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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 retires its own common stock, the company must:

  1. record a gain or loss depending on the difference between original selling price and repurchase cost.
  2. decrease the Common Stock account balances by the original issue price.
  3. get the approval of the state to do so.
  4. issue a different class of stock to the former stockholders.

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 correct statement about retirement of own Common stock.

Explanation

Explanation for correct answer:

When Company retires its own common stock; it decreases the Common Stock account balances by the original issue price. Hence the correct option is b.

Explanation for incorrect answers:

a. When Company retires its own common stock; it decreases the Common Stock account balances by the original issue price...

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