Several years ago,Knox Industries issued 200,000 of its $2 par value stock for a total of $1,600,000.This is the only time that it has sold stock.This year it purchased 2,000 shares of its own stock for $20 a share.As a result of acquiring treasury stock:
A)its stockholders' equity decreases by $40,000.
B)it will recognize a loss of $40,000.
C)its common stock account decreases by $40,000.
D)its retained earnings decrease by $40,000.

Question

Quizplus · Accepted Answer

When a company reacquires its own stock,Treasury Stock,a contra-stockholders' equity account,increases and Cash,an asset account,decreases for the cost of the treasury stock,which in this case is $40,000 (or 2,000 shares × $20 per share).That increase in the contra-stockholders' equity account decreases stockholders' equity.The Common Stock and Retained Earnings accounts are not affected.Equity transactions never result in a gain or loss.

Several Years Ago,Knox Industries Issued 200,000 of Its $2 Par