CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingMedium
A company issued 10,000 shares of $1 par value common stock for $50 per share. Later in the year, the company repurchased 1,000 of these shares for $60 per share and accounted for them using the cost method. What is the impact of the repurchase on the company's total stockholders' equity?
- ADecrease of $60,000.
- BIncrease of $60,000.
- CDecrease of $50,000.
- DIncrease of $50,000.
Show answer & explanationAnswer & explanation
Correct answer: A. Decrease of $60,000.
Under the cost method, treasury stock is recorded at its cost of acquisition. When a company repurchases its own shares, it reduces the amount of outstanding equity. The repurchase of 1,000 shares at $60 per share results in a decrease to total stockholders' equity of 1,000 shares * $60/share = $60,000. This is reflected by debiting Treasury Stock (a contra-equity account) and crediting Cash.
Why the other options are wrong
- B. Repurchasing shares decreases, not increases, stockholders' equity.
- C. This reflects the original issuance price, not the repurchase price.
- D. This reflects the original issuance price, not the repurchase price, and is an increase instead of a decrease.
Treasury Stock (Cost Method)
Under the cost method, treasury stock is recorded at the cost of its acquisition and is presented as a contra-equity account, reducing total stockholders' equity.
- Recorded at acquisition cost.
- Contra-equity account on the balance sheet.
- Reduces total stockholders' equity.
Memory trick: Cost method's simple: record what you paid, equity shrinks, no par value parade.