Final answer:
The final answer is that when treasury stock is sold for less than its cost, and Paid-in Capital in Excess of Par from past transactions is insufficient, the correct account to debit for the loss is Retained Earnings.
Step-by-step explanation:
When treasury stock is sold for less than its cost, the correct accounting treatment involves addressing the loss that occurs as a result of this transaction. The potential answers listed in the question suggest different financial accounts which might be affected. A gain on sale would not be appropriate because there is a loss implied by the selling price being less than the cost. A loss on sale of treasury stock is not traditionally used because losses on transactions involving equity do not typically get their own account.
Instead, the loss is absorbed by the equity accounts first by reducing any amounts in Paid-in Capital in Excess of Par related to the treasury stock transactions. If there is not enough balance in this account to absorb the entire loss, the remaining amount is typically deducted from Retained Earnings. Therefore, if the Paid-in Capital in Excess of Par from past treasury stock transactions is insufficient to cover the loss, the entry should include a debit to Retained Earnings.
Final answer in two-line explanation: When treasury stock is sold for less than its cost, and there is insufficient balance in Paid-in Capital from past transactions, the loss is debited to Retained Earnings. This accounting treatment ensures that the equity section of the balance sheet correctly reflects the decrease in corporate assets.