Question

At December 31, 2020, the balance sheet of Meca International included the following shareholders' equity accounts:

Shareholders’ Equity	($ in millions)
Common stock, 90 million shares at $1 par	$	90
Paid-in capital—excess of par		360
Retained earnings		470

Required:
Assuming that Meca International views its share buybacks as treasury stock, record the appropriate journal entry for each of the following transactions: (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

1. On February 12, 2021, Meca reacquired 1 million common shares at $17 per share.
2. On June 9, 2022, Meca reacquired 2 million common shares at $14 per share.
3. On May 25, 2023, Meca sold 2 million treasury shares at $19 per share. Determine cost as the weighted-average cost of treasury shares.
4. For the previous transaction, assume Meca determines the cost of treasury shares by the FIFO method.

Answer 1

Date	Account titles and explanation	Debit	Credit
February 12, 2021	Treasury stock (1*$17)	$17
	Cash		$17
	(To record treasury stock purchased)
June 9, 2022	Treasury stock (2*$14)	$28
	Cash		$28
	(To record treasury stock purchased)
May 25, 2023	Cash (2*$19)	$38
	Treasury stock (2*$15)		$30
	Paid in capital- Treasury stock ($38-30)		$8
	(To record treasury stock sold)
May 25, 2023	Cash (2*$19)	$38
	Treasury stock		$31
	Paid in capital- Treasury stock ($38-31)		$7
	(To record treasury stock sold)

When the company uses Weighted average method

Total treasury stock= 1 million+2 million= 3 million treasury stock

Total cost of treasury stock= (1 million*$17+2 million*$14)= $45 million

Weighted average cost of treasury stock= Total cost of treasury stock/Total treasury stock

= $45 million/3 million= $15 per share

When the company uses FIFO method

When the company uses FIFO method means the stock which are purchased first will be sold first. So, treasury stock which was purchased on Feb 12, 2021 will be sold first and the remaining will be sold from June 9, 2022

Cost of Treasury stock= (1 million*$17)+(1 million*$14)= $31