Chapter 18, Problem 18.2P

Share buyback—comparison of retirement and treasury stock treatment

• LO18–5

The shareholders’ equity section of the balance sheet of TNL Systems Inc. included the following accounts at December 31, 2017:

Shareholders’ Equity	($ in millions)
Common stock, 240 million shares at $1 par	$ 240
Paid-in capital—excess of par	1,680
Paid-in capital—share repurchase	1
Retained earnings	1,100

Required:

1. 1. During 2018, TNL Systems reacquired shares of its common stock and later sold shares in two separate transactions. Prepare the entries for both the purchase and subsequent resale of the shares assuming the shares are (a) retired and (b) viewed as treasury stock.
   1. a. On February 5, 2018, TNL Systems purchased 6 million shares at $10 per share.
   2. b. On July 9, 2018, the corporation sold 2 million shares at $12 per share.
   3. c. On November 14, 2020, the corporation sold 2 million shares at $7 per share.
2. 2. Prepare the shareholders’ equity section of TNL Systems’ balance sheet at December 31, 2020, comparing the two approaches. Assume all net income earned in 2018–2020 was distributed to shareholders as cash dividends.

To determine

Buyback of Shares

Retire stock:

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

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 stock transactions for Incorporation T assuming the shares are retired.

Explanation of Solution

Journalize the stock transactions for Incorporation T assuming the shares are retired.

Transaction on February 5, 2018:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
February	5	Common Stock (1)		6,000,000
		Paid-in Capital–Excess of Par (3)		42,000,000
		Paid-in Capital–Share            Repurchase		1,000,000
		Retained Earnings (5)		11,000,000
		Cash (4)			60,000,000
		(To record retirement of common stock)

Table (1)

Working Notes:

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value per share}\\ \text{= 6,000,000 shares × \$1}\\ \text{= \$6,000,000}\end{array}$ (1)

Compute excess of par value of shares.

$\begin{array}{c}\text{Excess of par value = }\frac{\text{Total paid-in capital-excess of par value}}{\text{Total common stock value}}\\ \text{=}\frac{\text{\$1,680,000,000}}{\text{\$240,000,000}}\\ \text{=\$7}\end{array}$ (2)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares}\times \\ \text{Excess of par value per share}\end{array}\right\}\\ \text{= 6,000,000 shares}\times \text{\$7}\\ \text{= \$42,000,000}\end{array}$ (3)

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

Compute cash paid amount.

$\begin{array}{c}\text{Cash paid = Number of shares }\times \text{ Re-acquisition price per share}\\ \text{= 6,000,000 shares×\$10}\\ \text{= \$60,000,000}\end{array}$ (4)

Compute retained earnings amount.

$\begin{array}{c}\begin{array}{l}\text{Retained }\\ \text{earnings }\\ \text{amount}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash paid–}\\ \text{Common stock value – }\\ \text{Paid-in capital-excess of par value–}\\ \text{Paid-n-capital share repurchase value}\end{array}\right\}\\ \text{=\$60,000,0000–\$6,000,000–\$42,000,000–\$1,000,000}\\ \text{=\$11,000,000}\end{array}$ (5)

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

b.

Transaction on July 9, 2018:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
July	9	Cash (6)		24,000,000
		Common Stock (7)			2,000,000
		Paid-in Capital–Excess of Par (8)			22,000,000
		(To record sale of common stock)

Table (2)

Working Notes:

Compute cash received.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Price per share}\\ \text{= 2,000,000 shares × \$12}\\ \text{= \$24,000,000}\end{array}$ (6)

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value of common stock}\\ \text{= 2,000,000 shares × \$1}\\ \text{= \$2,000,000}\end{array}$ (7)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Common stock value }\end{array}\right)\\ \text{= \$24,000,000 – \$2,000,000}\\ \text{= \$22,000,000}\end{array}$ (8)

Note: Refer to Equations (6) and (7) for values and computations of cash received and common stock value.

c.

Transaction on November 14, 2020:

Date		Account Titles and Explanation		Debit ($)	Credit ($)
2018
November	14		Cash (9)	14,000,000
			Common Stock (10)		2,000,000
			Paid-in Capital–Excess of Par (11)		12,000,000
			(To record sale of common stock)

Table (3)

Working Notes:

Compute cash received.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Price per share}\\ \text{= 2,000,000 shares × \$7}\\ \text{= \$14,000,000}\end{array}$ (9)

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value of common stock}\\ \text{= 2,000,000 shares × \$1}\\ \text{= \$2,000,000}\end{array}$ (10)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Common stock value }\end{array}\right)\\ \text{= \$14,000,000 – \$2,000,000}\\ \text{= \$12,000,000}\end{array}$ (11)

Note: Refer to Equations (9) and (10) for values and computations of cash received and common stock value.

To determine

To Journalize: The stock transactions for Incorporation T assuming the shares are repurchased as treasury stock.

Explanation of Solution

Journalize the stock transactions for Incorporation T assuming the shares are repurchased as treasury stock.

a.

Transaction on February 5, 2018:

Date		Account Titles and Explanation	Debit ($)	Credit ($)
2018
February	5	Treasury Stock (4)	60,000,000
		Cash (4)		60,000,000
		(To record purchase of treasury stock)

Table (4)

Note: Refer to Equation (4) for values and computations of cash paid.

b.

