Question

Joe Dumars Company has outstanding 40,000 shares of \(5 par common stock, which had been issued at \)30 per share. Joe Dumars then entered into the following transactions.

1. Purchased 5,000 treasury shares at \(45 per share.
2. Resold 2,000 of the treasury shares at \)49 per share.
3. Resold 500 of the treasury shares at $40 per share.

Instructions

Use the following code to indicate the effect each of the three transactions has on the financial statement categories listed in the table below, assuming Joe Dumars Company uses the cost method (I = Increase; D = Decrease; NE = No effect).

#	Asset	Liabilities	Stockholders’ Equity	Paid-in Capital	Retained Earnings	Net Income
1
2
3

Short answer

Purchasing treasury shares will decrease asset and stockholders’ accounts. Reselling treasury share will result in increased asset, stockholders’ equity, and paid-in capital account. Liabilities retained earnings, and net income will remain unaffected while preparing the transactions.

Step-by-step solution

Meaning of Treasury Share

As the name implies, “treasury stock” is the stock issued by the company. When establishing a company, the company issues its own stock. The investor underwrites the shares and provides the company with funds.

Indicating the effect of each transaction

#	Asset	Liabilities	Stockholders’ Equity	Paid-in Capital	Retained Earnings	Net Income
1	D	NE	D	NE	NE	NE
2	I	NE	I	I	NE	NE
3	I	NE	I	D	NE	NE