Question

(6) Treasury Stock Analysis

Ray Holt Corporation has retained you as a consultant on accounting policies and procedures. During 2016, the company engaged in a number of treasury stock transactions, having foreseen an opportunity to report its treasury stock as an asset and to recognize a profit in trading its own stock. The transactions were as follows:

1.	Reacquired 85 shares of its $10 par common stock at $20 per share. The shares had originally been issued at $22 per share.
2.	Reacquired 135 shares of its $10 par common stock at $23 per share. The shares had originally been issued at $22 per share.
3.	Reacquired 60 shares of its $100 par preferred stock at $145 per share. The shares had originally been issued at $172 per share.
4.	Sold all common treasury shares held at $27 per share.
5.	Reacquired 150 shares of its $100 par preferred stock at $128 per share. The shares had originally been issued at $172 per share.
6.	Retired all preferred shares held in the treasury.

Required:

1.	Next Level Is the corporation correct in assuming that its treasury stock is an asset and that it can recognize a profit or gain from its treasury stock transactions? Explain.
2.	Next Level Prepare an analysis of treasury stock accounting for Mr. Robert Richter, the controller. This analysis should contain proper journal entries for each of the treasury stock transactions occurring during 2016, prepared using the cost method discussed in the chapter.
3.	Next Level Conclude the analysis by discussing how “gains” on treasury stock are reported and how treasury stock is reported on a corporation’s balance sheet.

CHART OF ACCOUNTS
Ray Holt Corporation
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 181 Equipment 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 251 Unearned Revenue 255 Bonds Payable 256 Premium on Bonds Payable 261 Income Taxes Payable EQUITY 305 Preferred Stock 311 Common Stock 318 Additional Paid-in Capital on Preferred Stock 322 Additional Paid-in Capital on Treasury Stock: Preferred 323 Additional Paid-in Capital on Treasury Stock: Common 331 Retained Earnings 336 Treasury Stock: Preferred 337 Treasury Stock: Common	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

Prepare an analysis of treasury stock accounting for Mr. Robert Richter, the controller. This analysis should contain proper journal entries for each of the treasury stock transactions occurring during 2016, prepared using the cost method discussed in the chapter. Additional Instructions

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GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
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Which of the following is correct regarding treasury stock?

(A) A corporation may not recognize a gain or loss from trading in its own securities.

(B) All of the choices are correct regarding treasury stock.

(C) Reacquisition and reissuance are treated as a contraction and expansion of shareholders' equity.

(D) Treasury Stock is not asset, a corporation cannot own itself.

How are "gains" on treasury stock reported?

(A) As a gain.

(B) As an increase in additional paid-in capital.

(C) As a loss.

(D) As a decrease in additional paid-in capital.

Answer 1

Post the last questions separately.

Answer-1:
The Corporation is not correct in assuming the Treasury stock an asset. Treasury stock is a contra equity account and it reduces the stockholder’s equity. The gain or loss from sale of treasury stock is not recognized in the income statement; rather it is shows as the part of Additional Paid in Capital- Treasury Stock in the balance sheet.
Answer-2:
The analysis of Treasury Stock transactions is shown using the journal entries as follows:
Journal entries
SN	Account Titles	Debit	Credit
1	Treasury Stock- Common Stock (85 Shares @ $20)	$ 1700
	Cash		$ 1700
	(Being Common Stock Reacquired for cash)
2	Treasury Stock- Common Stock (135 Shares @ $23)	$ 3105
	Cash		$ 3105
	(Being Common Stock Reacquired for cash)
3	Treasury Stock- Preferred Stock (60 Shares @ $145)	$ 8700
	Cash		$ 8700
	(Being Preferred Stock Reacquired for cash)
4	Cash (220 Shares @ $27)	$ 5940
	Additional Paid in Capital (5940-4805)		$1,135
	Treasury Stock- Common Stock (2000+3600)		$4,805
	(Being Treasury Stock-Common Stock sold)
5	Treasury Stock- Preferred Stock (150 Shares @ $128)	$19,200
	Cash		$19,200
	(Being Preferred Stock Reacquired for cash)
6	Preferred Stock	$27,900
	Treasury Stock- Preferred Stock (8700+19200)		$27,900
	(Being Treasury Stock- Preferred Retired)
Answer-3:
The gain or loss from sale of treasury stock is not recognized in the income statement; rather it is shows as the part of Additional Paid in Capital- Treasury Stock in the balance sheet.