During 2007, Topeka Corporation entered into the following transactions: Transaction #1 – Interest on a certificate of deposit owned by Topeka was credited to Topeka’s investment account. Transaction #2 – Topeka sold 10,000 shares of common stock at $30 that had been repurchased by Topeka last year for $20. Should Topeka recognize the results of these transactions as income on the income statement for the year ended December 31, 2007? Answer: Interest earned on the CD is recognized as interest income. The gain on the sale of treasury stock is not reported on the income statement but is relected on the statement of changes in stockholders’ equity and on the balance sheet. The sale proceeds simply increase equity and increase cash. This is the statement that is giving me trouble: “The gain on the sale of treasury stock is not reported on the income statement but is relected on the statement of changes in stockholders’ equity and on the balance sheet.” Schweser says that gains and losses are also included on the income statement. Am I missing something here???
Vbcfa, which page of Schweser notes are you refering to? I didn’t see the one you mentioned in my Schweser notes. and from Internet, I found a summary of accounting for Treasury stock *purchase of treasury stock recorded at cost *sale of treasury stock *if sold aobve cost , excess is credited to Paid-In capital, Treasury stock *if sold below cost , difference is deducted from paid-in capital, treasury stock based on above , the gain must be paid-in capital of owner’s equity. in below link, there are step by step illustration of above rules, http://www.accountingcoach.com/online-accounting-course/17Xpg04.html#treasury-stock
Buying stock in another company is an investment subject to the normal gain/loss rules that you were referring to when the stock is subsequently sold. Buying back your own company’s stock from your shareholders is a contraction in your company’s equity base, and the resale of that stock results in expansion of your equity base in the form of additional paid in capital . The question is worded in almost a tricky way to make you think that they are talking about the sale of stock in an unrelated entity if you read it too quickly since it doesn’t use the words treasury stock, and if you read the word “repurchased” as “purchased” you can fall into their trap.
Super, you hit the nail on the head. I totally missed the work “repurchased.” Thanks annexguy for your help as well.
repurchase of stock at value less than market value should decrease equity and should be noted in “other comprehensive income” ?? I checked notes repurchased stock is not considered part of Other compre Income. why ?? help 