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Topic: Treasury stock – Cost or Par Value method (

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ssham1976
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Posted: 18 Jul 2009 at 17:47 \| IP Logged

c is the answer without even trying to do any journal entries or trying to know which method to use

1. net income is never touched when you are dealing with treasury shares - apic takes all the difference

2. retained earnings is never increased , only decreased debited

3. answer c is correct based on the above elimination

divyagovil1
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Posted: 18 Jul 2009 at 18:05 \| IP Logged

that's correct, ssham1976... However, it's always useful to understand the concept... Since you know the concept, you knew the answer... :)

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Jerry
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Posted: 19 Jul 2009 at 02:41 \| IP Logged

IrvineCPA wrote:

Thank you my friends. I think you both are rightbased on the answer. How would the entries look like ?

The problem is from Gleim, SU#14, Q#8.

In year 2, Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock transaction occurred until March 31, Year 4, when Fogg acquired some of the issued shares for $20 per share and retired them. Which of the following statement accurately states an effect of this acquisition and retirement?

Year 4 net income is decreased
Year 4 net income is increased
Additional paid in capital is decreased
Retained earnings is increased.

Answer is ‘C”

The answer is the Par Method. APIC is debited upon purchase of Treasury Stock in 2004.

Legal (or Par/Stated Value) Method

Journal Entry to Record Purchase of Treasury Stock:

(Example displays stock originally sold at $10 per share.)

Dr: Treasury stock (1,000 shares @ $1 par)

Dr: Additional paid-in capital (pro rata: 1,000 * $9)

Dr: Retained earnings (1,000 * $5)

Cr: Cash (paid for treasury stock)

$9 = ($10 price at issuance - $1 par)

Cost Method

The answer cannot be the Cost Method because only cash is credited and APIC is not debited.

Journal Entry to Record Purchase of Treasury Stock:

Dr: Treasury stock (shares @ per share cost)

Cr: Cash (paid for treasury stock)

Year 2 is just the issuance of stock:

Dr: Cash $25

Cr: C.S. $10

Cr: APIC $15

IrvineCPA
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Posted: 19 Jul 2009 at 10:43 \| IP Logged

Thank you all and Jerry !

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