Question

Sprinkle Inc. has outstanding 10,000 shares of $10 par value common stock. On July 1, 2017, Sprinkle reacquired 100 shares at $87 per share. On September 1, Sprinkle reissued 60 shares at $90 per share. On November 1, Sprinkle reissued 40 shares at $83 per share. Prepare Sprinkle’s journal entries to record these transactions using the cost method.

7/1/17

                  Treasury Stock (100 X $87)...........................           8,700

                          Cash.........................................................                                8,700

9/1/17

                  Cash (60 X $90)...............................................           5,400

                          Treasury Stock (60 X $87).....................                                5,220

                          Paid-in Capital from

                             Treasury Stock....................................                                 180

11/1/17

                  Cash (40 X $83)...............................................           3,320

                  Paid-in Capital from Treasury Stock...........              160

                          Treasury Stock (40 X $87).....................                               3,480

Arantxa Corporation has outstanding 20,000 shares of $5 par value common stock. On August 1, 2017, Arantxa reacquired 200 shares at $80 per share. On November 1, Arantxa reissued the 200 shares at $70 per share. Arantxa had no previous treasury stock transactions. Prepare Arantxa’s journal entries to record these transactions using the cost method.

8/1/17

                  Treasury Stock (200 X $80)...........................         16,000

                          Cash.........................................................                             16,000

11/1/17

                  Cash (200 X $70)............................................         14,000

                 Retained Earnings.........................................          2,000

                          Treasury Stock.......................................                             16,000

Why this two question use same way to solve, but the one record as Paid-in Capital from Treasury Stock, the other one record as Retained Earnings.

Answer 1

The answer is pretty simple. In the first question, re-acquired shares were issued in two installments. First, 60 shares were re-issued and later on remaining 40 shares were also issued. Now, while issuing the first 60 shares there was surplus generated in re-issuing these shares as these shares were bought back at $87 and were re-issued for $90 and thus leading to a surplus of $3 per share. This surplus was credited to a reserve called Paid-in Capital from Treasury Stock.

Now, while re-issuing the remaining 40 shares, this surplus was available which could be used against loss on issue of shares or share issue expenses, etc. Accordingly, it was used against loss on re-issuing these 40 shares as the remaining 40 shares were issued at a price of $83 per share. Here, it must be noted that there was a loss of only $160. Had it been more than $180, the first $180 would have been written off against Paid-in Capital from Treasury Stock and the remaining against retained earnings and general reserve, in the same order.

In the second question, there was no Paid-in Capital from Treasury Stock so the entire loss was written off against retained earnings.

Hope the above is sufficiently explanatory. In case of further doubts, feel free to comment on this answer.