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Voiles Company reissued 200 shares of its treasury stock. The treasury stock originally cost $25 per share and was reissued for $35 per share. Select the answer that accurately reflects how the reissue of the treasury stock would affect the elements of Voiles’ financial statements.

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Answer:

Option A is correct:

  • assets increase by $7,000
  • liabilities don't change
  • additional paid in capital increases by $2,000
  • treasury stocks decrease by $5,000
  • revenue, expenses and net income do not change
  • cash flow from financing activities increase by $7,000

Explanation:

Treasury stock is a contra equity account. When treasury stocks are purchased, they reduce cash account and equity account. So when treasury stocks are sold:

  • cash account increases = $35 x 200 = $7,000
  • treasury stocks account decreases = $25 x -200 = ($5,000). Since it is contra equity account, when it decreases, total equity actually increases by the same amount.
  • additional paid in capital will increase = ($35 - $25) x 200 = $2,000
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