CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingMedium
A publicly traded company, Sigma Corp., issued 1,000 shares of $1 par value common stock for $50 per share. Later in the year, Sigma Corp. repurchased 100 shares of its own common stock for $60 per share. The company uses the cost method to account for treasury stock. What is the impact of the repurchase on Sigma Corp.'s total stockholders' equity?
- ADecrease of $6,000
- BDecrease of $5,000
- CIncrease of $5,000
- DIncrease of $6,000
Show answer & explanationAnswer & explanation
Correct answer: A. Decrease of $6,000
Under the cost method, treasury stock is recorded at its cost of acquisition. Repurchasing shares reduces both cash and stockholders' equity by the amount paid for the shares. The par value and original issue price are irrelevant for the initial recording of treasury stock under the cost method.
Why the other options are wrong
- B. This uses the original issue price ($50) instead of the repurchase price ($60).
- C. This incorrectly assumes an increase in equity and uses the original issue price.
- D. This incorrectly assumes an increase in equity.
Treasury Stock (Cost Method)
A company's own stock that it has repurchased from the open market and holds, recorded at its acquisition cost.
- Reduces total stockholders' equity.
- Not considered an asset.
- Recorded at the cost of acquisition when repurchased.
Memory trick: Cost Method: What It Cost, That's What It Is.