Gannon Company acquired 10,000 shares of its own common stock at $20 per share on February 5, 2014, and sold 5,000 of these shares at $27 per share on August 9, 2015. The fair value of Gannon's common stock was $24 per share at December 31, 2014, and $25 per share at December 31, 2015. The cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2015 to record the sale of 5,000 shares?

Question

Quizplus · Accepted Answer

When using the cost method, treasury stock is recorded at its original cost, in this case $20 per share. When the shares are sold, the proceeds received above the cost of the treasury stock are recorded as an increase in both Treasury Stock and Paid-in Capital from Treasury Stock. The 5,000 shares were sold for $7 per share above their cost, resulting in total proceeds of $35,000 ($7 x 5,000 shares). Therefore, Gannon should credit Treasury Stock for $100,000 (5,000 shares x $20 per share) and Paid-in Capital from Treasury Stock for $35,000 (proceeds received above cost). Retained Earnings would not be affected by the sale of treasury stock under the cost method.

Gannon Company Acquired 10,000 Shares of Its Own Common Stock