FAR · Select balance sheet accounts · 9 practice questions
Treasury Stock Cost Method: Reissue Above or Below Cost
Under the cost method, reissuance differences stay in equity: above cost goes to APIC, treasury; below cost uses that APIC before retained earnings. Use the decision tree to choose the journal entry, then try the free practice questions.
Try one first
Hint
First identify which equity balance is used before retained earnings when reissued below cost, then apply the stated APIC balance.
Answer B. Under the cost method, a reissuance below reacquisition cost creates a deficit that is first absorbed by any paid-in capital specifically attributable to prior treasury-stock transactions. Only if those treasury-related APIC balances are insufficient is any remaining shortfall charged to retained earnings. Here, the treasury-related APIC is zero, so the full $50,000 deficit reduces retained earnings.
Why not A: Tempting because cost and par methods produce different equity entries and presentation; however, which account actually absorbs a reissuance deficit depends on whether treasury-related APIC exists, not simply which method is in use.
Why not C: Tempting because reissuing below cost does create a deficit, but that trigger does not by itself determine whether APIC or retained earnings is charged, the allocation depends on whether treasury-related APIC can absorb the deficit.
Why not D: Tempting because retirement status affects whether shares may be reissued, but the facts state the shares were reissued as treasury shares. Retirement versus treasury status does not govern how a deficit on a treasury reissuance is allocated between APIC and retained earnings.
Decide it in order
T1Are reissue proceeds above the repurchase cost of the shares reissued?
YesDebit Cash for proceeds. Credit Treasury Stock for cost. Credit APIC, treasury for the excess. Retained earnings is unchanged.NoGo to T2T2Do reissue proceeds equal the repurchase cost of the shares reissued?
YesDebit Cash and credit Treasury Stock for the same amount. No APIC or retained earnings adjustment.NoGo to T3T3Is the APIC, treasury credit balance at least the shortfall (cost minus proceeds)?
YesDebit Cash for proceeds and APIC, treasury for the shortfall. Credit Treasury Stock for cost. Retained earnings is unchanged.NoGo to T4T4Does APIC, treasury have any credit balance?
YesDebit Cash for proceeds. Debit APIC, treasury to zero and retained earnings for the remaining shortfall. Credit Treasury Stock for cost.NoDebit Cash for proceeds and retained earnings for the full shortfall. Credit Treasury Stock for cost. Do not use APIC, common.
Key points
- Remember: A $2,000 shortfall with $1,500 of APIC, treasury means debit APIC $1,500 and retained earnings $500.
- Treasury Stock is contra-equity, not an asset; repurchases reduce cash and total equity by cost.
- Ending Treasury Stock equals repurchase cost per share times shares still held.
- Reissuance increases total equity by cash received, even when proceeds are below cost.
How the exam traps you
- Compare the reissue price with par value or the original issue price. Compare proceeds with the repurchase cost of the shares reissued.
- Record a gain or loss in the income statement. Keep the difference within equity. Treasury stock transactions never create gains or losses in net income.
- Debit APIC, common or retained earnings before using APIC, treasury. Use APIC, treasury first, stopping at zero. Debit retained earnings for the remainder; leave APIC, common unchanged.
Question 2
| Account | Amount |
|---|---|
| Common stock, $5 par, 200,000 shares issued | $1,000,000 |
| Additional paid-in capital—common | $2,400,000 |
| Retained earnings | $1,800,000 |
| Treasury stock, at cost, representing 30,000 shares | $420,000 |
| Additional paid-in capital from treasury stock transactions | $36,000 |
Hint
Track the order of events carefully, and separate the retained-earnings effect of a small stock dividend from the APIC effect of reissuing treasury shares below cost.
Answer B. Treasury stock cost per share is $420,000 ÷ 30,000 = $14. Reissuing 10,000 shares at $12 produces a $20,000 deficiency that is absorbed by APIC from treasury stock (reducing it from $36,000 to $16,000), so retained earnings is unaffected by the reissuance. After the reissuance there are 180,000 shares outstanding, so the 10% small stock dividend is 18,000 shares × $16 market price = $288,000; retained earnings = $1,800,000 − $288,000 = $1,512,000.
Why not A: This reflects computing the 10% dividend on the 170,000 shares outstanding before the treasury reissuance (17,000 shares × $16 = $272,000) instead of on the 180,000 shares outstanding after the reissuance. The sequence matters, the reissuance occurred before the dividend.
