CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingEasy
A company issued 10,000 shares of $1 par value common stock for $50 per share. Later in the year, the company reacquired 1,000 shares of its own common stock for $60 per share and accounted for it using the cost method. What is the impact on the company's total stockholders' equity as a result of the treasury stock reacquisition?
- ADecrease of $50,000
- BDecrease of $60,000
- CIncrease of $50,000
- DIncrease of $60,000
Show answer & explanationAnswer & explanation
Correct answer: B. Decrease of $60,000
Under the cost method, treasury stock is recorded at its cost of reacquisition. When a company reacquires its own shares, it reduces both cash and stockholders' equity by the cost of the reacquired shares. Therefore, 1,000 shares * $60/share = $60,000 decrease.
Why the other options are wrong
- A. This is a decrease, but uses the original issuance price instead of the reacquisition cost.
- C. This would be an increase, and uses the original issuance price, not the reacquisition cost.
- D. Reacquisition of treasury stock decreases, not increases, stockholders' equity.
Treasury Stock (Cost Method)
Treasury stock reacquired under the cost method is recorded at its purchase price, reducing total stockholders' equity.
- Treasury stock is contra-equity account, reducing total equity.
- No gain or loss is recognized on the reacquisition of treasury stock.
- The par value of the stock is irrelevant for the initial reacquisition entry under the cost method.
Memory trick: Buyback means Equity Shrinks: Cash Out, Equity Down.