Question

A company purchased treasury stock for $20,800. The treasury stock was initially issued for $16,500 and had a $6,800 par value. Which of the following statements correctly describes the effects of the treasury stock purchase?A. Stockholders' equity increases $16,500.B. Net income decreases by $9,700.C. Stockholders' equity decreases $20,800.D. Net income increases by $9,700.

Answer 1

Answer:

The statement that correctly describes the effects of the treasury stock purchase by the company is:

C. Stockholders' equity decreases $20,800.

Explanation:

A treasury stock purchase decreases stockholders' equity because a treasury stock represents a contra account to the stockholders' equity.  When the value of the treasury stock is increased through a purchase, the treasury stock account increases while the common stockholders' equity decreases by the amount paid for the purchase.