Why not C: This represents treating the 10% distribution as a large stock dividend and charging retained earnings only for par value. A small stock dividend is recorded at market value, so retained earnings must be reduced by the market value of the shares distributed.
Why not D: This reflects correctly computing the $288,000 reduction for the small stock dividend but also incorrectly charging the $20,000 treasury reissuance shortfall to retained earnings. Under the cost method the shortfall reduces APIC from treasury stock first; retained earnings are affected only if that APIC is insufficient.
Question 3
Hint
Think about the journal entry under the cost method and whether treasury stock is reported as an asset or within equity.
Answer C. Under the cost method, repurchasing treasury stock is recorded as a debit to Treasury Stock and a credit to Cash. Cash (an asset) decreases, and Treasury Stock is a contra-equity account, so total stockholders' equity decreases by the cost of the repurchase. No gain or loss is recognized on the company's purchase of its own shares.
Why not A: This incorrectly treats treasury stock as an asset that offsets the cash outflow. Treasury stock is not an asset; the cash payment reduces total assets.
Why not B: This confuses repurchases with issuances; issuing stock increases equity, but repurchasing stock uses cash and records treasury stock (a contra-equity), which decreases equity rather than increasing it.
Why not D: This ignores the equity-side entry. The debit to Treasury Stock (a contra-equity account) reduces total stockholders' equity as well as assets.
Question 4
Hint
Focus on the basis used under the cost method when treasury shares are reissued, and separate that from the balance of any shares still held.
Answer D. Under the cost method, treasury stock is recorded at the reacquisition cost of $16 per share. When Kerr reissued 500 treasury shares at $19, the $3 excess per share (19 − 16) is credited to additional paid-in capital from treasury stock. Therefore, Kerr reports $1,500 (500 × $3) in that account at December 31, Year 1.
Why not A: This equals the cost of the 300 treasury shares still held at year-end (300 × $16) and represents the ending treasury stock balance, not additional paid-in capital from treasury stock.
Why not B: Tempting if a candidate incorrectly thinks any excess on reissue can't be credited to equity at all; however, under the cost method an excess of reissue price over cost is credited to additional paid-in capital from treasury stock, so $0 is incorrect.
Why not C: This reflects (19 − 14) × 500, which incorrectly compares the reissue price to the original issuance price. The cost method uses the reacquisition cost ($16), not the original issuance price ($14).
Question 5
Hint
Compute (reissue price − repurchase cost) × shares reissued to get the dollar amount, then decide whether that amount flows to income, retained earnings, or paid‑in capital.
Answer D. Under the cost method, treasury shares are removed at their original cost; any excess of reissue proceeds over cost is recorded in Additional Paid‑In Capital. Calculation: (25 − 20) × 5,000 = $25,000, so debit Cash $125,000; credit Treasury Stock $100,000; credit APIC $25,000. GAAP does not recognize a gain in net income on transactions in the entity's own stock.
Why not A: Tempting because selling an asset above its cost normally produces a gain; however, treasury stock transactions involve the company's own equity. GAAP treats the excess over cost as a capital transaction (APIC), not as income.
Why not B: Some may confuse distributions with treasury transactions. Reissuing treasury shares above cost increases APIC (equity) and does not reduce Retained Earnings, retained earnings are affected only in limited below‑cost situations after APIC from prior treasury transactions is exhausted.
Why not C: This appeals to candidates who equate reissuance with a fresh issuance. Under the cost method, reissued treasury shares do not increase the Common Stock account (those shares were not retired); instead Treasury Stock is reduced and any excess proceeds are credited to APIC.
Question 6
Hint
Focus on two points: treasury stock transactions do not create gains or losses, and a reissue below cost uses APIC from treasury stock first, then retained earnings if necessary.
Answer C. Under the cost method, treasury stock is carried at its repurchase cost, so the 400 shares being reissued have a cost of $7,200 and generate only $6,000 of cash proceeds. The $1,200 shortfall is not reported as a loss in net income. Instead, it first reduces any existing additional paid-in capital from treasury stock, and because none exists here, the remainder is charged to retained earnings.
