On 7/1/16, ABC purchased 4,000 shares of its own stock from existing stockholder

ID: 2508446 • Letter: O

Question

On 7/1/16, ABC purchased 4,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury stock was $5 per share, or $20,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/16, ABC reissued 2,000 shares of the treasury stock at $8 per share. Record the journal entry required for the reissuance of the treasury stock. To refresh your memory, treasury stock is usually accounted for at cost. When treasury stock is reissued for more than its cost, a separate Paid-in Capital-Treasury Stock account should be used to account for the excess proceeds over cost. (See your Principles of Accounting textbook or Chapter 18 of your Intermediate Accounting textbook for a review.) On 7/1/16, ABC purchased 4,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury stock was $5 per share, or $20,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/16, ABC reissued 2,000 shares of the treasury stock at $8 per share. Record the journal entry required for the reissuance of the treasury stock. To refresh your memory, treasury stock is usually accounted for at cost. When treasury stock is reissued for more than its cost, a separate Paid-in Capital-Treasury Stock account should be used to account for the excess proceeds over cost. (See your Principles of Accounting textbook or Chapter 18 of your Intermediate Accounting textbook for a review.)

Explanation / Answer

Solution:

Treatment of Treasury Stock

Treasury Stock

Treasury Stock is the shares that a company repurchased from the market or from its shareholders.

Under cost method, the cost of shares purchased is debited to Treasury Stock Account.

On sale of treasury stock

(i) If selling price is higher than cost

- the relevant COST of treasury stock share is credited to Treasury Stock Account and Cash is debited with the total selling price and the difference is credited to Paid In Capital from treasury stock.

(ii) If selling price is lower than cost

Debit: Cash (with the selling price)

Debit: Retained Earnings (Difference between selling price and cost)

Credit: Treasury Stock (with the cost of share)

Journal entry to record reissuance of the treasury stock

Date

General Journal

Debit

Credit

12/31/2016

Cash (2000 Shares x $8)

$16,000

Treasury Stock (2000 Shares x Cost $5)

$10,000

Paid in Capital - Treasury Stock (Bal. fig)

$6,000

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