Multiple Choice
Shares of stock that are repurchased by the issuing corporation are referred to as ______ stock.
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12. Stockholders' Equity
Treasury Stock
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When a corporation acquires shares of its own common stock, it records a:
A
debit to Treasury Stock
B
credit to Additional Paid-in Capital
C
debit to Retained Earnings
D
credit to Common Stock
Verified step by step guidance1
Understand the concept of Treasury Stock: Treasury Stock represents shares that a corporation has repurchased from its shareholders. These shares are held by the corporation and are not considered outstanding for purposes like dividends or voting rights.
Recognize the accounting treatment for Treasury Stock: When a corporation acquires its own shares, it records the transaction by debiting the Treasury Stock account. This reduces the equity section of the balance sheet because Treasury Stock is a contra-equity account.
Clarify why Additional Paid-in Capital is not credited: Additional Paid-in Capital is typically used to record amounts received above the par value of stock during issuance, not for repurchasing shares. Therefore, it is not involved in this transaction.
Explain why Retained Earnings is not debited: Retained Earnings is not directly affected by the repurchase of shares. Instead, the repurchase is recorded in the Treasury Stock account, which impacts the equity section.
Understand why Common Stock is not credited: Common Stock represents the par value of shares issued and outstanding. Repurchasing shares does not affect the Common Stock account; it only reduces the number of shares outstanding and increases Treasury Stock.
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