Ambiance Inc.buys back 3,000 shares of its $10 par value common stock from investors at $45 per share.This stock repurchase would be recorded with a debit to:
A) Cash and a credit to Treasury Stock for $135,000.
B) Treasury Stock and a credit to Cash for $30,000.
C) Treasury Stock and a credit to Cash for $135,000.
D) Treasury Stock for $30,000, a debit to Additional Paid-in Capital for $105,000, and a credit to Cash for $135,000.

Question

Quizplus · Accepted Answer

When a company buys back its own stock, it is recorded as a Treasury Stock transaction. The company pays cash to buy back the shares, which is recorded with a credit to Cash. The shares are then taken out of circulation and recorded as a debit to Treasury Stock, which is a contra-equity account that reduces stockholders' equity. In this case, Ambiance Inc. is buying back 3,000 shares at $45 per share, which gives a total cost of $135,000. Therefore, the correct journal entry would be a debit to Treasury Stock and a credit to Cash for $135,000. Option A is incorrect because it records a credit to Treasury Stock, which would increase stockholders' equity. Option B is incorrect because it records a credit to Cash for only $30,000, which is the par value of the shares, but the actual price paid was $45 per share. Option D is incorrect because it records a debit to Additional Paid-in Capital, which is not necessary in this case since the shares were originally issued at par value.