Chapter 11, Problem 11.8E

Recording Treasury Stock Transactions and Analyzing Their Impact

The following selected transactions occurred for Corner Corporation:

Feb. 1	Purchased 400 shares of the company’s own common stock at $20 cash per share: the stock is now held in treasury.
July 15	Issued 100 of the shares purchased on February 1 for $30 cash per share.
Sept. 1	Issued 60 more of the shares purchased on February 1 for $15 cash per share.

Required:

1. 1. Show the effects of each transaction on the accounting equation.
2. 2. Give the indicated journal entries for each of the transactions.
3. 3. What impact does the purchase of treasury stock have on dividends paid?
4. 4. What impact does the reissuance of treasury stock for an amount higher than the purchase price have on net income?

To determine

To show: The effect of each transaction on the accounting equation.

Explanation of Solution

Accounting equation:

Accounting equation is an accounting tool expressed in the form of equation, by creating a relationship between the resources or assets of a company, and claims on the resources by the creditors and the owners. Accounting equation is expressed as shown below:

$\boxed{\text{Assets}=\text{Liabilities+Stockholders' equity}}$

1. 1. Purchased 400 shares of the company’s own common stock at $20 per share; the stock is now held in treasury.

	Assets		Liabilities	Stockholders’ equity
February 1	Cash	-8,000(1)	No effect	Treasury stock (+xSE)	-8,000

Table (1)

• There is a decrease in the asset (cash) by $8,000.
• There is an increase in the contra-equity (treasury stock) which decreases the stockholders’ equity by $8,000.

Working note:

Calculate the cash:

$\begin{array}{c}\text{Cash}=\text{Number of shares purchased}\times \text{ Cost per share}\\ =400\text{Shares}\times \text{\$20}\\ =\$8,000\end{array}$ (1)

1. 2. Issued 100 of the shares purchased on February 1 for $30 cash per share.

	Assets		Liabilities	Stockholders’ equity
July 15	Cash	+3,000(2)	No effect	Treasury stock(-xSE) Additional paid-in capital	+2,000(3) +1,000(4)

Table (2)

• There is an increase in the asset (cash) by $3,000.
• There is a decrease in the contra- equity (Treasury stock) which increases the stockholders’ equity by $2,000 and the additional paid in capital (issue price is higher than the purchase price) increases the stockholders’ equity by $1,000.

Working note:

Calculate the cash:

$\begin{array}{c}\text{Cash}=\text{Number of shares issued}\times \text{Cost per share}\\ =100\text{Shares}\times \text{\$30}\\ =\$3,000\end{array}$ (2)

Calculate the amount of treasury stock:

$\begin{array}{c}\text{Treasury stock}=\text{Number of shares issued}\times \text{Cost price}\\ =100\text{Shares}\times \text{\$20}\\ =\$2,000\end{array}$ (3)

Calculate the amount of additional paid in capital:

$\begin{array}{c}\text{Additional paid-in capital}=\text{Number of shares issed}\times \left(\text{Issue price}-\text{Purchase price}\right)\\ =100\text{Shares}\times \left(\$30-\$20\right)\\ =\$1,000\end{array}$ (4)

1. 3. Issued 60 more of the shares purchased on February 1 for $15 per share.

	Assets		Liabilities	Stockholders’ equity
September 1	Cash	+900(5)	No effect	Treasury stock(-xSE) Additional paid-in capital	+1,200(6) -300(7)

Table (3)

• There is an increase in the asset (cash) by $900.
• There is a decrease in the contra- equity (Treasury stock) which increases the stockholders’ equity by $1,200 and the additional paid in capital(issue price is lesser than the purchase price) decreases the stockholders’ equity by $300.

Working note:

Calculate the cash:

$\begin{array}{c}\text{Cash}=\text{Number of shares issued}\times \text{Cost per share}\\ =60\text{Shares}\times \text{\$15}\\ =\$900\end{array}$ (5)

Calculate the amount of treasury stock:

$\begin{array}{c}\text{Treasury stock}=\text{Number of shares issued}\times \text{Cost price}\\ =60\text{Shares}\times \text{\$20}\\ =\$1,200\end{array}$ (6)

Calculate the amount of additional paid in capital:

$\begin{array}{c}\text{Additional paid-in capital}=\text{Number of shares issed}\times \left(\text{Issue price}-\text{Purchase price}\right)\\ =60\text{Shares}\times \left(\$15-\$20\right)\\ =\$300\end{array}$ (4)

To determine

To prepare: The journal entry for each transaction.

Explanation of Solution

Journal:

Journal is the book of original entry. Journal consists of the day-to-day financial transactions in a chronological order. The journal has two aspects; they are debit aspect and the credit aspect.

Prepare the journal entries:

1. a. Journal entry for purchase of treasury stock:

Date	Account Title and Explanation	Debit ($)	Credit ($)
February 1	Treasury stock $\left(400\text{Shares}\times \text{\$20}\right)$	8,000
	Cash		8,000
	(To record the purchase of treasury stock)

Table (4)

• Treasury stock is a contra-equity. There is an increase in the contra- equity which decreases the stockholders’ equity. Hence, debit treasury stock with $8,000.
• Cash is an asset. There is a decrease in the asset account. Hence, credit cash with $8,000.

1. b. Journal entry for issue of treasury stock:

Date	Account Title and Explanation	Debit ($)	Credit ($)
July 15	Cash $\left(100\text{Shares}\times \text{\$30}\right)$	3,000
	Treasury stock $\left(100\text{Shares}\times \text{\$20}\right)$		2,000
	Additional paid-in capital $\left[100\text{Shares}\times \left(\$30-\$20\right)\right]$		1,000
	(To record the issue of treasury stock

Table (5)

• Cash is an asset. There is an increase in the asset. Hence, debit cash account with $3,000.
• Treasury stock is a contra-equity. There is a decrease in the contra-equity which increases the stockholders’ equity. Hence, credit stockholders’ equity with $2,000.
• Additional paid in capital (treasury stock) –there is an issuance of stock at a price higher than the purchased price. Hence, credit additional paid in capital with $1,000.

1. c. Journal entry for issue of treasury stock:

Date	Account Title and Explanation	Debit ($)	Credit ($)
September 1	Cash $\left(\text{60Shares}\times \text{\$15}\right)$	900
	Additional paid in capital $\left[\text{60Shares}\times \left(\$15-\$20\right)\right]$	300
	Treasury stock $\left(\text{60Shares}\times \text{\$20}\right)$		1,200
	(To record the issue of treasury stock)

Table (6)

• Cash is an asset. There is an increase in the asset. Hence, credit cash account with $900.
• Additional paid in capital (Common stock) –there is an issuance of stock at lower price than the purchased price. Hence, debit additional paid in capital with $300.
• Treasury stock is a contra-equity. There is a decrease in the contra equity which increases stockholders’ equity. Hence, credit treasury stock with $1,200.

To determine

The impact of the purchase of treasury stock on payment of dividend.

Explanation of Solution

Treasury Stock:

It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

Cash dividend:

The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

When the treasury stock is purchased, the total amount of cash dividend will be reduced as the dividends are not paid out of the treasury stock.

To determine

The impact of reissuance of treasury stock for a higher amount than the purchase price on net income.

Explanation of Solution

Treasury Stock:

It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

If the treasury stock is issued for a higher amount than the purchase price, then the impact of this will be only on the balance sheet accounts as an additional paid in capital is received by issuing the stocks at higher price.

If the treasury stock is issued for higher the amount than the purchase price, there is no impact on the income statement as it affects only the stockholders’ equity.