Textbook Problem

Treasury Stock

For numerous reasons, a corporation may reacquire shares of its own capital stock. When a corporation purchases treasury stock, it has two options as to how to account for the shares: (1) the cost method and (2) the par value method.

Required:

Write a short report that compares and contrasts the cost method with the par value method for each of the following:

1. 1. Purchase of shares at a price less than par value.
2. 2. Purchase of shares at a price greater than par value.
3. 3. Subsequent resale of treasury shares at a price less than purchase price, but more than par value.
4. 4. Subsequent resale of treasury shares at a price greater than both purchase price and par value.
5. 5. Effect on net income.