After a company purchases treasury stock on October 11, how should the stockholders' equity section of the balance sheet reflect this transaction?

• A. Treasury stock is reported as a deduction from total stockholders' equity.
• B. Treasury stock is reported as a liability in the balance sheet.
• C. Treasury stock increases the total stockholders' equity.
• D. Treasury stock is reported as an asset in the current assets section.

Answer: (A)

Verified step by step guidance

1. Understand the concept of treasury stock: Treasury stock refers to shares that a company has repurchased from its shareholders. These shares are not considered outstanding and do not have voting rights or earn dividends.
2. Recognize the accounting treatment for treasury stock: Treasury stock is not classified as an asset or liability. Instead, it is reported as a deduction from total stockholders' equity in the balance sheet.
3. Analyze the impact on stockholders' equity: When a company purchases treasury stock, it reduces the total stockholders' equity because the repurchased shares are subtracted from the equity section.
4. Review the incorrect options: Treasury stock is not reported as a liability, nor does it increase stockholders' equity. It is also not classified as an asset in the current assets section.
5. Conclude the correct reporting method: Treasury stock is reported as a deduction from total stockholders' equity, reflecting its nature as a reduction in the company's equity.