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Treasury Stock quiz #1 Flashcards

Treasury Stock quiz #1
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  • What is treasury stock and how does it affect a company's equity?
    Treasury stock refers to shares that a company has issued and then repurchased from the market. It is a contra equity account with a debit balance, reducing the company's total equity.
  • How is treasury stock recorded on the balance sheet?
    Treasury stock is recorded as a contra equity account with a debit balance, reducing total stockholders' equity on the balance sheet.
  • Do treasury stock shares receive dividends? Why or why not?
    No, treasury stock shares do not receive dividends because the company cannot pay dividends to itself; only outstanding shares receive dividends.
  • What is the formula to calculate the number of treasury stock shares?
    Treasury stock shares = Issued shares - Outstanding shares.
  • When a company repurchases its own stock, what journal entry is made under the cost method?
    The company debits treasury stock and credits cash for the total cost of the repurchased shares.
  • Why is treasury stock considered a contra equity account rather than an asset?
    Treasury stock is a contra equity account because it represents the company's own shares repurchased, reducing equity rather than representing an asset.
  • What happens to equity when a company repurchases treasury stock?
    Equity decreases by the amount spent to repurchase the treasury stock.
  • How is the resale of treasury stock at a price higher than its repurchase price recorded?
    Cash is debited for the amount received, treasury stock is credited for the original cost of the shares sold, and the difference is credited to Additional Paid-In Capital (APIC).
  • If treasury stock is resold at a price lower than its repurchase price, how is the difference accounted for?
    The difference is debited to Additional Paid-In Capital (APIC) to balance the entry, without affecting the income statement.
  • Does the sale of treasury stock result in a gain or loss on the income statement?
    No, the sale of treasury stock does not result in a gain or loss on the income statement; differences are adjusted through APIC in equity.
  • What is the overall effect on the balance sheet when treasury stock is resold?
    Reselling treasury stock increases assets (cash) and increases equity by reducing the contra equity balance and adjusting APIC.
  • Why is the par value of stock not relevant when recording treasury stock transactions under the cost method?
    Under the cost method, only the amount paid to repurchase the stock is recorded; the par value is ignored.
  • What is the most challenging aspect of accounting for treasury stock transactions?
    The most challenging aspect is determining the correct proportion of the original treasury stock balance to remove when only part of the repurchased shares are resold.