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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Treasury stock transactions

Lava Lake Inc. bottles and distributes spring water. On February 11 of the current year, Lava Lake reacquired 180,000 shares of its common stock at $17 per share. On April 30, Lava Lake Inc. sold 90.000 of the reacquired shares at $20 per share. On August 22, Lava Lake Inc. sold 30.000 shares at $15 per share. Journalize the transactions of February 11, April 30, and August 22.

  1. a. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year?
  2. b. For what reasons might Lava Lake have purchased the treasury stock?

a.

To determine

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 transactions of February 11, April 30, and August 22.

Explanation

Record the repurchase of180,000shares of own stock at $17 per share.

Date Account Titles and Explanation Debit ($) Credit ($)
February 11 Treasury Stock (180,000 shares × $17 per share) 3,060,000
     Cash 3,060,000
(To record purchase of treasury stock)

Table (1)

Description:

  • Treasury stock is contra-stockholders’ equity account with a normal debit balance. Thus, when treasury stocks are purchased, it decreases the stockholders’ equity account. In this case, it reduces the stockholders’ equity by $3,060,000. Therefore, treasury stock account is debited with $3,060,000.
  • Cash is an asset. It is decreased as cash is paid for the purchase of treasury stock. Therefore, the cash account is credited with $3,060,000.

Record the sale of 90,000 shares of treasury stock for cash at $20 per share.

Date Account Titles and Explanation Debit ($) Credit ($)
April 30 Cash (90,000 shares × $20 per share) 1,800,000

     Treasury stock

(90,000 shares × $17 per share)

1,530,000

     Paid-in capital from sale of treasury stock

($1,800,000$1,530,000)

270,000
(To record sale of treasury stock for above the cost price)

Table (2)

Description:

  • Cash is an asset

b.

To determine
The balance in paid in capital from sale of treasury stock on December 31 of the current year.

c.

To determine

To discuss: The reason, for which Incorporation L has purchased the treasury stock.

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