Chapter 10, Problem 20DQ

To determine

Concept introduction:

Treasury stock:

Treasury stock is the shares bought back by the company itself. A company may purchase its own shares and the shares bought back are called treasury stock. The journal entries are made at the time of sale and purchase of treasury stock as follows:

• For Purchase of treasury stock:

  Treasury stock account is debited and cash account is credited with the cost of treasury stock purchased.

• For Sale / Reissuance of treasury stock:

  Cash account is debited for the amount received on sale of treasury stock and the Treasury stock account is credited with the cost of treasury stock. For the difference in cost and sale value, Additional Paid in Capital and Retained earnings accounts are adjusted.

To indicate:

The effect of purchase of treasury stock on the stockholder’s equity section of a corporation’s balance sheet.