CFA Practice Question

CFA Practice Question

Holiday Corp. holds 10,000 shares of its $10 par value common stock as treasury stock reacquired in 2010 for $120,000. On December 12, 2012, Holiday reissued all 10,000 shares for $190,000. Under the cost method of accounting for treasury stock, the reissuance resulted in increasing ______.
A. retained earnings by $70,000.
B. capital stock by $100,000.
C. additional paid-in capital by $70,000.
Explanation: Under the cost method, treasury stock is decreased by $120,000, cash is increased by $190,000 and the difference (which is like a gain) is reported as an increase in additional paid-in capital. Accounting rules do not allow a firm to record a gain or loss when it buys back treasury stock because the transaction is viewed as an equity transaction.

User Contributed Comments 3

User Comment
adansaenz Can someone make clear for me the meaning of the additional paid in capital account...
mattg APIC is the amount above par value of the company's stock paid for an equity stake in the company
Jurrens in this case it's just the gain (not using par... only use par values when issuing)
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