IASA2: 2007, Q26d
This is another one that is raising a lot of questions. A lot of people are curious about why the treasury stock is not included in the surplus calculation.
Remember that there are 2 ways to calculate surplus (from the Feldblum surplus paper):
-balance sheet approach: A – L
-income statement approach: prior surplus + income + direct charges/ credits
This particular question is using the Balance Sheet approach, since we are given a lot of info on both assets and liabilities.
Since we are not using the income statement approach (we can’t because we don’t have enough info), the components of income and directs/ credits are irrelevant. An increase in treasury stock falls under this category: it is a direct charge to surplus. We therefore need to ignore it.