On December 31, 20X4, Pack Corp.'s Board of Directors canceled 50,000 shares of $2.50 par value common stock held in treasury at an average cost of $13 per share. Before recording the cancellation of the treasury stock, Pack had the following balances in its stockholders' equity accounts:

Common stock
$540,000
Additional paid-in capital
750,000
Retained earnings
900,000
Treasury stock, at cost
650,000

In its balance sheet at December 31, 20X4, Pack should report common stock outstanding of
a) $0
b) $250,000
c) $415,000
d) $540,000

c) $415,000

Explanation:

Treasury share are company's own share which have been bought back by the company from the market. These share are held by the company and it can be either reissued or canceled by the company.

The cancelled treasury stcoks are deducted from the common stcok value by the par value of each share.

Common stock at December 31, 20X4 = $540,000 - ( 50,000 x $2.5) = $540,000 - $125,000 = $415,000

C) $415,000

Explanation:

The journal entry to record the repurchase of treasury stocks:

Dr Treasury stock 125,000

Dr Additional paid-in capital in excess of par value 525,000

    Cr Cash 650,000

After this transaction, the account balances should be:

Common stock  $540,000 - $125,000 = $415,000

Additional paid-in capital  = $750,000 - $525,000 = $225,000

Retained earnings  = $900,000

Treasury stock  = $650,000 + $125,000 = $775,000

After the stocks are cancelled, only treasury stock will be affected, since it will be decrease to $650,000.

Treasury stock is a contra equity account but is reported in the balance sheet as an asset. It decreases the value of common stock.

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