Question

Which of the following is true regarding treasury stock transactions by a corporation?

1) May increase but not decrease retained earnings
2) May increase net income if the cost method is used
3) May decrease but not increase retained earnings
4) May decrease but not increase net income

Answer 1

Treasury stock transactions by a corporation may decrease but not increase retained earnings. These transactions are used to buy back shares and if they are resold, the financial impact is handled through paid-in capital accounts or retained earnings, but never directly affect net income.

Step-by-step explanation:

The correct statement regarding treasury stock transactions by a corporation is: May decrease but not increase retained earnings. When a company buys back its own shares, it records the transaction by debiting treasury stock and crediting cash. If the treasury stock is then reissued for more than its cost, the excess is credited to additional paid-in capital, not retained earnings. In contrast, if the treasury stock is sold for less than its cost, the difference is debited to additional paid-in capital to the extent there is a balance and any remaining balance is debited to retained earnings. Treasury stock transactions do not affect net income directly as they are not considered income-generating events.