Choice "B" is correct. Corporations are not permitted to report income statement gains and losses from treasury stock transactions. Instead, treasury stock "gains and losses" are reported as direct adjustments to stockholders' equity. Gains are recorded by crediting APIC - Treasury Stock, while losses are recorded by first reducing any existing APIC - Treasury Stock to $0, and then debiting any additional loss to Retained Earnings.Baker's treasury stock transactions would be recorded as follows:
10/1 - Repurchase of Treasury Stock | Debit (Dr) | Credit (Cr) |
|---|
| Treasury stock | $ 1,000,000 | |
| Cash | | $ 1,000,000 |
12/1 - Resell Treasury Stock | Debit (Dr) | Credit (Cr) |
|---|
| Description for debit | $ 1,200,000 | |
| Treasury stock | | $ 1,000,000 |
| APIC - Treasury stock | | 200,000 |
Choice "a" is incorrect. This amount would be reported as APIC - Treasury stock on the balance sheet, not as a gain on the income statement.
Choice "d" is incorrect. The treasury stock repurchase is reported at the price paid, not the average purchase price.
Choice "c" is incorrect. The difference between the par value of the stock and the price paid to repurchase the stock is not reported as a gain.