Why not A: This confuses original stock issuance accounting with treasury reissuance. Under the cost method, common stock is not adjusted on reissuance; the shortfall is handled within equity (APIC from treasury stock first, then retained earnings).
Why not B: Selling treasury shares below cost might resemble a loss, but transactions in a company's own stock are equity transactions. GAAP does not permit gains or losses from treasury stock transactions to be recognized in net income.
Why not D: APIC from treasury stock is credited only when shares are reissued above cost. Because the reissue price here is below cost, APIC would not be credited; any existing APIC would be reduced first and any remaining deficit charged to retained earnings.
Question 7
Hint
Compute (cost − proceeds) × shares to find the total shortfall, then apply the APIC, treasury balance first; only the remaining amount reduces retained earnings.
Answer A. Proceeds are $12,000 and the cost removed is $15,000, so the total shortfall is $3,000. Under the cost method the deficit is absorbed first by any Additional paid-in capital, treasury stock (here $2,000) and the remaining $1,000 is charged to Retained Earnings; Treasury Stock is reduced and Cash increases accordingly.
Why not B: Tempting because students may view the shortfall as a direct 'loss' to retained earnings for the full amount. It's wrong because GAAP requires APIC, treasury stock to absorb the deficit first; only the remainder (after using APIC, treasury) reduces retained earnings.
Why not C: Tempting because some candidates assume APIC, treasury can cover the entire shortfall. It's incorrect here because the APIC, treasury balance is only $2,000 and cannot absorb the full $3,000 deficit, so the excess must be charged to retained earnings.
Why not D: Tempting because a student might think after exhausting APIC, treasury the next source is other APIC accounts. It's wrong because GAAP prescribes that any remaining deficiency after APIC, treasury is charged to retained earnings, not other APIC accounts.
Question 8
Hint
For treasury stock reissued below cost, think about the order in which equity accounts absorb the shortfall.
Answer B. Under the cost method, when treasury stock is reissued below cost the shortfall is first charged against any existing additional paid-in capital from treasury stock transactions; if that balance is insufficient, the remaining amount is debited to retained earnings. Here the $3,500 shortfall exceeds the $1,500 available APIC (treasury) balance, so the excess is charged to retained earnings.
Why not A: Common stock is not reduced when treasury shares are reissued below cost under the cost method; common stock was affected at original issuance, not at reissuance of the corporation's own shares.
Why not C: Candidates may confuse different APIC accounts. The shortfall is first absorbed by APIC specifically related to treasury stock transactions; APIC from original issuances is not used before retained earnings.
Why not D: Transactions in a corporation's own stock do not produce gains or losses on the income statement; differences remain within equity accounts rather than being recorded as an expense.
Question 9
Hint
Focus on how treasury stock is measured after reacquisition under the cost method, and then decide where any amount above that cost goes.
Answer B. Under the cost method, treasury stock is removed at the amount originally paid to reacquire it; for 1,200 shares reacquired at $24, that is $28,800. Cash received is $32,400, so the $3,600 excess is credited to additional paid-in capital from treasury stock (not to income). Par value is irrelevant when measuring treasury stock under the cost method.
Why not A: This treats the reissuance as if new shares were issued (crediting common stock at par and APIC-common for the remainder). Because these are previously issued shares being reissued, the company removes treasury stock at cost and records any excess to APIC from treasury stock instead.
Why not C: Although the reissue price exceeds the repurchase cost, transactions in a company's own stock are equity transactions; the excess increases APIC from treasury stock rather than producing a gain on the income statement.
Why not D: This option incorrectly removes treasury stock at the reissue proceeds instead of at the original repurchase cost. Under the cost method treasury stock is removed at cost, and any difference between proceeds and cost is recorded in equity (APIC from treasury stock) rather than changing the treasury stock balance.
Common questions
What is the journal entry to reissue treasury stock above cost?
Debit Cash for proceeds and credit Treasury Stock for repurchase cost. Credit the excess to APIC, treasury, not net income or retained earnings.
How do you record treasury stock reissued below cost?
Debit Cash for proceeds and credit Treasury Stock for repurchase cost. Debit APIC, treasury up to its credit balance, then debit retained earnings for any remaining shortfall.
Can APIC from common stock absorb a treasury stock reissuance shortfall?
No. Use the available APIC, treasury credit balance first; APIC from original issuances does not replace retained earnings for the remaining shortfall.
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