Question

Fechter Corporation had the following stockholders’ equity accounts on January 1, 2017: Common Stock ($5 par) $500,000, Paid-in Capital in Excess of Par—Common Stock $200,000, and Retained Earnings $100,000. In 2017, the company had the following treasury stock transactions.

Mar.	1		Purchased 5,000 shares at $8 per share.
June	1		Sold 1,000 shares at $12 per share.
Sept.	1		Sold 2,000 shares at $10 per share.
Dec.	1		Sold 1,000 shares at $7 per share.

Fechter Corporation uses the cost method of accounting for treasury stock. In 2017, the company reported net income of $30,000.

Journalize the treasury stock transactions, and prepare the closing entry at December 31, 2017, for net income.

List of Accounts that can be used

Accounts Receivable
Cash
Common Stock
Equipment
Income Summary
Inventory
Land
Organization Expense
Paid-in Capital from Treasury Stock
Paid-in Capital in Excess of Par-Common Stock
Paid-in Capital in Excess of Par-Preferred Stock
Paid-in Capital in Excess of Stated Value-Common Stock
Patents
Preferred Stock
Retained Earnings
Share Capital-Ordinary
Share Capital-Preference
Share Premium-Ordinary
Share Premium-Preference
Treasury Stock

Answer 1

Concepts and reason

Transaction: A transaction in business refers to any events that affect the financial position of the business that can be reliably measured in monetary terms.

Journal entry: It is the process of recording transactions in a chronological order. Normally double entry accounting system is used for recording accounting transactions. Under this method each transaction has two sides, debit side and credit side. Total amount of debit side must be equal to the total amount of credit side.

Revenues: The income or earnings received by a company for the goods and services delivered, are known as revenues. It is the income received by a company from its business operations.

Expenses: The costs borne by a company to produce and sell the goods and services to the customers are known as expenses.

Common stock: The amount invested in the corporation by an investor to receive a return or share of profit from the profits earned by the corporation is known as common stock. This is a stockholders’ equity account. If the company issues common stock to raise capital, it increases common stock value.

Fundamentals

Closing entry: The journal entries that are recorded to transfer the revenues and expenses account to clearing or temporary account (income summary account), and which are again transferred to retained earnings account, thereby, reducing the balance of these temporary accounts to zero are known as closing entries.

Revenues and expenses are temporary accounts. To close these temporary accounts, prepare closing entries by transferring all revenue and expenses account to an income summary account at the end of the accounting period. This income summary account represents net income. Finally, the income summary account balance (temporary accounts) should be shifted to the retained earnings account (permanent account) in order to close all temporary accounts.

Assets: Asset is the resource used by the company to generate income. Assets can be classified into different types, Current assets, long term assets and intangible assets. Assets that are expected to be converted into cash within one year are called as current assets. Assets that are expected to be converted into cash more than one year are called as long-term assets. Asset which cannot be touch and see is called as intangible asset. Goodwill, patents etc are the examples of intangible assets.

Stockholders’ equity: A Shareholders claim on the assets of a company is known as stockholders’ equity, which are assets minus liabilities. This is also a permanent account because these balances are carried forward from one financial year to the other. Stockholders’ equity also called as owners’ equity.

Liabilities: Liability is an amount of money owed to outsider of the company. Accounts payable, bank loans, personal loans etc are examples of liability. Liabilities that are expected to repay within one year are coming under the category of current liabilities. Liabilities that are expected to repay more than one year are coming under the category of long term liabilities.

Rules for debit and credit

When asset increases debit it; asset decreases credit it.

When liabilities increases credit it; liabilities decreases debit it.

When stockholders’ equity increases credit it; stockholders’ equity decreases debit it.

Expenses and losses increases debit it; expenses and losses decreases credit it.

Incomes and gains increases credit it; incomes and gains decreases debit it.

Accounting equation: Accounting equation is the relationship among the assets, liabilities and stockholders’ equity. Total assets are equal to total liabilities and stockholders’ equity. According to this equation, when assets increase, corresponding increase will happen on either liabilities or owners’ equity. The following formula used for accounting equation.

Net income: The net income is the excess of total revenues over total expenses.

Retained earnings: The amount of earnings undistributed as dividends to the stockholders is termed as retained earnings.

Retained earnings statement: Retained earnings statement is a statement that shows the changes in the retained earnings of a corporation over a period.

Treasury stock: Treasury stock is also called as reacquired stock. Purchase of treasury stock is the repurchase of shares from the shareholders’ of the company. It will reduce the shareholders’ equity balance of the company.

Paid-in Capital from Treasury Stock: It is the difference between sales prices of treasury stock over the purchase price of treasury stock. If the sales price of treasury stock is more than the purchase price of treasury stock, credit the Paid-in Capital from Treasury Stock account. If the sales price of treasury stock is less than the purchase price of treasury stock, debit the Paid-in Capital from Treasury Stock account.

Journal entry is given below:

Working note:

Calculation of treasury stock balance is given below:

Therefore, the value of treasury stock is $40,000.

Journal entry is given below:

Working note:

Calculation of treasury stock balance is given below:

Therefore, the value of treasury stock is $8,000.

Calculation of cash received is given below:

Therefore, the cash received balance is $12,000.

Calculation of Paid-in Capital from Treasury Stock is given below:

Therefore, the Paid-in Capital from Treasury Stock is $4,000.

Journal entry is given below:

Working note:

Calculation of treasury stock balance is given below:

Therefore, the value of treasury stock is $16,000.

Calculation of cash received is given below:

Therefore, the cash received balance is $20,000.

Calculation of Paid-in Capital from Treasury Stock is given below:

Therefore, the Paid-in Capital from Treasury Stock is $4,000.

Journal entry is given below:

Working note:

Calculation of treasury stock balance is given below:

Therefore, the value of treasury stock is $8,000.

Calculation of cash received is given below:

Therefore, the cash received balance is $7,000.

Calculation of Paid-in Capital from Treasury Stock is given below:

Therefore, debit the Paid-in Capital from Treasury Stock account of $1,000.

Journal entry is given below:

Ans: