Multiple Choice
When a corporation acquires shares of its own common stock, it records a:
25
views
12. Stockholders' Equity
Treasury Stock
Struggling with Financial Accounting?
Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following is true regarding the accounting for treasury stock?
A
The purchase of treasury stock increases the number of shares outstanding.
B
Treasury stock is classified as an asset on the balance sheet.
C
Treasury stock is recorded as a deduction from total stockholders' equity on the balance sheet.
D
Dividends are paid on treasury stock held by the company.
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 not considered outstanding and do not have voting rights or receive dividends.
Analyze the first statement: 'The purchase of treasury stock increases the number of shares outstanding.' This is incorrect because treasury stock reduces the number of shares outstanding, as repurchased shares are no longer available in the market.
Evaluate the second statement: 'Treasury stock is classified as an asset on the balance sheet.' This is incorrect because treasury stock is not an asset; it is recorded as a contra-equity account, reducing total stockholders' equity.
Examine the third statement: 'Treasury stock is recorded as a deduction from total stockholders' equity on the balance sheet.' This is correct because treasury stock reduces the equity section of the balance sheet, reflecting the cost of repurchased shares.
Review the fourth statement: 'Dividends are paid on treasury stock held by the company.' This is incorrect because dividends are not paid on treasury stock, as these shares are not considered outstanding and do not participate in dividend distributions.
Related Videos
Related Practice
