Question 1

(a) For numerous reasons, a corporation may reacquire shares of its own capital stock. When a company purchases treasury stock, it usually accounts for the stock using the cost method.

Required

Explain how a company would account for each of the following:

1. Purchase of shares at a price less than par value.

2. Subsequent resale of treasury shares at a price less than purchase price, but more than par value.

3. Subsequent resale of treasury shares at a price greater than both purchase price and par value.

4. Effect on net income due to treasury stock transactions. (10 marks)

(b) Ellison Company's balance sheet shows:

Common stock, $20 par $ 3,000,000

Paid-in capital in excess of par $ 1,050,000

Retained earnings $ 750,000

Required

Record the following transactions by the cost method.

(a) Bought 10,000 shares of its common stock at $ 29 a share.

(b) Sold 5,000 treasury shares at $ 30 a share.

(c) Sold 2,000 shares of treasury stock at $ 26 a share.

(b) Alex Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock for a lump sum of $72,000 cash.

Required

(a) Give the entry for the issuance assuming the par value of the common stock was $ 5 and the market value $ 30, and the par value of the preferred was $ 40 and the market value $ 50. (Each valuation is on a per share basis and there are ready markets for each stock.)

(b) Give the entry for the issuance assuming the same facts as (a) above except the preferred stock has no ready market and the common stock has a market value of $ 25 per share.

(12 marks)

(c) Describe the journal entry for a stock dividend on common stock (which has a par