Final answer:
The correct answer is B. Treasury stock is a contra-equity account that appears on a company's balance sheet as a deduction from total shareholders' equity. It is not considered an asset nor an increase in additional paid-in capital.
Step-by-step explanation:
The correct answer to the provided question regarding treasury stock is that it is a contra-equity account. Treasury stock represents the shares that a company has repurchased from the open market and held in its treasury. These shares do not carry voting rights, do not pay dividends, and are not included in the calculation of earnings per share.
When a company buys back its own shares, they become treasury stock and are reported in the shareholders' equity section of the balance sheet as a deduction from the total equity. It's important to note that treasury stock is not considered an asset, as assets provide future economic value, while treasury stock is a form of reacquired capital. Consequently, it does not increase the value of the company's assets but decreases the total shareholders' equity. Moreover, treasury stock is not reported as an increase in additional paid-in capital; instead, it typically reduces retained earnings or additional paid-in capital.
Understanding the role of treasury stock is significant in financial accounting as it impacts the company's equity structure and how it is perceived by investors and analysts. The reason it's reported as a contra-equity account is to reflect the reduction in the amount of capital attributable to shareholders.