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jmjkon
04-18-2003, 09:01 AM
Hello, I'm doing my last minute cramming for CAS Part 7 and have a question from the IASA book about Treasury Stock-

I was doing old exam problems and from the 2001 exam there is a problem which asks for what happens when a company sells 100 shares of treasury stock for \$50/share that it had repurchased for \$40/share the year before.

1) Paid in Capital would increase by (50-40)x100=1000, and
2) Treasury Stock would decrease by (40 x 100)= 4000, since that was the cost to acquire the stock that was sold.
3) The answer also said that Surplus would increase by 5000, matching the increase of 5000 in assets caused by the sale of 100 shares at \$50/share.

So here is my question: shouldn't that be LIABILITIES that increase by 5000, not surplus? Doesn't surplus stay the same here if Liabilities increase by 5000 also? (Liabilities increase 5000 due to 1000 more of paid in capital and the decrease of 4000 in treasury stock, which decreases liabilities)

This is probably nitpicky but from experience this is exactly the kind of trick the CAS likes to ask about. All help appreciated, thanks in advance - JK

MNBridge
04-21-2003, 11:06 AM
Paid in Capital would not change.
This is the number of shares issued * par value.

Buying / selling treasury stock has no effect on this.

When you buy shares of you own stock the Surplus number goes down.

To me in the example above:

When selling treasury stock the treasury stock number is decreased by the paid price for the stock.

Contributed (not paid in) surplus then is the balance item between the selling price and the paid in price.

So in this example I would say:
Treasury Stock decreases \$4,000 (Causing a \$4,000 increase to surplus) &
Contributed Capital increases \$1,000 ( Causing a \$1,000 increase to surplus)
For a total of \$5,000 increase to surplus (liabilities remain the same)

Had the stock been sold for \$2,000 then the following would occur
Treasury Stock decreases \$4,000 (Causing a \$4,000 increase to surplus) &
Contributed Capital decreases \$2,000 ( Causing a \$2,000 decrease to surplus)
For a total of \$2,000 increase to surplus.

jmjkon
04-21-2003, 11:23 AM
... for the response. I see now that Paid in Capital, Capital stock, and Treasury stock are all listed on page 3 BELOW the "Total Liabilities" line. So they all do go straight to surplus and do not impact total liabilities.

Thanks for the help! Much appreciated- good luck studying everybody- JK