Explanation Treasury Stock : It is the type of stock that company keeps with itself either by not issuing the shares or by buying back of shares Journalizing: Journalizing is the process of recording the transactions of an organization in a chronological order. Based on these journal entries recorded, the accounts are posted to the relevant ledger accounts. Accounting rules for journal entries: To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains. To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains. Purchased treasury stock: Date Account Title and Explanation Post ref Debit ($) Credit ($) Treasury stock 165,000 Cash 165,000 (Being treasury stock repurchased) Table (1) Treasury stocks are equity. Since, own equity is purchased, it reduces equity. Hence, debit treasury stocks account. Cash is an asset. Since, cash is used to purchase treasury stock, it reduces asset. Hence, credit cash account. Calculation of amount of cash, Cash = Number of shares issued × Selling price = 20 , 000 shares × $ 8.25 = $ 165 , 000 Treasury stock retired immediately: Date Account Title and Explanation Post ref Debit ($) Credit ($) Common stock 20,000 Paid in capital in excess of par value, common stock 60,000 Retained Earnings 85,000 Treasury stocks 165,000 (Being treasury stock retired) Table (2) Common stock is equity. Since, stock is retired, it decreases equity. Hence debit common stock account. Paid in capital in excess of par value is debited in order to set off the liability and close the balance in this account. Retained earnings are a part of equity. Since, shares are retired, it create loss and reduces equity. Hence, debit retained earnings account. Treasury stock is equity account. Treasury stock account is credited in order to set off the assets. Working note: Calculation of amount of common stock, Common stock = Number of shares retired × Par value = 20 , 000 share × $ 1 = $ 20 , 000 Calculation of amount of treasury stock, Treasury stock = Number of shares repurchased × Purchase price = 20 , 000 shares × $ 8

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ISBN: 9780136912644

Author: Elizabeth A. Gordon; Jana S. Raedy; Alexander J. Sannella

Publisher: Pearson Education (US)

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Chapter 15, Problem 15.9E

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Chapter 15 Solutions

Intermediate Accounting

Ch. 15 - Prob. 15.1Q Ch. 15 - What are the retained earnings of a firm?Ch. 15 - Prob. 15.3Q Ch. 15 - Prob. 15.4Q Ch. 15 - Does an entity have to legally dissolve treasury...Ch. 15 - Prob. 15.6Q Ch. 15 - Prob. 15.7Q Ch. 15 - Prob. 15.8Q Ch. 15 - Prob. 15.9Q Ch. 15 - Prob. 15.10Q

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