Transaction on July 9, 2018:

Date		Account Titles and Explanation	Debit ($)	Credit ($)
2018
July	9	Cash	24,000,000
		Treasury Stock (12)		20,000,000
		Paid-in Capital–Share Repurchase (13)		4,000,000
		(To record sale of treasury stock)

Table (5)

Working Notes:

Compute treasury stock value.

$\begin{array}{c}\text{Treasury stock = }\left\{\begin{array}{l}\text{Number of treasury stock sold ×}\\ \text{Purchase price per share}\end{array}\right\}\\ \text{=2,000,000 shares×\$10}\\ \text{=\$20,000,000}\end{array}$ (12)

Compute paid-in capital–share repurchase value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital–}\\ \text{share repurchase}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received–}\\ \text{Treasury stock value }\end{array}\right)\\ \text{= \$24,000,000 – \$20,000,000}\\ \text{= \$4,000,000}\end{array}$ (13)

Note: Refer to Equations (6) and (12) for the values and computations of cash received and treasury stock value at cost.

c.

Transaction on November 14, 2020:

Date		Account Titles and Explanation	Debit ($)	Credit ($)
2020
November	14	Cash	14,000,000
		Paid-in Capital–Share Repurchase (15)	5,000,000
		Retained Earnings (16)	1,000,000
		Treasury Stock (14)		20,000,000
		(To record sale of treasury stock)

Table (6)

Working Notes:

Compute treasury stock value.

$\begin{array}{c}\text{Treasury stock = }\left\{\begin{array}{l}\text{Number of treasury stock sold ×}\\ \text{Purchase price per share}\end{array}\right\}\\ \text{=2,000,000 shares×\$10}\\ \text{=\$20,000,000}\end{array}$ (14)

Compute paid-in-capital repurchase value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital–share }\\ \text{repurchase value on }\\ \text{November14}\end{array}\}\text{= }\left(\begin{array}{l}\text{Paid-in capital}\\ –\text{share repurchase }\\ \text{as per balance sheet+}\\ \text{Paid-in capital}\\ –\text{share repurchase on July 9}\end{array}\right)\\ \text{= \$1,000,000+\$4,000,000}\\ \text{= \$5,000,000}\end{array}$ (15)

Compute retained earnings value.

$\begin{array}{c}\text{Retained earnings value = }\left(\begin{array}{l}\text{Treasury stock value}–\\ \text{Cash received–}\\ \text{Paid-in capital–share repurchase}\end{array}\right)\\ \text{= \$20,000,000 – \$14,000,000–\$5,000,000}\\ \text{= \$1,000,000}\end{array}$ (16)

Note: Refer to Equations (14), (9), and (15) for the values and computations of treasury stock value at cost, cash received, and paid-in capital–share repurchase values respectively.

To determine

To prepare: The stockholders’ equity section of balance sheet for Incorporation T assuming the shares are retired.

Explanation of Solution

Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.

Prepare stockholders’ equity section of balance sheet for Incorporation T assuming the shares are retired.

Incorporation T
Stockholders’ Equity Section
December 31, 2020
Paid-in Capital	Amount ($)
Common stock, $1 par value, 238,000,000 shares         issued	$238,000,000
Paid-in capital – excess of par	1,672,000,000
Total paid-in capital	1,910,000,000
Retained earnings	1,089,000,000
Total paid-in capital and retained earnings	2,999,000,000
Deduct: Treasury stock	(0)
Total stockholders’ equity	$2,999,000,000

Table (7)

Working Notes:

Compute number of shares on December 31, 2020.

Particulars	Number of Shares
Number of shares on December 31, 2017	240,000,000
Number of shares purchased on February 5	(6,000,000)
Number of shares sold on July 9	2,000,000
Number of shares sold on November 14	2,000,000
Number of shares on December 31, 2020	238,000,000

Table (8)

Compute paid-in-capital excess of par value.

Particulars	Amount ($)
Balance on December 31, 2018	1,680,000,000
Paid-in-capital excess of par due to transaction on February 5	(42,000,000)
Paid-in-capital excess of par due to transaction on July 9	22,000,000
Paid-in-capital excess of par due to transaction on November 14	12,000,000
Balance on December 31, 2020	$1,672,000,000

Table (9)

Note: Refer to Equations (3), (8), and (11) for value and computation of paid-in-capital excess of par values on February 5, July 9, and November 14 respectively.

Compute retained earnings value.

Particulars	Amount ($)
Balance on December 31, 2017	1,100,000,000
Paid-in-capital excess of par due to transaction on February 5	(11,000,000)
Balance on December 31, 2020	$1,089,000,000

Table (10)

Note: Refer to Equation (5) for value and computation of retained earnings value.

Prepare stockholders’ equity section of balance sheet for Incorporation T assuming the shares are bought as treasury stock.

Incorporation T
Stockholders’ Equity Section
December 31, 2020
Paid-in Capital	Amount ($)
Common stock, $1 par value, 240,000,000 shares         issued	$240,000,000
Paid-in capital – excess of par	1,680,000,000
Total paid-in capital	1,920,000,000
Retained earnings	1,099,000,000
Total paid-in capital and retained earnings	3,019,000,000
Deduct: Treasury stock	(20,000,000)
Total stockholders’ equity	$2,999,000,000

Table (11)

Working Notes:

Compute retained earnings value.

Particulars	Amount ($)
Balance on December 31, 2017	1,100,000,000
Paid-in-capital excess of par due to transaction on November 14	(1,000,000)
Balance on December 31, 2020	$1,099,000,000

Table (12)

Note: Refer to Equation (16) for value and computation of retained earnings value.