Reacquired shares—comparison of retired shares and treasury shares
• LO18–5
National Supply’s shareholders’ equity included the following accounts at December 31, 2017:
Shareholders’ Equity | ($ in millions) |
Common stock, 6 million shares at $1 par | $ 6,000,000 |
Paid-in capital—excess of par | 30,000,000 |
86,500,000 |
Required:
1. National Supply reacquired shares of its common stock in two separate transactions and later sold shares. Prepare the entries for each of the transactions under each of two separate assumptions: the shares are (a) retired and (b) accounted for as
February 15, 2018 Reacquired 300,000 shares at $8 per share.
February 17, 2019 Reacquired 300,000 shares at $5.50 per share.
2. Prepare the shareholders’ equity section of National Supply’s balance sheet at December 31, 2020, assuming the shares are (a) retired and (b) accounted for as treasury stock. Net income was $14 million in 2018, $15 million in 2019, and $16 million in 2020. No dividends were paid during the three-year period.
1. (a)
Buyback of Shares
Retire stock:
Buy back of shares from the shareholders by paying cash and obtaining the status of “authorized but unissued shares are known as retired shares.
Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.
Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.
To Journalize: The stock transactions for N Supply assuming the shares are retired.
Explanation of Solution
Transaction on February 15, 2018:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2018 | |||||
February | 15 | Common Stock | 300,000 | ||
Paid-in Capital–Excess of Par | 1,500,000 | ||||
Retained Earnings | 600,000 | ||||
Cash | 2,400,000 | ||||
(To record retirement of common stock) |
Table (1)
Working Notes:
Compute common stock value.
Compute excess of par value of shares.
Compute paid-in capital in excess of par value.
Note: Refer to Equation (2) for values and computations of excess of par value per share.
Compute cash paid amount.
Compute retained earnings amount.
Note: Refer to Equations (1), (3), and (4) for values and computations of common stock, paid-in capital-excess of par value, and cash paid.
Transaction on February 17, 2019:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2019 | |||||
February | 17 | Common Stock | 300,000 | ||
Paid-in Capital–Excess of Par | 1,500,000 | ||||
Paid-in-Capital-Share Repurchase | 150,000 | ||||
Cash | 1,650,000 | ||||
(To record retirement of common stock) |
Table (2)
Working Notes:
Compute common stock value.
Compute paid-in capital in excess of par value.
Note: Refer to Equation (2) for values and computations of excess of par value per share.
Compute cash paid amount.
Compute paid-in-capital-share repurchase amount.
Note: Refer to Equations (8), (6), and (7) for values and computations of common stock, paid-in capital-excess of par value, and cash paid.
(b)
To Journalize: The stock transactions for N Supply assuming the shares are accounted as treasury stock.
Explanation of Solution
Transaction on February 15, 2018:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2018 | |||||
February | 15 | Treasury Stock | 2,400,000 | ||
Cash | 2,400,000 | ||||
(To record purchase of treasury stock) |
Table (3)
Note: Refer to Equation (4) for values and computations of cash paid.
Transaction on February 17, 2019:
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2019 | |||||
February | 17 | Treasury Stock | 1,650,000 | ||
Cash | 1,650,000 | ||||
(To record purchase of treasury stock) |
Table (4)
Note: Refer to Equation (8) for values and computations of cash paid.
2. (a)
To Prepare: Stockholders’ equity section of balance sheet for N Supply assuming the shares is retired.
Explanation of Solution
Prepare stockholders’ equity section of balance sheet for N Supply assuming the shares is retired.
N Supply | |
Stockholders’ Equity Section | |
December 31, 2020 | |
Paid-in Capital | Amount ($) |
Common stock, $1 par value, 5,400,000 shares issued | $5,400,000 |
Paid-in capital – excess of par | 27,000,000 |
Paid-in capital – share repurchase | 150,000 |
Total paid-in capital | 32,550,000 |
Retained earnings | 130,900,000 |
Total paid-in capital and retained earnings | 163,450,000 |
Deduct: Treasury stock | (0) |
Total stockholders’ equity | $163,450,000 |
Table (5)
Working Notes:
Compute number of shares on December 31, 2020.
Particulars | Number of Shares |
Number of shares on December 31, 2017 | 6,000,000 |
Number of shares purchased on February 15, 2018 | (300,000) |
Number of shares purchased on February 17, 2019 | (300,000) |
Number of shares on December 31, 2020 | 5,400,000 |
Table (6)
Compute paid-in-capital excess of par value.
Particulars | Amount ($) |
Balance on December 31, 2017 | 30,000,000 |
Paid-in-capital excess of par due to transaction on February 15 | (1,500,000) |
Paid-in-capital excess of par due to transaction on February 17 | (1,500,000) |
Balance on December 31, 2020 | $27,000,000 |
Table (7)
Note: Refer to Equations (3), and (7) for value and computation of paid-in-capital excess of par values on February 15, and February 17 respectively.
Compute retained earnings value.
Particulars | Amount ($) |
Balance on December 31, 2015 | 86,500,000 |
Retained earnings value due to transaction on February 15 | (600,000) |
Net income in 2018 | 14,000,000 |
Net income in 2017 | 15,000,000 |
Net income in 2020 | 16,000,000 |
Balance on December 31, 2020 | $130,900,000 |
Table (8)
Note: Refer to Equation (5) for value and computation of retained earnings value.
(b)
To Prepare: Stockholders’ equity section of balance sheet for N Supply assuming the shares is bought as treasury stock.
Explanation of Solution
Prepare stockholders’ equity section of balance sheet for N Supply assuming the shares are bought as treasury stock.
N Supply | |
Stockholders’ Equity Section | |
December 31, 2020 | |
Paid-in Capital | Amount ($) |
Common stock, $1 par value, 6,000,000 shares issued | $6,000,000 |
Paid-in capital – excess of par | 30,000,000 |
Total paid-in capital | 36,000,000 |
Retained earnings | 131,500,000 |
Total paid-in capital and retained earnings | 167,500,000 |
Deduct: Treasury stock, 600,000 shares (at cost) | (4,050,000) |
Total stockholders’ equity | $163,450,000 |
Table (9)
Working Notes:
Compute retained earnings value.
Particulars | Amount ($) |
Balance on December 31, 2017 | 86,500,000 |
Net income in 2018 | 14,000,000 |
Net income in 2019 | 15,000,000 |
Net income in 2020 | 16,000,000 |
Balance on December 31, 2020 | $131,500,000 |
Table (10)
Note: Refer to Equation (14) for value and computation of retained earnings value.
Compute treasury stock value.
Particulars | Amount ($) |
Treasury stock due to transaction on February 15, 2018 | (2,400,000) |
Treasury stock due to transaction on February 17, 2019 | (1,650,000) |
Balance on December 31, 2020 | $(4,050,000) |
Table (11)
Note: Refer to journal entries recorded on February 15 and February 17 in requirement 1 (b).
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