Final answer:
The sale of treasury stock above its cost increases additional paid-in capital, and does not affect retained earnings or show as a gain on the income statement.
Step-by-step explanation:
If a firm sells treasury stock for more than its cost, the correct answer is C. additional paid-in capital is increased. When treasury stock is sold at a price higher than its repurchase cost, the excess amount is generally credited to the additional paid-in capital account within shareholders' equity. This is because the sale of treasury stock is considered a transaction with shareholders and not a source of profit for the company. Therefore, no gain is recognized on the income statement. The retained earnings account is not directly affected by this transaction either. Additionally, the total owners' equity might change because the additional paid-in capital has increased, reflecting the additional amount paid by investors over the cost of the treasury stock.
If a firm sells treasury stock for more than its cost, the answer is A. a gain is recognized in the income statement. When a company sells treasury stock for a higher price than its cost, it results in a gain, which is recorded on the income statement as a non-operating item. This gain increases the company's net income and ultimately affects its retained earnings.