Question

Indigo Company had the following Shareholders' Equity accounts as of May 1, 2020: Share capital: Preferred shares, 60,000 issued and outstanding Class A common shares, 150,000 issued and outstanding Class B common shares, 440,000 issued and outstanding Retained earnings Total shareholders' equity $738,000 750,000 2,530,000 3,285,000 $7,303,000 On June 10, Indigo reacquired and cancelled 1,800 Class A common shares at a cost of $4.15 per share. On August 26, 2020, Indigo issued 3.600 Class A common shares for $8.55 each. On September 30, the company reacquired and cancelled another 1,800 Class A common shares at $8.55 per share. Prepare the journal entries required to record these transactions. (Round per share value to 4 decimal places, e.g. 1.2512 and final answer to 0 decimal places, eg. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter Ofor the amounts. Record journal entries in the order presented in the problem.)

Answer 1

Answer :-

When a company decides to buy back (or repurchase its own shares), then those shares are called Treasury Stock.

Now there are two things the management can do with them, either retire these shares, or hold them for resale or reissue them at later date. Stock which has been bought back does not qualify for voting purposes and also it is not included in the calculation of Earning Per Share.

If the Company uses the Cost Methods then the cost at which shares are brought back is recorded in Treasury Stock Account.

This account would be shown in the Shareholders Equity Section in the balance sheet which acts a deduction from the stockholders equity account.

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1) Remember these are Class A Common Shares which were originally issued at 75000/150000 = $ 5 per share.

On 10th June, 2020, the Company decided to buy back 1800 shares at $4.50 each.

		Shares	Price per share	Total
Buy back	10-Jun	1800	4.15	7,470.00

Journal Entry
Treasury Stock Account Class A Shares	Debit	7,470.00
To Cash Account		Credit		7,470.00
(Being 1800 shares bought back @ 4.15 per share)

The Board has decided to cancel or retire those shares :-
Journal Entry
Common Stock, $5 par value	Debit	9000
To Treasury Stock Account Class A Shares	Credit		7470
Additional paid in capital	Credit			1530

One Single entry for the above would be :-

Common Stock Class A Shares $ 5 par value Debit 9000

To Cash Account Credit 7470

To Additional Paid in Capital Credit 1530 (1800*0.85)

(Being Shares of par value $ 5 bought back at $4.15)

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(2) On 26 August, 2020 - Indigo issues 3600 shares @ $ 8.55 each.

The Journal Entry for the same would be :-

Cash Account Debit			30780
Common Stock Account (Class A Shares)	Credit		30780
(Being 3600 shares purchased @ 8.55 each)

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(3) On 30th September, 2020, the Company re-acquired and cancelled another 1800 Class A Common shares at $ 8.55 per share.

Treasury Stock Account Class A Shares Debit 15390

To Cash Account Credit 15390 (Being 1800 shares bought back @ $8.55 per share)