On January 1 Vermont Corporation had 39000 shares of 12 par

On January 1, Vermont Corporation had 39,000 shares of $12 par value common stock issued and outstanding. All 39,000 shares had been issued in a prior period at $20 per share. On February 1, Vermont purchased 900 shares of treasury stock for $28 per share and later sold the treasury shares for $22 per share on March 1. The journal entry to record the purchase of the treasury shares on February 1 would include a

a.credit to Treasury Stock for $25,200

b.debit to Treasury Stock for $25,200

c.debit to a loss account for $7,200

d.credit to a gain account for $7,200

Solution

Before we explain the journal entry treatment for purchase of Treasury Stocks, lets explain what is a treasury stock which is nothing but the difference between shares issued by a company and shares outstanding.

On February 1 Vermont Corporation purchased 900 shares of Treasury Stock for $28 per share amounting to Rs $25200 (900 shares * $28 per share).

Journal entry to record the above is as follows:

Debit Treasury Stock            $25200

       Credit Cash                                $25200

Note the above method is also called Cost Method of recording Treasury Stock.