Given below is some summarized information taken from the adjusted trial balance
ID: 2435419 • Letter: G
Question
Given below is some summarized information taken from the adjusted trial balance of New Company at December 31, Year 2, the end of its second year of operations.
Debit
Credit
Cash
15,000
A/R
6,000
Equipment (net)
66,000
A/P
31,000
Dividends Payable
3,000
Common Stock ($3 par, 1,000 shares issued)
3,000
APIC
27,000
Treasury Stock (200 shares)
8,000
Retained Earnings
14,000
Revenues
98,000
Expenses
78,000
Dividends Declared
3,000
.
Total
176,000
176,000
The only treasury stock transaction was the purchase of 200 shares on November 15, Year 2.
New Company
Statement of Retained Earnings
For the Year Ended December 31, Year 2
Line 1
$
Line 2
20,000
Line 3
.
Line 4
$31,000
Which one of the following is not a reason New Company would buy back its own shares (treasury stock)?
a. To issue later under stock option or employee stock purchase plans
b. To resell at a later date in order to record a gain on the income statement as therefore EPS will be increased
c. To hold as an investment as management feels the stock is undervalued.
d. To increase EPS since the average number of shares outstanding would be reduced
Debit
Credit
Cash
15,000
A/R
6,000
Equipment (net)
66,000
A/P
31,000
Dividends Payable
3,000
Common Stock ($3 par, 1,000 shares issued)
3,000
APIC
27,000
Treasury Stock (200 shares)
8,000
Retained Earnings
14,000
Revenues
98,000
Expenses
78,000
Dividends Declared
3,000
.
Total
176,000
176,000
Explanation / Answer
b) Under GAAP, you are not allowed to record a gain on the income statement from the sale of treasury stock.
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