Choice "A" is correct. $360,000 retained earnings at 12/31/Year 2 ($300 + $60). Because all treasury stock transactions were recorded under the "cost method," and the resale of treasury stock was at a price that exceeded its acquisition price, none of the treasury stock transactions affected retained earnings.
Choice "c" is incorrect. The $5,000 gain [1000 shares x ($25 sale price - $20 purchase price)] is recorded as a credit to Additional Paid-in Capital-Treasury Stock, not as a credit to retained earnings. Only losses in excess of APIC-Treasury Stock are booked to retained earnings.
Choice "d" is incorrect. The gain from the resale of the treasury stock is calculated as the difference between the resale price and the reacquisition price, not the difference between the resale price and the amount received from the original issuance of the stock. Additionally, gains on treasury stock transactions are credited to APIC-Treasury Stock, not to retained earnings.
Choice "b" is incorrect. The gain from the resale of the treasury stock is not the difference between the resale price and the par value of the stock. The gain is correctly calculated as the difference between the resale price and the reacquisition price. Additionally, gains on treasury stock transactions are credited to APIC-Treasury Stock, not to retained earnings.