Question
Treasury Stock, Cost and Par Value Methods On January 1, West Company had outstanding 10,000 shares of $10 par common stock, which had been originally
Treasury Stock, Cost and Par Value Methods
On January 1, West Company had outstanding 10,000 shares of $10 par common stock, which had been originally issued at an average price of $35 per share. During the year, West engaged in the following treasury stock transactions:
Reacquired 1,000 shares of its common stock for $33 per share.
Reissued 600 shares of the treasury stock for $35 per share.
Reissued 300 shares of the treasury stock for $32 per share.
Retired the remaining 100 shares of treasury stock.
1. Prepare journal entries to record the preceding treasury stock transactions for West Company assuming it uses the cost method.
1. | Treasury Stock | $ ????? |
|
| Cash |
| $ ????? |
|
|
|
|
2. | Cash | $ ????? |
|
| Treasury Stock |
| $ ????? |
| Additional Paid-in Capital from Treasury Stock |
| $ ????? |
|
|
|
|
3. | Cash | $ ????? |
|
| Additional Paid-in Capital from Treasury Stock | $ ????? |
|
| Treasury Stock |
| $ ????? |
|
|
|
|
4. | Common Stock | $ ????? |
|
| Additional Paid-in Capital from Common Stock | $ ????? |
|
| Treasury Stock |
| $ ????? |
| Additional Paid-in Capital from Treasury Stock |
| $ ????? |
Hint:
Under the cost method, when the corporation reacquires its capital stock it debits an account entitled Treasury Stock (and credits Cash or other appropriate asset accounts) for the cost paid to reacquire the shares. When the corporation reissues the treasury shares, it reduces (credits) the Treasury Stock account for the cost of the shares reissued and records the difference between the cash received and the cost of the reissued shares as an adjustment of shareholders' equity. If the cash received exceeds the cost of the reissued treasury stock, it records the excess as an increase in additional paid-in capital from treasury stock. If the cash is less than the cost, it records the "deficit" as a reduction of additional paid-in capital from treasury stock. If the additional paid-in capital from treasury stock is insufficient to absorb the deficit, the corporation records the remainder as a reduction in retained earnings.
When making the journal entry to record the retirement of treasury stock, you should offset the cost of the retired shares in the Treasury Stock account against both the par value in the Capital Stock account and a pro rata share from the Additional Paid-in Capital (on common or preferred) account. You should record any difference between these amounts and the cost of the treasury stock with either a debit to Retained Earnings or a credit to an Additional Paid-in Capital from Treasury Stock account.
2. Prepare journal entries to record the preceding treasury stock transactions for West Company assuming it uses the par value method.
1. | Treasury Stock | $ ????? |
|
| Additional Paid-in Capital on Common Stock | $ ????? |
|
| Cash |
| $ ????? |
| Additional Paid-in Capital from Treasury Stock |
| $ ????? |
|
|
|
|
2. | Cash | $ ????? |
|
| Treasury Stock |
| $ ????? |
| Additional Paid-in Capital on Common Stock |
| $ ????? |
|
|
|
|
3. | Cash | $ ????? |
|
| Treasury Stock | $ ????? |
|
| Additional Paid-in Capital on Common Stock |
| $ ????? |
|
|
|
|
4. | Common Stock, $10 par | $ ????? |
|
| Treasury Stock |
| $ ????? |
Hint:
If a corporation uses the par value method to account for treasury stock, it treats the reacquisition of capital stock as an event entirely separate from the stock's reissuance. When the corporation reacquires its capital stock, it debits the Treasury Stock (either common or preferred) account for the par value of the stock and debits the original Additional Paid-in Capital (on common or preferred) account for an amount based on the average price received from all the original issuances of the stock
If the reacquisition price is less than the original average issuance price, it credits the excess to a new Additional Paid-in Capital from Treasury Stock account.
If the reacquisition price is more than the original average issuance price, it first records the deficit as a reduction of Additional Paid-in Capital from Treasury Stock (if any) and then as a reduction of Retained Earnings (as a kind of dividend paid upon reacquisition).
When the corporation reissues the treasury stock, it increases its contributed capital (and the number of outstanding shares) by crediting the Treasury Stock account at par and crediting the existing Additional Paid-in Capital (on common or preferred) account for the excess of the proceeds over the par value.
If the cash received is less than par, it reduces the Additional Paid-in Capital account.
If no additional paid-in capital exists related to this class of stock, it debits Retained Earnings
If the corporation retires treasury stock, it debits the Capital Stock account and credits the Treasury Stock account for the par value of the retired stock.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started