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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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When a company purchases treasury stock, which of the following statements is true?

  1. Dividends continue to be paid on the treasury stock.
  2. It is no longer considered to be issued.
  3. The cost of the treasury stock reduces stockholders’ equity.

d. Treasury stock is considered to be an asset because cash is paid for the stock.

To determine

Concept introduction:

Treasury stock:

Treasury stock is the shares bought back by the company itself. A company may purchase its own shares and the shares bought back are called treasury stock. The journal entries are made at the time of sale and purchase of treasury stock as follows:

  • For Purchase of treasury stock:

    Treasury stock account is debited and cash account is credited with the cost of treasury stock purchased.

  • For Sale / Reissuance of treasury stock:

    Cash account is debited for the amount received on sale of treasury stock and the Treasury stock account is credited with the cost of treasury stock. For the difference in cost and sale value, Additional Paid in Capital and Retained earnings accounts are adjusted.

To choose:

The true statement about treasury stock.

Explanation

Explanation for correct answer:

The Cost of the treasury stock reduces the stockholder’s equity. Hence the correct option is c.

Explanation for incorrect answers:

a. Dividends are not paid to shares in treasury stock...

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