Question

Thorpe Corporation holds 10,000 shares of its $10 par common stock as treasury stock, which was purchased in 2007 at a cost of $120,000. On December 10, 2008, Thorpe sold all 10,000 shares for $210,000. Assuming that Thorpe used the cost method of accounting for treasury stock, this sale would result in a credit to

1) Retained Earnings
2) Common Stock
3) Treasury Stock
4) Additional Paid-in Capital

Answer 1

The sale of treasury stock at a gain with the cost method results in a credit to Additional Paid-in Capital and potentially Retained Earnings if the gain exceeds the available balance in Additional Paid-in Capital.

Step-by-step explanation:

When Thorpe Corporation sold its 10,000 shares of treasury stock for $210,000, having originally purchased it at a cost of $120,000, the company realized a gain on the sale. Since the treasury stock was accounted for using the cost method, upon sale, the treasury stock account would be debited to remove it at its cost, which is a debit of $120,000.

The cash account would be credited for the full sale amount of $210,000, resulting in a gain of $90,000 over the cost of the treasury stock. This gain would be credited to Additional Paid-in Capital, assuming there is a balance in the additional paid-in capital from treasury stock. If not, or if the gain exceeds this balance, the excess is credited to Retained Earnings. Therefore, the correct answer to the question is a credit to 4) Additional Paid-in Capital and, if necessary, 1) Retained Earnings for any excess gain.