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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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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.

1.

To determine

Write a short report on “purchase of shares at a price less than par value” that compares and contrasts the cost method with par value method.

Explanation

Cost method: Under this method, at the time of reacquiring the treasury stock, it will be debited for the amount paid. At the time of reissuance, treasury stock will be credited and cash will be debited with the proceeds received. Credit the additional paid-in capital for the difference amount.

Par value method: Under this method, at the time of reacquiring the treasury stock, it will be debited with par valu...

2.

To determine

Write a short report on “purchase of shares at a price greater than par value” that compares and contrasts the cost method with par value method.

3.

To determine

Write a short report on “subsequent resale of treasury shares at a price less than purchase price, but more than par value” that compares and contrasts the cost method with par value method.

4.

To determine

Write a short report on “subsequent resale of treasury shares at a price greater than both purchase price and par value” that compares and contrasts the cost method with par value method.

5.

To determine

Write a short report on “effect on net income” that compares and contrasts the cost method with par value method.

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