Chapter 18, Problem 18.13E

Treasury stock; weighted-average and FIFO cost

• LO18–5

At December 31, 2017, the balance sheet of Meca International included the following shareholders’ equity accounts:

Shareholders’ Equity	($ in millions)
Common stock, 60 million shares at $1 par	$ 60
Paid-in capital—excess of par	300
Retained earnings	410

Required:

Assuming that Meca International views its share buybacks as treasury stock, record the appropriate journal entry for each of the following transactions:

1. On February 12, 2018, Meca reacquired 1 million common shares at $13 per share.

2. On June 9, 2019, Meca reacquired 2 million common shares at $10 per share.

3. On May 25, 2020, Meca sold 2 million treasury shares at $15 per share. Determine cost as the weighted-average cost of treasury shares.

4. For the previous transaction, assume Meca determines the cost of treasury shares by the FIFO method.

To determine

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.

To Journalize: The treasury stock transactions for M International.

Explanation of Solution

(1)

Journalize the shares required (reacquired as treasury stock) on February 12, 2018.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
February	12	Treasury Stock		13,000,000
		Cash			13,000,000
		(To record purchase of treasury stock)

Table (1)

• Treasury Stock is stockholders’ equity account. The amount has decreased because common stock is purchased as treasury stock. Therefore, debit Treasury Stock account with $13,000,000.
• Cash is an asset account and the amount is decreased because cash is paid to buy treasury stock. Therefore, credit Cash account with $13,000,000.

Working Note:

Compute the treasury stock amount.

$\begin{array}{c}\text{Treasury stock = }\left\{\begin{array}{l}\text{Number of treasury stock purchased ×}\\ \text{Purchase price per share}\end{array}\right\}\\ \text{=1,000,000 shares × \$13}\\ \text{=\$13,000,000}\end{array}$

(2)

Journalize the shares required (reacquired as treasury stock) on June 9, 2019.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
June	9	Treasury Stock		20,000,000
		Cash			20,000,000
		(To record purchase of treasury stock)

Table (2)

• Treasury Stock is stockholders’ equity account. The amount has decreased because common stock is purchased as treasury stock. Therefore, debit Treasury Stock account with $20,000,000.
• Cash is an asset account and the amount is decreased because cash is paid to buy treasury stock. Therefore, credit Cash account with $20,000,000.

Working Note:

Compute the treasury stock amount.

$\begin{array}{c}\text{Treasury stock }=\left\{\begin{array}{l}\text{Number of treasury stock purchased}\times \\ \text{Purchase price per share}\end{array}\right\}\\ =\text{2,000,000 shares }\times \text{ \$10}\\ =\text{\$20,000,000}\end{array}$

(3)

Journalize the sale of treasury stock on May 25, 2020 (Use weighted average cost method to determine the cost of treasury stock).

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2020
May	25	Cash		30,000,000
		Treasury Stock			22,000,000
		Paid-in Capital–Share      Repurchase			8,000,000
		(To record sale of treasury stock)

Table (3)

• Cash is asset account. The amount is increased because cash is received on sale of treasury stock. Therefore, debit Cash account with $30,000,000.
• Treasury Stock is a stockholders’ equity account and the equity amount has increased due to sale of treasury stock. Therefore, credit Treasury Stock account with $22,000,000.
• Paid-in Capital–Share Repurchase is a stockholders’ equity account and the amount has increased because treasury stock is sold for more than the price purchased. Therefore, credit Paid-in Capital–Share Repurchase account with $8,000,000.

Working Notes:

Compute cash received.

$\begin{array}{c}\begin{array}{l}\text{Cash }\\ \text{received}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of treasury stock sold }\times \\ \text{Sale price per stock}\end{array}\right\}\\ \text{= 2,000,000 shares × \$15}\\ \text{= \$30,000,000}\end{array}$ (1)

Compute treasury stock at weighted average cost.

