Question

Horton Co. was organized on January 2, 2012, with 500,000 authorized shares of $10 par value common stock. During 2012, Horton had the following capital transactions:

January 5—issued 375,000 shares at $14 per share.
July 27—purchased 25,000 shares at $11 per share.
November 25—sold 20,000 shares of treasury stock at $13 per share.
Horton used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2012?
a. $0.
b. $20,000.
c. $40,000.
d. $60,000.

Answer 1

The balance in Paid-in Capital from Treasury Stock account would be $40,000, which is the excess from selling 20,000 shares of treasury stock at $13 per share, over the cost of those shares at $11 per share.

Step-by-step explanation:

The balance in the Paid-in Capital from Treasury Stock account at December 31, 2012, for Horton Co. needs to be calculated based on the treasury stock transactions. When Horton purchased 25,000 shares back as treasury stock at $11 per share, they spent $275,000, which is recorded as treasury stock at cost. The sale of 20,000 shares of treasury stock at $13 per share generated $260,000.

According to the cost method, the sale of treasury stock at a price higher than its cost should result in the excess being credited to Paid-in Capital from Treasury Stock. Therefore, the excess of the sale price over the cost would be:

Thus, the Paid-in Capital from Treasury Stock would be credited by $40,000. Therefore, the correct answer is option (c) $40,000.