Question

When a corporation acquires shares of its own common stock, it records a:

Multiple Choice
A. debit to Common Stock for par value
B. debit to Common Stock for cost
C. debit to Treasury Stock for par value
D. debit to Treasury Stock for cost

Answer 1

The correct answer is option D. debit to Treasury Stock for cost.

Step-by-step explanation:

When a corporation acquires shares of its own common stock, it records the transaction by debiting Treasury Stock for the cost of the shares acquired. This is recorded as a treasury stock transaction on the balance sheet, where treasury stock is considered a contra equity account. As such, the correct answer to the question is D. debit to Treasury Stock for cost.

It is important to note that the cost method is the most common approach when accounting for treasury shares. This method does not concern itself with the par value of the stock.

Therefore, when a firm buys back its stock, the entry includes a debit to Treasury Stock and a credit to Cash for the amount paid to reacquire the shares.