Final answer:
When treasury stock is resold at a price above cost, Additional Paid-In Capital is increased, reflecting the excess of resale price over the initial cost. This transaction affects shareholders' equity and is not reported as a gain or revenue on the income statement.
Step-by-step explanation:
When treasury stock is resold at a price above cost, the correct accounting treatment is to increase the Additional Paid-In Capital account. No gain is recognized on the income statement as this transaction pertains to equity, not to operational earnings. The difference between the resale price and the cost at which the treasury stock was initially purchased is recorded in the equity section of the balance sheet under Additional Paid-In Capital. It's important to understand that treasury stock transactions do not affect revenue or reported earnings since they represent changes in shareholders' equity rather than the company's operational performance.
A practical example would be if a company were to buy back its own shares at $45 and then resell them to the market at $60, the $15 excess would not be recorded as a gain but as an addition to Additional Paid-In Capital. This is in line with how an investor realizes a capital gain when selling an asset for more than its purchase price.