Question

Treasury Stock Transactions

Biscayne Bay Water Inc. bottles and distributes spring water. On May 14 of the current year, Biscayne Bay Water Inc. reacquired 2,700 shares of its common stock at $48 per share. On September 6, Biscayne Bay Water Inc. sold 2,000 of the reacquired shares at $51 per share. The remaining 700 shares were sold at $45 per share on November 30.

a. Journalize the transactions of May 14, September 6, and November 30. For a compound transaction, if an amount box does not require an entry, leave it blank.

May 14
Sept. 6
Nov. 30

b. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year?
$

c. Where will the balance in Paid-In Capital from Sale of Treasury Stock be reported on the balance sheet?

d. For what reasons might Biscayne Bay Water Inc. have purchased the treasury stock?

Answer 1

Biscayne Bay Water Inc

1. Journal entries

Date	Account Titles and Explanation		Debit	Credit
14-May	Treasury Stock		$129,600
	Cash			$129,600
	(To record reacquisition of 2,700 shares at $48 per share)
6-Sep	Cash		$102,000
	Paid-in Capital, Treasury Stock			$6,000
	Treasury Stock			$96,000
	(To record sale of 2,000 shares of treasury stock at $51 per share; paid-in capital - $3 (51 -48) x 2,000 = $6,000 and Treasury stock = 2,000 x $48 = $96,000)
30-Nov	Cash		$31,500
	Paid-in Capital, Treasury Stock		$2,100
	Treasury Stock			$33,600
	(To record sale of 700 shares of treasury stock at $45 per share; paid-in capital - $3 (48-45) x 700 = $2,100 and Treasury stock = 700 x $48 = $33,600)

1. Determination of balance in Paid-in Capital from sale of Treasury Stock on December 31, of the current year:

Paid-in Capital as on September 6 = $6,000

(excess of sale price over cost price, $51 -$48 = $3) 2,000 shares x $3 = 6,000

Less: Paid-in Capital from sale of 700 shares on Nov 30, = ($2,100)

(Excess of cost price over sale price, ($48 - $45 =$3) = 700 shares x $3 = ($2,100)

Balance in Paid-in Capital from sale of Treasury Stock on December 31 = 6,000 - $2,100 = $3,900

1. Balance in Paid-in Capital from Sale of Treasury Stock would be reported as a sub-section of the Paid-in Capital under the Stockholders’ Equity section of the balance sheet.

1. Reasons for purchase of treasury stock:

• The company may have huge amount of idle cash. The company has to pay dividends on equity, and the company has to pay dividend on the funds it is not using. Hence, buying back some portion is an option to pay off investor and lower the overall cost of capital.
• And if the directors believe that the market price of their stock is too low, and hence to increase the earnings price per share the company would reacquire its own shares as only fewer shares remain as outstanding balance. The improved EPS would improve the financial ratios.