Chapter 18, Problem 18.3P

Reacquired shares—comparison of retired shares and treasury shares

• LO18–5

National Supply’s shareholders’ equity included the following accounts at December 31, 2017:

Shareholders’ Equity	($ in millions)
Common stock, 6 million shares at $1 par	$ 6,000,000
Paid-in capital—excess of par	30,000,000
Retained earnings	86,500,000

Required:

1. National Supply reacquired shares of its common stock in two separate transactions and later sold shares. Prepare the entries for each of the transactions under each of two separate assumptions: the shares are (a) retired and (b) accounted for as treasury stock.

February 15, 2018 Reacquired 300,000 shares at $8 per share.

February 17, 2019 Reacquired 300,000 shares at $5.50 per share.

2. Prepare the shareholders’ equity section of National Supply’s balance sheet at December 31, 2020, assuming the shares are (a) retired and (b) accounted for as treasury stock. Net income was $14 million in 2018, $15 million in 2019, and $16 million in 2020. No dividends were paid during the three-year period.

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.

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.

To Journalize: The stock transactions for N Supply assuming the shares are retired.

Explanation of Solution

Transaction on February 15, 2018:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
February	15	Common Stock		300,000
		Paid-in Capital–Excess of Par		1,500,000
		Retained Earnings		600,000
		Cash			2,400,000
		(To record retirement of common stock)

Table (1)

Working Notes:

Compute common stock value.

$\begin{array}{c}\text{Common stock value= Number of shares }\times \text{ Par value per share}\\ \text{= 300,000 shares × \$1}\\ \text{= \$300,000}\end{array}$ (1)

Compute excess of par value of shares.

$\begin{array}{c}\text{Excess of par value = }\frac{\text{Total paid-in capital-excess of par value}}{\text{Total common stock value}}\\ \text{=}\frac{\text{\$30,000,000}}{\text{\$6,000,000}}\\ \text{=\$5}\end{array}$ (2)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares}\times \\ \text{Excess of par value per share}\end{array}\right\}\\ \text{= 300,000 shares}\times \text{\$5}\\ \text{= \$1,500,000}\end{array}$ (3)

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

Compute cash paid amount.

$\begin{array}{c}\text{Cash paid = Number of shares }\times \text{ Re-acquisition price per share}\\ \text{= 300,000 shares×\$8}\\ \text{= \$2,400,000}\end{array}$ (4)

Compute retained earnings amount.

$\begin{array}{c}\begin{array}{l}\text{Retained earnings }\\ \text{amount}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash paid–Common stock value – }\\ \text{Paid-in capital-excess of par value–}\end{array}\right\}\\ \text{=\$2,400,0000–\$300,000–\$1,500,000}\\ \text{=\$600,000}\end{array}$ (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.

Transaction on February 17, 2019:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
February	17	Common Stock		300,000
		Paid-in Capital–Excess of Par		1,500,000
		Paid-in-Capital-Share Repurchase			150,000
		Cash			1,650,000
		(To record retirement of common stock)

Table (2)

Working Notes:

Compute common stock value.

$\begin{array}{c}\text{Common stock value= Number of shares }\times \text{ Par value per share}\\ \text{= 300,000 shares × \$1}\\ \text{= \$300,000}\end{array}$ (6)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares}\times \\ \text{Excess of par value per share}\end{array}\right\}\\ \text{= 300,000 shares}\times \text{\$5}\\ \text{= \$1,500,000}\end{array}$ (7)

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

Compute cash paid amount.

$\begin{array}{c}\text{Cash paid = Number of shares }\times \text{ Re-acquisition price per share}\\ \text{= 300,000 shares×\$5}\text{.50}\\ \text{= \$1,650,000}\end{array}$ (8)

Compute paid-in-capital-share repurchase amount.

$\begin{array}{c}\begin{array}{l}\text{Paid-in-capital-share }\\ \text{repurchase amount}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash paid–Common stock value – }\\ \text{Paid-in capital-excess of par value–}\end{array}\right\}\\ \text{=\$1,650,0000–\$300,000–\$1,500,000}\\ \text{=\$150,000}\end{array}$ (9)

Note: Refer to Equations (8), (6), and (7) for values and computations of common stock, paid-in capital-excess of par value, and cash paid.

