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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Treasury Stock, Cost Method On January 1, Lorain Corporation had 2,000 shares of $5 par common stock authorized and outstanding. These shares were originally issued at a price of $26 per share. In addition, 500 shares of $50 par preferred stock were outstanding. These were issued at a price of $75 per sl1are. During the year, the following stock transactions occurred:

  1. 1. March 3: Lorain reacquired 100 shares of its own common stock at a cost of $24 per share.
  2. 2. April 27: It sold 25 shares of the common stock acquired on March 3 for $33 per share.
  3. 3. July 10: It sold 25 shares of the common stock acquired on March 3 for $22 per share.
  4. 4. October 12: It retired the remaining shares acquired on March 3.

Required:

Prepare journal entries to record the treasury stock transactions of Lorain, assuming it uses the cost method.

To determine

Prepare the journal entries to record the treasury stock transactions of Corporation L under cost method.

Explanation

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.

Cost method: Under this method, at the time of reacquiring the treasury stock, it will be debited for the amount paid. At the time of reissuance, treasury stock will be credited and cash will be debited with the proceeds received. Credit the additional paid-in capital for the difference amount.

Retired stock: The shares of a corporation which are formally bought back from the shareholders for cash obtain the status of ‘authorized but unissued shares’.  Such shares are referred to as retired stock.

Prepare the journal entries to record the treasury stock transactions of Corporation L under cost method:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
March 03Treasury Stock ($24×100) 2,400 
    Cash  2,400
 (To record purchase of treasury stock)   
     
April 27Cash ($33×25) 825 
    Treasury Stock ($24×25)  600
     Additional Paid-in Capital from Treasury     Stock  225
 (To record sale of treasury stock)   
July 10Cash ($22×25) 550 
Additional Paid-in Capital from Treasury Stock 50 
     Treasury Stock ($24×25)  600
 (To record sale of treasury stock)   
October 12Common Stock ($5×50

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