A company issued 4,000 shares of $5 par common stock for $30 per share.The company purchased 1,200 shares as treasury stock at $32 per share.Later, the company reissued 400 shares of the treasury stock at $34 per share.Which of the following is true?

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The initial sale of 4,000 shares at $30 per share generated $120,000 ($30 x 4,000) in cash. The par value of the common stock issued is $20,000 ($5 x 4,000). The excess of the cash received over the par value of the common stock issued ($120,000 - $20,000 = $100,000) is recorded in the additional paid-in capital account.

When the company purchases 1,200 shares of its own stock at $32 per share, the Treasury Stock account is debited for $38,400 ($32 x 1,200) and cash is credited for the same amount. Treasury stock is a contra-equity account, and it reduces total shareholders' equity. The cost of treasury stock is reported as a deduction from total shareholders' equity on the balance sheet.

When 400 shares of the treasury stock are reissued at $34 per share, the Treasury Stock account is credited for $12,800 ($32 x 400) and cash is debited for the same amount. The difference between the cost of the treasury stock and the proceeds from the sale is recorded as an increase in additional paid-in capital. The gain on the sale of treasury stock is the difference between the credit to the Treasury Stock account and its cost. In this case, the gain is $1,600 ($12,800 - $38,400 = $25,600). Therefore, the balance of the Treasury Stock account after the reissuance is $25,600, and the company has a gain of $1,600 that should appear on the income statement.

A Company Issued 4,000 Shares of $5 Par Common Stock