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Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31,Year 1,Cyan's retained earnings were $300,000. In March,Year 2,Cyan reacquired 5,000 shares of its common stock at $20 per share. In June,Year 2,Cyan sold 1,000 of these shares to its corporate officers for $25 per share. Cyan uses the cost method to record treasury stock. Net income for the year ended December 31,Year 2,was $60,000. At December 31,Year 2,what amount should Cyan report as retained earnings?
a.$365,000
b.$380,000
c.$375,000
d.$360,000
Explanation
Choice “d” is correct. $360,000 retained earnings at 12/31/Year 2($300 + $60)。Because all treasury stock transactions were recorded under the “cost method,”and the resale of treasury stock was at a price that exceeded its acquisition price,none of the treasury stock transactions affected retained earnings.
Choice “a” is incorrect. The $5,000 gain [1000 shares x ($25 sale price - $20 purchase price)] is recorded as a credit to Additional Paid-in Capital-Treasury Stock,not as a credit to retained earnings.Only losses in excess of APIC-Treasury Stock are booked to retained earnings.
Choice “c” is incorrect.The gain from the resale of the treasury stock is calculated as the difference between the resale price and the reacquisition price,not the difference between the resale price and the amount received from the original issuance of the stock.Additionally,gains on treasury stock transactions are credited to APIC-Treasury Stock,not to retained earnings.
Choice “b” is incorrect.The gain from the resale of the treasury stock is not the difference between the resale price and the par value of the stock.The gain is correctly calculated as the difference between the resale price and the reacquisition price. Additionally,gains on treasury stock transactions are credited to APIC-Treasury Stock,not to retained earnings.
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