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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 Bush-Caine Company reported the following data on its December 31, 2018, balance sheet:

Chapter 15, Problem 16P, Treasury Stock, Cost Method Bush-Caine Company reported the following data on its December 31, 2018,

The following transactions were reported by the company during 2019:

  1. 1. Reacquired 200 shares of its preferred stock at $57 per share.
  2. 2. Reacquired 500 shares of its common stock at $16 per share.
  3. 3. Sold 100 shares of preferred treasury stock at $58 per share.
  4. 4. Sold 200 shares of common treasury stock at $17 per share.
  5. 5. Sold 100 shares of common treasury stock at $9 per share.
  6. 6. Retired the shares of common stock remaining in the treasury.

The company maintains separate treasury stock accounts and related additional paid-in capital accounts for each class of stock.

Required:

  1. 1. Prepare the journal entries required to record the treasury stock transactions using the cost method.
  2. 2. Assuming the company earned a net income in 2019 of $30.000 and declared and paid dividends of $10,000, prepare the shareholders’ equity section of its balance sheet at December 31, 2019.

1.

To determine

Prepare the journal entries to record the treasury stock transaction under cost method.

Explanation

Treasury Stock: The shares of a corporation which are bought back from the shareholders for cash but are not formally retired are referred to as treasury stock.

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.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

Prepare the journal entries to record the treasury stock transaction under cost method:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
1Treasury Stock: Preferred  11,400 
     Cash (200×$57)  11,400
 (To record reacquisition of preferred stock)   
     
2Treasury Stock: Common  8,000 
     Cash (500×$16)  8,000
 (To record reacquisition of common stock)   
     
3Cash (100×$58) 5,800 
     Treasury Stock: Preferred (100×$57)  5,700
     Additional Paid-in Capital from Treasury     Stock: Preferred   100
 (To record sale of treasury stock)&

2.

To determine

Prepare the shareholders’ equity part of its balance sheet as on December 31, 2019

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