Question

Question 8

All of the following statements regarding treasury stock are true EXCEPT which one?

a. It should be recorded on the Balance Sheet as an asset.

b. They are shares that have been bought back by the corporation and are being held by the corporation.

c. It has a normal debit balance

d. It is a contra-stockholders' equity account

Question 9

ROK Corporation purchased 4,000 shares of its own $8 par value common stock for $17 per share, the current market price. The journal entry to record this transaction would include a:

a. Credit to Paid in Capital Excess of Par-Treasury Stock for $36,000

b. Credit to Cash for $32,000

c. debit Treasury Stock for $68,000

d. debit to Treasury Stock for $32,000

Question 17

Which of the following statements regarding dividends in arrears on cumulative preferred stock is FALSE?

a. they are dividends that have not been declared for a given period of time.

b. they should be disclosed in the notes to the financial statements

c. they must be paid before common stockholders can receive a dividend

d. they are dividends that have been declared but not yet paid.

Answer 1

1. All of the following statements regarding treasury stock are true EXCEPT which one?

a. It should be recorded on the Balance Sheet as an asset.

b. They are shares that have been bought back by the corporation and are being held by the corporation.

c. It has a normal debit balance

d. It is a contra -stockholders' equity account

Ans: a. It should be recorded on the Balance Sheet as an asset.

Because treasury stock, the cost of treasury stock is reported at the end of the Stockholders Equity section of the balance sheet. Treasury stock will be a deduction from the amounts in Stockholders' Equity.

Treasury stock is stock repurchased by the issuer company and intended held for retirement or resale to the public. Treasury stock is the difference between the number of shares issued and the number of shares outstanding.

We record treasury stock on the balance sheet as a contra -stockholders equity account. Contra accounts always carry a balance opposite to the normal account balance. Equity accounts normally have a credit balance, because it is liability so a contra equity account is opposite of liability should have with a debit balance.

Treasury Stock is a contra -stockholders' equity account item. It is not reported as an asset, it is reported as subtraction from stockholders' equity

2. ROK Corporation purchased 4,000 shares of its own $8 par value common stock for $17 per share, the current market price. The journal entry to record this transaction would include a:

a. Credit to Paid in Capital Excess of Par-Treasury Stock for $36,000

b. Credit to Cash for $32,000

c. debit Treasury Stock for $68,000

d. debit to Treasury Stock for $32,000

Ans: c. debit Treasury Stock for $68,000

Because, We record treasury stock on the balance sheet as a contra -stockholders equity account. The journal entry is :

Debit Treasury Stock for $68,000

Credit cash      $68000

The journal entry is to debit treasury stock and credit cash for the purchase price. To record a repurchase, simply record the entire amount of the purchase in the treasury stock account as debit. And the cash are gone, assets what goes out, should credit.

3. Which of the following statements regarding dividends in arrears on cumulative preferred stock is FALSE?

a. they are dividends that have not been declared for a given period of time.

b. they should be disclosed in the notes to the financial statements

c. they must be paid before common stockholders can receive a dividend

d. they are dividends that have been declared but not yet paid.

Ans: d. they are dividends that have been declared but not yet paid.

Because, A dividend in arrears is a dividend payment related with cumulative preferred stock that hasn’t been paid by the actual date. These dividends have not been authorized by the board of directors, because the issuing entity does not have sufficient cash to make the payment. Instead, the existence of this nonpayment is disclosed in the footnotes that accompany the financial statements.

The existence of any dividends in arrears is a problem to common stockholders, because they must be paid before common stockholders can receive a dividend. So claims to preferred dividends take Cumulative preference over claims to dividends that are paid on common shares.