Chapter 13, Problem 10E

1 (a)

To determine

Prepare journal entries to record the purchase of treasury stock.

Explanation of Solution

Treasury stock: The shares which were reacquired or bought back by the company, but not formally retired from the corporation stock, are called as treasury stock. The re-acquisition of issued shares decreases the number of outstanding shares.

Prepare the journal entry to record the purchase of its own common stock:

Date	Account Titles	Debit ($)	Credit ($)
October 11	Treasury Stock $\left(5,000\text{shares}\times \text{\$25}\right)$	125,000
	Cash		125,000
	(To record purchase of treasury stock)

Table (1)

To record purchase of treasury stock:

• Treasury stock is contra-stockholders’ contra equity account with a normal balance of debit. Thus, when treasury stocks are purchased, it decreases the stockholders’ equity account. In this case, it reduces the stockholders’ equity. Therefore, treasury stock account is debited.
• Cash is an asset account, and it decreases the value of cash account. Therefore, credit cash account.

1 (b)

To determine

Prepare journal entries to record the sale of treasury stock.

Explanation of Solution

Prepare the journal entry to record the sale of treasury shares:

Date	Account Titles	Debit ($)	Credit ($)
November 1	Cash $\left(1,000\text{shares}\times \text{\$31}\right)$	31,000
	Treasury Stock $\left(1,000\text{shares}\times \text{\$25}\right)$		25,000
	Paid-In Capital, Treasury stock		6,000
	(To record sale of treasury stock for above the cost price)

Table (2)

• Cash is an asset account, and it increases the value of cash account. Therefore, debit cash account.
• Treasury stock is contra-stockholders’ contra equity account with a normal balance of debit. Thus, when treasury stocks are sold at its cost price, then cash would be debited and treasury stock would be credited. But, when treasury stocks are sold for higher than its cost price, then cash would be debited and treasury stock would be credited for cost price, and paid-in capital from treasury stock would be credited for excess selling price.

1 (c)

To determine

Prepare journal entries to record the sale of treasury stock.

Explanation of Solution

Prepare the journal entry to record the sale of treasury shares:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
November 25
	Cash $\left(4,000\text{shares}\times \text{\$20}\right)$		80,000
	Paid-in Capital–Treasury stock		6,000
	Retained Earnings		14,000
	Treasury Stock     $\left(4,000\text{shares}\times \text{\$25}\right)$			100,000
	(To record sale of treasury stock)

Table (3)

To record sale of treasury stock:

• Cash is asset account. The amount is increased because cash is received on sale of treasury stock. Therefore, debit Cash account.
• Paid-in Capital–Share Repurchase is a stockholders’ equity account and the amount has decreased because treasury stock is sold for lesser than the price purchased. Therefore, debit Paid-in Capital–Share Repurchase account.
• Retained Earnings is a stockholders’ equity account. The amount has decreased because treasury stock is sold for lesser than the price purchased. Therefore, debit Retained Earnings account.
• Treasury Stock is a stockholders’ equity account and the equity amount has increased due to sale of treasury stock. Therefore, credit Treasury Stock account.

2.

To determine

Explain the manner in which the company’s equity section changes after the October 11 treasury stock purchase, and prepare the revised equity section of its balance sheet at that date.

Explanation of Solution

Explain the manner in which the company’s equity section changes after the October 11 treasury stock purchase:

• There will be a change in the description line of the common stock account. After the purchase of treasury stock, common stock will be as follows:

Common stock–$10 par value; 72,000 shares authorized and issued; 5,000 shares in treasury

$720,000

Table (4)

The dollar balance of this common stock account does not change with a treasury stock purchase.

• There will not be any change in the descriptions, and dollar amounts for Paid-In capital in excess of par value.
• There will be not be any change in the dollar balance of the retained earnings, but there will be a change in its description as follows:

Retained earnings ($125,000 restricted for treasury stock)

$864,000

Table (5)

• Before the total line for stockholders’ equity, a deduction for the cost of treasury stock is reported immediately, after the purchase as follows:

Less: Cost of treasury stock

$(125,000)

Table (6)

• There will be change in stockholders’ equity from $1,800,000 to $1,675,000.

Prepare the revised equity section of its balance sheet:

Particulars	Amounts ($)
Common stock–$10 par value; 72,000 shares authorized and issued; 5,000 shares in treasury	$720,000
Paid-in capital in excess of par value, Common stock	216,000
Retained earnings, $125,000 restricted by treasury stock	864,000
Total	1,800,000
Less: Cost of treasury stock	(125,000)
Total stockholders’ equity	$1,675,000

Table (7)