Question

Ten thousand shares of $10 par value common stock were issued initially at $15 per share. Subsequently, 1,000 of these shares were purchased as treasury stock at $13 per share. The cost method of accounting for treasury stock is used. What is the effect of the purchase of the treasury stock on the amount reported in the balance sheet on each of the following?

A. No effect on any
B. Decrease in total equity
C. Decrease in additional paid in capital
D. Decrease in additional paid in capital, total equity
B. Decrease in total equity

Answer 1

B. Decrease in total equity

Step-by-step explanation:

Treasury stock is the contra equity account and it will decrease only total equity value when it is purchased.

Following is the Journal entry on Purchase of Treasury stock

Dr. Cr.

Treasury Stock xxx

Cash xxx

So the treasury stock account will be deduct from total equity while preparing equity section of balance sheet as it is a contra equity account.