transactions. (correct answer)
3. Losses on treasury stock reissuance below cost decrease net income.
4. Treasury stock repurchases create a loss equal to the premium paid over book value.

Explanation: 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.

Question 8

1. Total stockholders' equity increases because the contra-equity Treasury Stock account is eliminated.
2. Total stockholders' equity decreases by the par value of the retired shares.
3. Total stockholders' equity is unchanged; retirement reclassifies amounts within equity. (correct answer)
4. Total stockholders' equity increases by the APIC eliminated in the retirement entry.

Explanation: 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.

Question 9

1. Debit Common Stock $2,000; Debit APIC$68,000; Credit Cash $70,000.
2. Debit Treasury Stock $2,000; Credit Cash$2,000.
3. Debit Retained Earnings $70,000; Credit Cash$70,000.
4. Debit Treasury Stock $70,000; Credit Cash$70,000. (correct answer)

Explanation: 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.

Question 10

1. Debit Cash $48 per share; Credit Treasury Stock$48 per share. (correct answer)
2. Debit Cash $48 per share; Credit Retained Earnings$48 per share.
3. Debit Cash $48 per share; Credit Common Stock$48 per share.
4. No entry required since there is no gain or loss.

Explanation: When treasury stock is reissued at exactly its cost, Cash is debited and Treasury Stock is credited at cost. There is no excess or deficiency, so no APIC or Retained Earnings entry is needed. Answer A is correct. Answer B credits Retained Earnings rather than Treasury Stock. Answer C credits Common Stock, which is not affected by treasury stock reissuances under the cost method. Answer D incorrectly omits the entry entirely - the transaction still needs to be recorded even when there is no gain or loss.

Question 11

1. Declaring a cash dividend.
2. Repurchasing treasury stock for cash. (correct answer)
3. Issuing a stock dividend.
4. Completing a stock split.

Explanation: 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.

Question 12

1. Debit Common Stock $1,000; Credit Treasury Stock$25,000; Credit Retained Earnings $24,000.
2. Debit Treasury Stock $25,000; Credit Common Stock$1,000; Credit APIC $24,000.
3. Debit Common Stock $1,000; Debit APIC$17,000; Debit APIC-Treasury Stock $7,000; Credit Treasury Stock$25,000.
4. Debit Common Stock $1,000; Debit APIC$17,000; Debit Retained Earnings $7,000; Credit Treasury Stock$25,000. (correct answer)

Explanation: 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.

Question 13

1. Loss on Sale of Treasury Stock, recognized in the income statement.
2. Additional Paid-In Capital from original issuance.
3. Common Stock at par value.
4. Retained Earnings. (correct answer)

Explanation: 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.

Question 14

1. $220,000 (correct answer)
2. $250,000
3. $190,000
4. $280,000

Explanation: 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.

Question 15

1. A gain is recognized in the income statement for the excess of reissuance price over cost.
2. The excess is credited to Retained Earnings.
3. The excess is credited to Common Stock.
4. The excess is credited to APIC-Treasury Stock. (correct answer)

Explanation: Under the cost method, when treasury shares are reissued above cost, the excess of reissuance price over cost is credited to APIC-Treasury Stock (a separate paid-in capital account). No gain is recognized on the income statement - treasury stock transactions never produce income statement effects. Answer D is correct. Answer A records a gain, which is prohibited for equity transactions. Answer B credits Retained Earnings, which is only used when the deficiency exceeds available APIC-Treasury Stock balances (for below-cost reissuances). Answer C credits Common Stock at par, which is not affected by treasury stock reissuances under the cost method.

Question 16

1. 20,000 shares
2. 10,500 shares (correct answer)
3. 12,000 shares
4. 15,000 shares

Explanation: Stock dividends are issued on shares outstanding, not shares issued or authorized. Shares outstanding = 120,000 - 15,000 = 105,000. Stock dividend shares = 105,000 x 10% = 10,500. Answer B is correct. Answer A applies 10% to issued shares (120,000). Answer C applies 10% to a different base. Answer D incorrectly equals the treasury share count.

Question 17

1. Treasury Stock at the full repurchase price only.
2. Common Stock at par, APIC for the original premium, and Retained Earnings for any excess of repurchase price over original issuance price. (correct answer)
3. Retained Earnings for the full repurchase price.
4. Treasury Stock at par and APIC for the remainder.

Explanation: 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.

Question 18

1. Debit Cash $125,000; Credit Treasury Stock$125,000.
2. Debit Cash $125,000; Debit APIC-Treasury Stock$25,000; Credit Treasury Stock $150,000.
3. Debit Cash $125,000; Debit Retained Earnings$25,000; Credit Treasury Stock $150,000. (correct answer)
4. Debit Cash $125,000; Debit Loss on Treasury Stock$25,000; Credit Treasury Stock $150,000.

Explanation: Reissuance proceeds = 2,500 x $50 =$125,000. Treasury Stock at cost = 2,500 x $60 =$150,000. Deficiency = $25,000. With no APIC-Treasury Stock balance available, the full deficiency is charged to Retained Earnings. Entry: Debit Cash$125,000, Debit Retained Earnings $25,000, Credit Treasury Stock$150,000. Answer C is correct. Answer A credits Treasury Stock at reissuance price rather than cost. Answer B debits APIC-Treasury Stock when the balance is zero. Answer D records an income statement loss, which is not permitted.

Question 19

1. Retained Earnings decreases by $5,000.
2. Retained Earnings decreases by $5,000 offset by a gain.
3. Retained Earnings decreases by $2,000. (correct answer)
4. Retained Earnings is not affected.

Explanation: Reissuance proceeds = $65,000. Cost of treasury stock =$70,000. Deficiency = $5,000. Available APIC-Treasury Stock =$3,000, which absorbs the first $3,000. Remaining deficiency charged to Retained Earnings =$5,000 - $3,000 =$2,000. Entry: Debit Cash $65,000, Debit APIC-Treasury Stock$3,000, Debit Retained Earnings $2,000, Credit Treasury Stock$70,000. Answer C is correct. Answer A charges the full $5,000 to Retained Earnings, ignoring available APIC-Treasury Stock. Answer B incorrectly records a gain. Answer D ignores the deficiency entirely.

Question 20

1. The cost method records treasury stock at par value; the par value method records it at cost.
2. 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. (correct answer)
3. Both methods produce identical balance sheet totals; they differ only in income statement presentation.
4. The cost method is required by U.S. GAAP; the par value method is only permitted under IFRS.

Explanation: 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.