Question

Preferred Stock, 5 percent, Cumulative $50.00 par, 35,000 shares authorized, 7,000 shares issued $ 350,000.00

Common stock, $5.00 par, 140,000 shares authorized, 50,000 shares issued $ 250,000.00
Paid-in Capital in excess of Par-Common $ 202,500.00
Retained Earnings $ 204,500.00
Total Paid-in Capital $ 802,500.00
Total Stockholders' Equity $ 1,007,000.00
Assuming no treasury stock has been reissued prior to this transaction, the entry to record the sale of 8,000 shares of treasury stock that cost $9.50 per share for $8 per share includes a:
A. Credit to common stock for $40,000
B. Credit to paid-in capital from treasury stock transactions for $64,000
C. Debit to treasury stock for $76,000
D. Debit to retained earnings for $12,000

Answer 1

The correct entry for the sale of treasury stock involves debiting treasury stock for $76,000 and debiting retained earnings for $12,000. The shares are sold at a loss, which leads to the deficit being recognized in retained earnings.

Step-by-step explanation:

The transaction of selling 8,000 shares of treasury stock that cost $9.50 per share for $8.00 per share results in a loss since the shares are being sold for less than they cost. This transaction would involve debiting treasury stock for the cost of the shares that is being removed from treasury stock, which equals 8,000 shares multiplied by the cost per share of $9.50.

Therefore, the correct entry for debiting treasury stock would be 8,000 shares × $9.50/share = $76,000. This results in a debit to treasury stock for $76,000 (C). Since the shares sold for less than their cost, there would be a debit to retained earnings (or a separate paid-in capital account such as “Paid-in Capital from Treasury Stock Transactions”), which reflects the loss on the sale. The difference between the sale price and the cost price, which is a loss of $1.50 per share for 8,000 shares, equals $12,000. Therefore, the amount debited to retained earnings should be $12,000 (D).