C is corrent. The unadjusted stockholders’ equity section shows a total of $500,000. However, analysis of the current asset section of the balance sheet reveals that Mag has incorrectly classified $75,000 of treasury stock as a current asset. Although this account has a debit balance, it is not an asset. Treasury stock should be reported as a reduction of stockholders’ equity. Therefore, stockholders’ equity should be reported at $425,000 ($500,000 – $75,000) in the 12/31/Y2 balance sheet.
A is incorrect. The unadjusted stockholders’ equity section shows a total of $500,000. However, analysis of the current asset section of the balance sheet reveals that Mag has incorrectly classified $75,000 of treasury stock as a current asset. Although this account has a debit balance, it is not an asset. Treasury stock should be reported as a reduction of stockholders’ equity. Therefore, stockholders’ equity should be reported at $425,000 ($500,000 – $75,000) in the 12/31/Y2 balance sheet.
B is incorrect. The unadjusted stockholders’ equity section shows a total of $500,000. However, analysis of the current asset section of the balance sheet reveals that Mag has incorrectly classified $75,000 of treasury stock as a current asset. Although this account has a debit balance, it is not an asset. Treasury stock should be reported as a reduction of stockholders’ equity. Therefore, stockholders’ equity should be reported at $425,000 ($500,000 – $75,000) in the 12/31/Y2 balance sheet.
D is incorrect. The unadjusted stockholders’ equity section shows a total of $500,000. However, analysis of the current asset section of the balance sheet reveals that Mag has incorrectly classified $75,000 of treasury stock as a current asset. Although this account has a debit balance, it is not an asset. Treasury stock should be reported as a reduction of stockholders’ equity. Therefore, stockholders’ equity should be reported at $425,000 ($500,000 – $75,000) in the 12/31/Y2 balance sheet.
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