$\begin{array}{c}\begin{array}{l}\text{Weighted average cost }\\ \text{per treasury share}\end{array}\}\text{ = }\frac{\text{Total treasury stock amount}}{\text{Total number of treasury shares}}\\ \text{=}\frac{\text{\$13,000,000+\$20,000,000}}{\text{1,000,000 shares+2,000,000 shares}}\\ \text{=}\frac{\text{\$33,000,000}}{\text{3,000,000 shares}}\\ \text{=\$11}\end{array}$ (2)

Note: Refer to transactions 1 and 2 for values and computations of treasury stock amount and number of treasury shares.

Compute treasury stock value.

$\begin{array}{c}\text{Treasury stock = }\left\{\begin{array}{l}\text{Number of treasury stock sold ×}\\ \text{Weighted average cost per share}\end{array}\right\}\\ \text{=2,000,000 shares×\$11}\\ \text{=\$22,000,000}\end{array}$ (3)

Note: Refer to Equation (2) for value and computation of weighted average cost of treasury shares.

Compute paid-in capital–share repurchase value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital–}\\ \text{share repurchase}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received–}\\ \text{Treasury stock value }\end{array}\right)\\ \text{= \$30,000,000 – \$22,000,000}\\ \text{= \$8,000,000}\end{array}$

Note: Refer to Equations (1) and (3) for the values and computations of cash received and treasury stock value at cost.

(4)

Journalize the sale of treasury stock on May 25, 2020 (Use FIFO method to determine the cost of treasury stock).

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2020
May	25	Cash		30,000,000
		Treasury Stock			23,000,000
		Paid-in Capital–Share      Repurchase			7,000,000
		(To record sale of treasury stock)

Table (4)

• Cash is asset account. The amount is increased because cash is received on sale of treasury stock. Therefore, debit Cash account with $30,000,000.
• Treasury Stock is a stockholders’ equity account and the equity amount has increased due to sale of treasury stock. Therefore, credit Treasury Stock account with $23,000,000.
• Paid-in Capital–Share Repurchase is a stockholders’ equity account and the amount has increased because treasury stock is sold for more than the price purchased. Therefore, credit Paid-in Capital–Share Repurchase account with $7,000,000.

Working Notes:

Compute cash received.

$\begin{array}{c}\begin{array}{l}\text{Cash }\\ \text{received}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of treasury stock sold }\times \\ \text{Sale price per stock}\end{array}\right\}\\ \text{= 2,000,000 shares × \$15}\\ \text{= \$30,000,000}\end{array}$ (4)

Compute treasury stock at first-in-first-out (FIFO) cost for first 1,000,000 shares.

$\begin{array}{c}\begin{array}{l}\text{Treasury stock for }\\ \text{first 1,000,000 shares}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of treasury stock sold ×}\\ \text{Purchase price per share}\end{array}\right\}\\ \text{=1,000,000 shares×\$13}\\ \text{=\$13,000,000}\end{array}$ (5)

Compute treasury stock at first-in-first-out (FIFO) cost for next 1,000,000 shares.

$\begin{array}{c}\begin{array}{l}\text{Treasury stock for }\\ \text{next 1,000,000 shares}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of treasury stock sold ×}\\ \text{Purchase price per share}\end{array}\right\}\\ \text{=1,000,000 shares×\$10}\\ \text{=\$10,000,000}\end{array}$ (6)

Compute total treasury stock value.

$\begin{array}{c}\text{Treasury stock = }\left\{\begin{array}{l}\text{Treasury stock value for first 1,000,0000 shares+}\\ \text{Treasury stock value for next 1,000,0000 shares}\end{array}\right\}\\ \text{= \$13,000,000+\$10,000,000}\\ \text{= \$23,000,000}\end{array}$ (7)

Note: Refer to Equations (5) and (6) for values and computations of treasury stock value for first 1,000,000 shares and treasury stock value for next 1,000,000 shares.

Compute paid-in capital–share repurchase value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital–}\\ \text{share repurchase}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received–}\\ \text{Treasury stock value}\end{array}\right)\\ \text{= \$30,000,000 – \$23,000,000}\\ \text{= \$7,000,000}\end{array}$

Note: Refer to Equations (4) and (7) for the values and computations of cash received and treasury stock value at cost.