Question

Voiles Company reissued 200 shares of its treasury stock. The treasury stock originally cost $25 per share and was reissued for $35 per share. Select the answer that accurately reflects how the reissue of the treasury stock would affect the elements of Voiles’ financial statements.

Answer 1

Option A is correct:

• assets increase by $7,000
• liabilities don't change
• additional paid in capital increases by $2,000
• treasury stocks decrease by $5,000
• revenue, expenses and net income do not change
• cash flow from financing activities increase by $7,000

Step-by-step explanation:

Treasury stock is a contra equity account. When treasury stocks are purchased, they reduce cash account and equity account. So when treasury stocks are sold:

• cash account increases = $35 x 200 = $7,000
• treasury stocks account decreases = $25 x -200 = ($5,000). Since it is contra equity account, when it decreases, total equity actually increases by the same amount.
• additional paid in capital will increase = ($35 - $25) x 200 = $2,000