Chapter 18, Problem 18.11E

To determine

Retired stock:

Buy back of shares from the shareholders by paying cash and obtaining the status of “authorized but unissued share”is known as retired shares.

To Journalize: the transactions for B Communications.

Explanation of Solution

1.

Prepare journal entry, to record the required shares on January 7, 2016.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
January	7	Common Stock		2,000,000
		Paid-in Capital–Excess of Par		6,000,000
		Retained Earnings		2,000,000
		Cash			10,000,000
		(To record retirement of common stock)

Table (1)

• Common Stock is a stockholders’ equity account and the amount has decreased due to re-acquisition of common stock. Therefore, debit Common Stock account with $2,000,000.
• Paid-in Capital–Excess of Par is a stockholders’ equity account and the amount has decreased due to decrease in capital. Therefore, debit Paid-in Capital–Excess of Par account with $6,000,000.
• Retained Earnings is a stockholders’ equity account. The amount paid for reacquisition is higher than its value by $2 million. This decreased the retained earnings. Therefore, debit Retained Earnings account with $2,000,000.
• Cash is an asset account. The amount is decreased because cash is paid due to stock re-acquisition; therefore, credit Cash account with $10,000,000.

Working Notes:

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value per share}\\ \text{= 2,000,000 shares × \$1}\\ \text{= \$2,000,000}\end{array}$ (1)

Compute excess of par value of shares.

$\begin{array}{c}\text{Excess of par value = }\frac{\text{Total paid-in capital-excess of par value}}{\text{Total common stock value}}\\ \text{=}\frac{\text{\$300,000,000}}{\text{\$100,000,000}}\\ \text{=\$3}\end{array}$ (2)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares}\times \\ \text{Excess of par value per share}\end{array}\right\}\\ \text{= 2,000,000 shares}\times \text{\$3}\\ \text{= \$6,000,000}\end{array}$ (3)

Note: Refer to Equation (2) for values and computations of excess of par value per share.

Compute cash paid amount.

$\begin{array}{c}\text{Cash paid = Number of shares }\times \text{ Re-acquisition price per share}\\ \text{= 2,000,000 shares×\$5}\\ \text{= \$10,000,000}\end{array}$ (4)

Compute retained earnings amount.

$\begin{array}{c}\text{Retained earnings amount = }\left\{\begin{array}{l}\text{Cash paid–}\\ \text{Common stock value – }\\ \text{Paid-in capital-excess of par value}\end{array}\right\}\\ \text{=\$10,000,0000–\$2,000,000–\$6,000,000}\\ \text{=\$2,000,000}\end{array}$

Note: Refer to Equations (4), (1), and (3) for values and computations of cash paid, common stock, and paid-in capital-excess of par value.

2.

Prepare journal entry, to record the required shares on August 23, 2016.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
August	23	Common Stock		4,000,000
		Paid-in Capital–Excess of Par		12,000,000
		Paid-in Capital–Share       Repurchase			2,000,000
		Cash			14,000,000
		(To record retirement of common stock)

Table (2)

• Common Stock is a stockholders’ equity account and the amount has decreased due to re-acquisition of common stock. Therefore, debit Common Stock account with $4,000,000.
• Paid-in Capital–Excess of Par is a stockholders’ equity account and the amount has decreased due to decrease in capital. Therefore, debit Paid-in Capital–Excess of Par account with $12,000,000.
• The amount paid for reacquisition is $14,000,000, which is lesser than its value by $2,000,000. This should be recorded by increasing the paid-in capital-share repurchase. Paid-in Capital–Share Repurchase is a stockholders’ equity account. The amount has been credited because of increase in the Paid-in Capital–Share Repurchase account. Therefore, credit Paid-in Capital–Share Repurchase account with $2,000,000.
• Cash is an asset account. The amount is decreased because cash is paid for stock re-acquisition; therefore, credit Cash account with $14,000,000.

Working Notes:

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value per share}\\ \text{= 4,000,000 shares × \$1}\\ \text{= \$4,000,000}\end{array}$ (5)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares}\times \\ \text{Excess of par value per share}\end{array}\right\}\\ \text{= 4,000,000 shares}\times \text{\$3}\\ \text{= \$12,000,000}\end{array}$ (6)

Note: Refer to Equation (2) for values and computations of excess of par value per share.

Compute cash paid amount.

$\begin{array}{c}\text{Cash paid = Number of shares }\times \text{ Re-acquisition price per share}\\ \text{= 4,000,000 shares×\$3}\text{.50}\\ \text{= \$14,000,000}\end{array}$ (7)

Compute paid-in capital-share repurchase amount.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital–share }\\ \text{repurchase amount}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Common stock value + }\\ \text{Paid-in capital-excess of par value–}\\ \text{Cash paid}\end{array}\right\}\\ \text{=\$4,000,0000+\$12,000,000–\$14,000,000}\\ \text{=\$2,000,000}\end{array}$

Note: Refer to Equations (5), (6), and (7) for values and computations of common stock, paid-in capital-excess of par value, and cash paid.

3.

Prepare journal entry, to record the sale of common shares on July 25, 2017.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2017
July	25	Cash		18,000,000
		Common Stock			3,000,000
		Paid-in Capital–Excess of Par			15,000,000
		(To record issuance of common stock)

Table (3)

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $18,000,000.
• Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $3,000,000.
• Paid-in Capital–Excess of Par is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid-in Capital–Excess of Par account with $15,000,000.

Working Notes:

Compute cash received.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Price per share}\\ \text{= 3,000,000 shares × \$6}\\ \text{= \$18,000,000}\end{array}$ (8)

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value of common stock}\\ \text{= 3,000,000 shares × \$1}\\ \text{= \$3,000,000}\end{array}$ (9)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Common stock value }\end{array}\right)\\ \text{= \$18,000,000 – \$3,000,000}\\ \text{= \$15,000,000}\end{array}$

Note: Refer to Equations (8) and (9) for values and computations of cash received and common stock value.