To determine

To Journalize: The stock transactions for N Supply assuming the shares are accounted as treasury stock.

Explanation of Solution

Transaction on February 15, 2018:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
February	15	Treasury Stock		2,400,000
		Cash			2,400,000
		(To record purchase of treasury stock)

Table (3)

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

Transaction on February 17, 2019:

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2019
February	17	Treasury Stock		1,650,000
		Cash			1,650,000
		(To record purchase of treasury stock)

Table (4)

Note: Refer to Equation (8) for values and computations of cash paid.

To determine

To Prepare:  Stockholders’ equity section of balance sheet for N Supply assuming the shares is retired.

Explanation of Solution

Prepare stockholders’ equity section of balance sheet for N Supply assuming the shares is retired.

N Supply
Stockholders’ Equity Section
December 31, 2020
Paid-in Capital	Amount ($)
Common stock, $1 par value, 5,400,000 shares issued	$5,400,000
Paid-in capital – excess of par	27,000,000
Paid-in capital – share repurchase	150,000
Total paid-in capital	32,550,000
Retained earnings	130,900,000
Total paid-in capital and retained earnings	163,450,000
Deduct: Treasury stock	(0)
Total stockholders’ equity	$163,450,000

Table (5)

Working Notes:

Compute number of shares on December 31, 2020.

Particulars	Number of Shares
Number of shares on December 31, 2017	6,000,000
Number of shares purchased on February 15, 2018	(300,000)
Number of shares purchased on February 17, 2019	(300,000)
Number of shares on December 31, 2020	5,400,000

Table (6)

Compute paid-in-capital excess of par value.

Particulars	Amount ($)
Balance on December 31, 2017	30,000,000
Paid-in-capital excess of par due to transaction on February 15	(1,500,000)
Paid-in-capital excess of par due to transaction on February 17	(1,500,000)
Balance on December 31, 2020	$27,000,000

Table (7)

Note: Refer to Equations (3), and (7) for value and computation of paid-in-capital excess of par values on February 15, and February 17 respectively.

Compute retained earnings value.

Particulars	Amount ($)
Balance on December 31, 2015	86,500,000
Retained earnings value due to transaction on February 15	(600,000)
Net income in 2018	14,000,000
Net income in 2017	15,000,000
Net income in 2020	16,000,000
Balance on December 31, 2020	$130,900,000

Table (8)

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

To determine

To Prepare:  Stockholders’ equity section of balance sheet for N Supply assuming the shares is bought as treasury stock.

Explanation of Solution

Prepare stockholders’ equity section of balance sheet for N Supply assuming the shares are bought as treasury stock.

N Supply
Stockholders’ Equity Section
December 31, 2020
Paid-in Capital	Amount ($)
Common stock, $1 par value, 6,000,000 shares issued	$6,000,000
Paid-in capital – excess of par	30,000,000
Total paid-in capital	36,000,000
Retained earnings	131,500,000
Total paid-in capital and retained earnings	167,500,000
Deduct: Treasury stock, 600,000 shares (at cost)	(4,050,000)
Total stockholders’ equity	$163,450,000

Table (9)

Working Notes:

Compute retained earnings value.

Particulars	Amount ($)
Balance on December 31, 2017	86,500,000
Net income in 2018	14,000,000
Net income in 2019	15,000,000
Net income in 2020	16,000,000
Balance on December 31, 2020	$131,500,000

Table (10)

Note: Refer to Equation (14) for value and computation of retained earnings value.

Compute treasury stock value.

Particulars	Amount ($)
Treasury stock due to transaction on February 15, 2018	(2,400,000)
Treasury stock due to transaction on February 17, 2019	(1,650,000)
Balance on December 31, 2020	$(4,050,000)

Table (11)

Note: Refer to journal entries recorded on February 15 and February 17 in requirement 1 (b).