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What is treasury stock?

What is treasury stock?

Solution

Treasury stock is a company's repurchase of its own shares, which reduces the number of shares outstanding — a common reason for the buyback being that officers and directors believe the market price is unrealistically low, so the repurchase supports the price and uses corporate funds to maximise value for the shareholders who do not sell.

Nature: it is not an asset but a contra-equity account — when a company buys its own shares it is contracting itself and reducing shareholders' equity, so treasury stock is deducted from total paid-in capital and retained earnings on the balance sheet, and outstanding shares = issued shares − treasury shares.

Accounting: under the widely used cost method the reacquisition cost is debited to treasury stock and cash credited; on resale, any excess over cost is credited to additional paid-in capital — treasury stock and never treated as a gain, since no gain or loss may be recognized on transactions with the company's own shareholders.

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  1. 1.

    (a) What is double entry book-keeping system? Also write down the advantages and disadvantages of double entry book-keeping system.

    (b) What is accounting? Also, explain in details about the accounting cycle.

    Practice
  2. 2.

    The balance sheet of a company for two years are given below:

    Liabilities Year 1 Year 2
    Equity Share capital 900,000 1,000,000
    Share premium 90,000 100,000
    10% Debentures 100,000 50,000
    Provision for tax 20,000 30,000
    Provision for dividend 10,000 20,000
    Accounts payable 60,000 110,000
    Profit and loss a/c 30,000 160,000
    Total 1,210,000 1,470,000
    Assets
    Fixed assets 800,000 1,000,000
    Inventory 100,000 150,000
    Accounts receivable 190,000 150,000
    Prepaid expenses 20,000 30,000
    Cash 100,000 140,000
    Total 1,210,000 1,470,000

    Income Statement for the Year 2

    Particulars Rs.
    Sales revenue 11,00,000
    Less: Cost of goods sold 710,000
    Gross Profit 390,000
    Less: Operating expenses:
    Administrative expenses 157,000
    Depreciation 50,000
    Provision for tax 30,000
    Provision for dividend 20,000
    Interest paid 10,000
    Premium on redemption of debentures 5,000
    Total operating expenses 272,000
    Net income 118,000
    Add: Gain on sale of fixed assets 12,000
    Retained earning 130,000

    Required: Cash flow statement

    Long question Practice
  3. 3.

    The following are the transactions of a company:

    a. Started business with cash Rs. 400,000 and bank balance Rs. 50,000.

    b. Deposited into bank Rs.100,000

    c. Machinery costing Rs.100,000 was purchased payment made by a cheque.

    d. Purchased merchandise goods for Rs.60,000 on account.

    e. Sold merchandise goods on account for Rs.200,000.

    f. Received a cheque from debtor, Rs.190,000 after deduction of 5% discount. The cheque was banked immediately.

    g. Paid Rs.54,000 to creditor by issuing a cheque after deduction 10% discount.

    h. Rs.12,000 was paid for insurance premium.

    i. Paid wages and salary Rs.40,000 by issuing cheques.

    j. Paid Rs.30,000 for rent.

    Required:

    a. Journal entries

    b. T accounts (ledger) for sales, purchase, account receivable and account payable

    c. Triple column cash book

    d. Trial Balance

    Long question Practice
  4. 4.

    Write about the disclosures required for financial statement under Nepal Financial Reporting Standard (NFRS).

    Practice
  5. 5.

    (a) What is financial statement? Also, mention the objectives of financial statement.

    (b) Differentiate between account receivable and note receivable

    Practice
  6. 6.

    (a) The bank statement of a company showed a balance of Rs. 52,000 on 30th Poush 2079. However the company balance showed a different balance of Rs. 48,000. On the investigation, the following differences were noticed:

    i. Company issued check of Rs.12,000 but during Poush only Rs.8,000 was presented to bank for payment

    ii. Deposit in transit Rs.6,000

    iii. EFT payment Rs.1,500

    iv. Customer’s cheque of Rs.3,000 was return with the bank statement marked NSF.

    v. Collection of notes and interest receivable was for Rs.8,000 and Rs.4,000 respectively

    vi. Bank charge Rs.500 for the service provided by the bank

    vii. A cheque of Rs.10,000 was deposited by the bank. However, the amount recorded by the company was Rs.11,000 in its statement.

    Required: Bank reconciliation statement

    (b) Differentiate between bond and debenture

    Long question Practice