Book 1 - Chapter 30

Discussion Questions and Brief Exercises
1.	A corporation would purchase its own stock and hold it as treasury stock for several possible reasons. These reasons include:
	•	If the stock can be purchased at a lower price and resold at a higher price, the business can increase the amount of invested capital.
	•	Reducing the shares of outstanding stock tends to keep the stock price higher or reduce the rate of decrease. This makes most investors happy.
	•	Reducing the outstanding shares makes it more difficult for another company or large investor to obtain enough shares to acquire control of a company.
	•	The company may need additional shares for other purposes such as employee stock plans or using company stock to acquire another company.
	Gain or loss is never recorded with treasury stock sales. When treasury stock is sold above or below its acquisition cost, it is simply an expansion or contraction of stockholders’ equity. When a company is buying and reissuing shares of its own stock, it is just dealing with its own capital.
2.	Authorized stock is the total amount of shares that a corporation is authorized to issue at the time it receives a charter from the state of incorporation. Issued stock is the total number of shares that have ever been issued to investors and other parties and that have not been cancelled or retired. Outstanding stock is the number of shares that are currently held that are not treasury stock.
3.	•	Effect on total assets: Total assets increase because cash is received.
	•	Effect on total stockholders’ equity: Stockholders’ equity increases because the Treasury Stock contra account is reduced. This amount is increased if the stock is sold above its purchase price and decreased if the stock was sold below its purchase price.
	•	Effect on net income: Net income is not affected by a treasury stock purchase or sale.
	•	Effect on paid-in capital: Paid-in capital will increase if the treasury stock is sold for more than its cost. Paid-in capital will decrease if treasury stock is sold for less than its cost. (An alternative is to decrease retained earnings if there is not sufficient paid-in capital from treasury stock transactions.)
	•	Although treasury stock has a debit balance, it is not an asset. It is a contra equity account.

Example of increase: 1,000 shares of treasury stock were purchased for $20 and sold for $23.
	Cash	23,000
	Treasury Stock		20,000
	Paid-in Capital in Excess of Par, Treasury Stock		3,000
Example of decrease: 1,000 shares of treasury stock were purchased for $20 and sold for $18
	Cash	18,000
	Paid-in Capital in Excess of Par, Treasury Stock	2,000
	Treasury Stock		20,000

Learning Goal 30, continued

SOLUTIONS

Section VI · Corporations

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