Question

During 2010, the following selected transactions affecting stockholder's equity occurred for Corner Corporation

Feb 1. Purchased 400 shares of the company's own common stock at $22 cash per share.
Jul 15. Issued 100 of the shares purchased on February 1 for $24 cash per share.
Sept. 1 Issued 60 more of the shares purchased on February 1 for $20 cash per share.

1. Show the effects of each transaction on the accounting equation.
2. Give the indicated Journal entries for each of the transactions.
3. What impact does the purchase of treasury stock have on dividends paid?
4. What impact does the reissuance of treasury stock for an amount higher than the purchase price have on net income?

Answer 1

1). Effects of transactions on the Accounting Equation:

	Assets =	Liabilities	+Owner's Equity
1-Feb	Cash - $8800		Treasury stock -$8000
15-Jul	Cash + $2400		Treasury stock +$2200
			Additional paid in capital + 200
1-Sep	Cash + 1200		Treasury stock +$1320
			Additional paid in capital -120

2). Following are the journal entries for each of the transaction:

Date	Particulars	L/F	Debit	Credit
1-Feb	Treasury stock		8000
	Cash			8000
	(To record the purchase of treasury stock)
15-Jul	Cash		2400
	Additional paid in capital			200
	Treasury stock			2200
	(To record the reissue of treasury stock)
1-Sep	Cash		1200
	Additional paid in capital		120
	Treasury stock			1320
	(To record the reissue of treasury stock)

3). Impact of purchase of treasury stock on dividends:

The impact from the purchase of treasury stock is,”reduces the number of outstanding shares”. We know that, the dividend can be declared on Number of outstanding shares .Hence, No need to pay the dividend of such treasury stock. Ultimately it will lead to decrease in the dividends paid.

4). Impact of reissuance of treasury stock:

No effect will be there on Net income. Since the excess amount which is collected from re issuance of treasury stock will be adjusted to “Additional paid in capital”.