Multiple Choice
Which of the following statements regarding treasury stock is false?
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12. Stockholders' Equity
Treasury Stock
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When treasury stock is purchased, what is the effect on total shareholders' equity?
A
Total shareholders' equity decreases.
B
Total shareholders' equity increases.
C
Total shareholders' equity is transferred to retained earnings.
D
Total shareholders' equity remains unchanged.
Verified step by step guidance1
Understand the concept of treasury stock: Treasury stock refers to shares that a company has repurchased from its shareholders. These shares are held by the company and are not considered outstanding shares.
Recognize the accounting treatment for treasury stock: When a company purchases treasury stock, it reduces the total shareholders' equity because the cost of the repurchased shares is recorded as a deduction in the equity section of the balance sheet.
Identify the impact on the financial statements: The purchase of treasury stock does not affect retained earnings directly. Instead, it reduces the 'Treasury Stock' account, which is a contra-equity account, leading to a decrease in total shareholders' equity.
Analyze the options provided: Evaluate each option in the problem. The correct answer is the one that reflects the decrease in total shareholders' equity due to the treasury stock purchase.
Conclude the reasoning: Based on the accounting principles, purchasing treasury stock decreases total shareholders' equity because it reduces the amount of equity available to shareholders.
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