 Hello and welcome to the session in which we would look at a treasury stock exercise or this could be a simulation on the CPA exam, simulating a treasury stock transaction effect on the classes of accounts and on certain accounts. So we're going to review three transactions that deals with treasury stock and determine whether these accounts increase, decrease or has no effect on the following accounts and you might see something like this on the CPA exam or you might see something like this in your intermediate accounting course or in your financial accounting course. So let's go ahead and get started. Adam Company has outstanding 80,000 shares of $10 power value stock which has been issued at $60. That's fine. It was issued at $60. Review the following transaction and determine their effect. Whether these transactions increase, decrease or they have no effect on the classes of accounts below. So first I want to make sure you understand when we issue stocks what entry do we make. When we issue stocks, we debit cash for the amount of cash that we received. We credit common stock for the number of shares times the power value which is in our situation it's going to be 800,000 and anything left will be placed and paid in capital. Whatever's left will be paid in capital. Now since those stocks were sold at $60, we know that we received $4.8 million and as a result our paid in capital is a plug-in of $4 million. So this is the original entry that we made when we issued the stocks. It's very important that you understand what was the original entry because if you understand the original entry purchasing treasury stock is simply the opposite of that. So if you understand the initial entry, the opposite is easy. Remember the paid in capital is a plug, whatever's left. So we know we received cash for $4.8 million. Common stock is the number of shares. I want to make sure you know the formula times the power value, remember. You want to memorize this because this is easy. Common stock always the number of shares times the power value. Anything left is paid in capital pick. So if we look at this transaction, we notice that assets went up and equity went up. This is when we issued those stocks but that's not the question. The question is about those three transactions here. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. So let's start with the first transaction. We purchased 5,000 shares of Treasury stock at $90. Well, let's think about this. What journal entry do we make? We are going to credit cash for the amount that we paid, which is 5,000 times 90 shares, which is, I believe, 45,000 or was it? It is four zeroes. It's 450,000, 450,000, and we're going to debit Treasury stock. So let's take a look at these, at the effect of the accounts. Assets, assets will decrease. So assets will go down. While liability is not affected, stockholders' equity, well, what would happen to stockholders' equity if we increased Treasury stock by 450? Stockholders' equity is a contra-acquiry. Contra-acquiry, therefore, stockholders' equity will go down. Well, did we touch paid in capital? Because the question is about paid in capital. So when we bought the Treasury stock, did we touch paid in capital? And the answer is no effect on paid in capital. Did we touch retained earnings, none that obviously nothing in net income and nothing in retained earnings? Now, transaction two. We resold 2,000 shares of those Treasury stock, of those 5,000 Treasury stock at $98. Hold on a second. We bought them at nine, sold them at 98, not a bad deal. Okay, let's see what we do. We're gonna debit cash for the number of shares times what we sold them for. So 2,000 times 98, that's gonna be 196,000. And we are going to credit. I'm gonna be assuming we're gonna be using the cost method. We're gonna credit Treasury stock, Treasury stock for the amount of what? Treasury stock, the cost was 90. So if we take 90 times 2,000 shares, that's gonna be 180,000. And we have left something is hanging. We have an extra, which is technically the, in quote, the profit, in quote, the profit of 16,000. So let's start with what we know. We know that cash went up. So assets went up. We don't see any effect on liability so far. Obviously, we're not gonna credit a liability. So now the question is, what do we do with the 16,000? For that 16,000, we cannot increase profit. What we're gonna have to do, we're gonna have to credit paid in capital and account called paid in capital Treasury stock. Therefore, stockholders equity overall would go up. Notice it's the opposite of what we did earlier. Paid in capital also would go up because this is paid in capital. We have different type of paid in capital. We have paid in capital, Treasury stock. We have paid in capital, common stock. We have paid in capital, preferred stock. But paid in capital would also go up. With retained earnings goes up. I don't see anything because it did not affect income. If it doesn't affect income, it doesn't affect retained earnings. Okay? So we don't, there's no effect on income, no effect on retained earnings. Now, we resold 500 shares of Treasury stock at $80. Again, what do we do first? Let's account for the cash. Sorry, let's account for the cash. Okay, we sold cash. And that's gonna be 80 times 500 shares. That's $4,000 in cash. We sold them at, we credit Treasury stock for the amount of 500 times 90 at cost. Again, I'm using the cost method, which will give us 4,500. And now we have 500 hanging here. 500 hanging a debit to make the entry balance. So let's start with what we know. We know that assets will increase. We know that. We know there is no effect on liabilities. Stockholders' equity, what's gonna happen to stockholders' equity here? Well, let's think about it for a moment. What we're doing here is we are reselling the stock. Okay, reselling the stock. So we debited cash, increasing cash. We credited Treasury stock. When we credit Treasury stock, we reduced stockholders' equity. We reduced counter equity, which means we increase stockholders' equity. Cyber, by reducing Treasury stock, I failed to mention this here. Since I failed to mention it, let me mention it again. Since we are reducing Treasury stock, we are increasing equity. So we increased equity. Now, we are missing a debit here. What do we debit? Well, here's what's gonna happen. Technically, this 500 is a loss. Notice we sold it at 80. We purchased the stock at 90. We have a loss. Again, we don't book a loss or a gain from our own transaction, but listen to me carefully here. Listen to what I'm gonna have to say because there's gonna be an exception. I already have, not exceptions, it's gonna be a different, it could be a different scenario. I already have paid in capital Treasury stock and in that account, I have 16,000 if you notice. So if I incurred a loss in quote from selling my own stock and I do have paid in capital Treasury stock, I'm gonna book that loss here. So this $500 will be booked to, sorry, let me, it closed on me. So just let me, okay. So this $500 will be, will be, will be, will be debited to paid in capital Treasury stock. So I'm gonna debit, paid in capital Treasury stock. And what is that going to do if I debit paid in capital Treasury stock? Well, if I debit paid in capital Treasury stock, paid in capital overall will go down. There's no effect on retained earnings. There's no effect on income, okay? Now, here's the exception. If my losses from selling Treasury stock did not have, if my losses exceeded for this example, 16,000, because I have 16,000 paid in capital Treasury stock, any excess above 16,000, then I will reduce retained earnings. So I will have to debit retained earnings if I did not have paid in capital Treasury stock. And if I did not have paid in capital Treasury stock altogether from the beginning, let's assume that's the case, then I will debit retained earnings, then retained earnings will be affected. So the only way retained earnings can be affected from Treasury stock is downward. No way retained earnings would go up here in any scenario. Okay, retained earnings could go down because you don't, you have losses, you created in quote losses from buying and selling your own stock and you don't have paid in capital Treasury stock to absorb those losses. Net income, no way will be affected, liabilities no way will be affected in any way shape or form, in any way you do it. So net income and liabilities are out. So what's affected are assets specifically cash and equity accounts and you need to know how these equity accounts are affected. Treasury stock is an important transaction. Treasury stock transaction is an important concept in your accounting course as a student and on the CPA exam. Invest in yourself, don't take it lightly. The CPA exam is worth it if you're studying for your accounting courses. Now you need to go to Farhat lectures and start to work MCQs through false. Look at additional resources to help you understand this topic. Invest in yourself, your certification, your accounting career is worth it.