Chapter 11, Problem 6BTN

To determine

Treasury Stock:

It is the type of stock that company keeps with itself either by not issuing the shares or by buying back of shares.

Common Stock:

It shows the total amount of money that the owner has in this business. Owner use their right of being owner by voting for important matters in the general meetings of the company.

1.

To explain: Effects of buyback on corporation’s financial position.

Explanation of Solution

When an organization engaged itself in buyback, it reduces both the assets and the liabilities by the amount of buyback because to buy back its own share cash is used, which reduces asset and own stock bought is written with value 0 in the balance sheet and it reduces liability as well.

Hence, buyback reduce both asset and liability by the same amount.

2.

To determine

To explain: Affect of buyback on corporation’s financial position.

Explanation of Solution

• A company may buyback when it has extra equity then it requires because having more equity means paying to more shareholders even when you are not using their capital at all.
• A company may buy back its own equity when its share price falls for some bad news and can reissue when there is good news in the market and company’s share price is rising. In this way, company can earn extra money for their business without issuing any additional shares.
• A buyback is also increase the earning per share of the company because same profit is now divided among fewer shareholders.

Hence , a buyback can be done for number of reasons.

3.

To determine

To prepare: Journal entry.

Explanation of Solution

Treasury stock is purchased.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Oct 11	Treasury Stocks		13,400
	Cash			13,400
	(Being treasury stocks is purchased )

Table (1)

• Treasury stocks are equity. Since, own equity is purchased, it reduces equity. Hence, credit Treasury Stocks account.
• Cash is an asset. Since, cash is used to pay dividend, it reduces asset. Hence credit Cash account.

a.

Treasury stocks reissued at cost price.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Nov 1	Cash		13,400
	Treasury Stocks			13,400
	(Being treasury stock issued at cost price )

Table (2)

• Cash is an asset. Since, cash is received, it increases asset. Hence debit Cash account.
• Treasury stock is equity. Since, shares is issued, it increases equity. Hence, credit Treasury Stock account.

b.

Treasury stocks reissued at $150 per share.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Nov 1	Cash		15,000
	Treasury Stocks			13,400
	Paid in capital in excess of par value, treasury stock			1,600
	(Being treasury stock issued at above cost price)

Table (3)

• Cash is an asset. Since, cash is received, it increases asset. Hence debit Cash account.
• Treasury stock is equity. Since, shares is issued, it increases equity. Hence, credit Treasury Stock account.
• Paid in capital in excess of par value, treasury stock is part of a shareholder’s fund. Since, money is received, it increases equity. Hence, credit paid in capital in excess of par value.

Working Notes:

Calculation of treasury stock,

$\begin{array}{c}\text{Treasury}\text{Stock}=\text{Number}\text{of}\text{Shares}\times \text{Face}\text{value}\\ =100\times \$134\\ =\$13,400\end{array}$

Calculation of paid in excess of par value,

$\begin{array}{c}\text{Paid}\text{in}\text{excess}\text{of}\text{par}\text{value}=\text{Total}\text{Cash}-\text{Treasury}\text{Stock}\\ =\$15,000-\$13,400\\ =\$1,600\end{array}$

c.

Treasury stocks reissued at $120 per share.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Nov 1	Cash		12,000
	Paid in capital in excess of par value, treasury stock		1,400
	Treasury Stocks			13,400
	(Being treasury stock issued at above cost price)

Table (4)

• Cash is an asset. Since, cash is received, it increases asset. Hence debit Cash account.
• Paid in capital in excess of par value, treasury stock is part of a shareholder’s fund. Since, money is used, it decreases equity. Hence, debit paid in capital in excess of par value, treasury stock.
• Treasury stock is equity. Since, shares is issued, it increases equity. Hence, credit Treasury Stock account.

Working notes:

Calculation of cash,

$\begin{array}{c}\text{Cash}=\text{Number}\text{of}\text{Shares}\times \text{Issue}\text{value}\\ =100\times \$120\\ =\$12,000\end{array}$

Calculation of paid in excess of par value,

  $\begin{array}{c}\text{Paid}\text{in}\text{excess}\text{of}\text{par}\text{value}=\text{Treasury}\text{Stock}-\text{Total}\text{Cash}\\ =\$13,400-\$12,000\\ =\$1,400\end{array}$

d.

Treasury stocks reissued at $120 per share.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Nov 1	Cash		12,000
	Paid in capital in excess of par value, treasury stock		1,000
	Retained earnings		400
	Treasury Stocks			13,400
	(Being treasury stock issued at above cost price)

Table (5)

• Cash is an asset. Since, cash is received, it increases asset. Hence debit Cash account.
• Paid in capital in excess of par value, treasury stock is part of a shareholder’s fund. Since, money is used, it decreases equity. Hence, debit paid in capital in excess of par value, treasury stock.
• Retained earnings are a part of stockholder’s equity. Since, stock is bought back, it reduces retained earnings account. Hence, debit Retained Earnings account.
• Treasury stock is equity. Since, shares is issued, it increases equity. Hence, credit Treasury Stock account.

Working notes:

Calculation of cash,

$\begin{array}{c}\text{Cash}=\text{Number}\text{of}\text{Shares}\times \text{Issue}\text{value}\\ =100\times \$120\\ =\$12,000\end{array}$

Calculation of retained earnings,

$\begin{array}{c}\text{Retained}\text{Earnings}=\text{Excess}\text{money}\text{required}-\text{Paid}\text{in}\text{excess}\text{of}\text{par}\text{value}\\ =\$1,400-\$1,000\\ =\$400\end{array}$

e.

Treasury stocks reissued at $120 per share.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
Nov 1	Cash		12,000
	Retained earnings		1,400
	Treasury Stocks			13,400
	(Being treasury stock issued at above cost price)

Table (6)

• Cash is an asset. Since, cash is received, it increases asset. Hence debit Cash account.
• Retained earnings are a part of stockholder’s equity. Since, stock is bought back, it reduces retained earnings account. Hence, debit Retained Earnings account.
• Treasury stock is equity. Since, shares is issued, it increases equity. Hence, credit Treasury Stock account.

Working notes:

Calculation of cash,

$\begin{array}{c}\text{Cash}=\text{Number}\text{of}\text{Shares}\times \text{Issue}\text{value}\\ =100\times \$120\\ =\$12,000\end{array}$

Calculation of retained earnings,

$\begin{array}{c}\text{Retained}\text{Earnings}=\text{Treasury}\text{stocks}-\text{Total}\text{Cash}\\ =\$13,400-\$12,000\\ =\$1,400\end{array}$

4.

To determine

To explain: Similarities and dissimilarities between previous entries.

Explanation of Solution

Similarities

• It will lead to increase in the treasury stock by $13,400.
• Cash will always increase.

Dissimilarities

• Different amounts of paid in capital in excess of par value is used in part b, c and d for compensating fewer amounts received.
• Retained earnings is used in part e to compensate the fewer amount received in the entry.
• Except for entry a. In all the entries, treasury stock is issued at below cost price.

Hence, similarities are in cash and treasury stock there are dissimilarities is in amount and accounts used to compensate loss in issue.