Question

Intermediate Accounting by authors: Spiceland, Nelson, and Thomas. Ch.18 P-2 On part 1-c.) (viewed as Treasury Stock), why is Paid-In-Capital Share Repurchase debited by 5,000,000 and Retained Earnings debited by 1,000,000?

The shareholders' equity section of the balance sheet of TNL Systems Inc. included the following accounts at December 31, 2017: ($ in millions) $ 240 1,680 Shareholders' Equity Common stock, 240 million shares at $1 par Paid-in capital excess of par Paid-in capital-share repurchase Retained earnings Required: 1,100 1. During 2018, TNL Systems reacquired shares of its common stock and later sold shares in two separate trans-actions. Prepare the entries for both the purchase and subsequent resale of the shares assuming the shares are (a) retired and (b) viewed as treasury stock. a. On February 5, 2018, TNL Systems purchased 6 million shares at $10 per share. b. On July 9, 2018, the corporation sold 2 million shares at $12 per share. c. On November 14, 2020, the corporation sold 2 million shares at $7 per share.

Answer 1

TNL Systems Inc.				-
Date	Account	Debit	Credit	Calculation
5-Feb	Treasury Stock	60,000,000		=6,000,000*10
	Cash		60,000,000
9-Jul	Cash	24,000,000		=2,000,000*12
	Treasury Stock		20,000,000	=2,000,000*10
	Paid in Capital -Share Repurchase		4,000,000
14-Nov	Cash	14,000,000		=2,000,000*7
	Paid in Capital -Share Repurchase	5,000,000		=1,000,000+4,000,000
	Retained Earnings	1,000,000		Balancing figure
	Treasury Stock		20,000,000	=2,000,000*10

	Workings
	Paid in Capital -Share Repurchase
	Opening Balance	1,000,000
9-Jul	Treasury Stock Sale	4,000,000
	Total	5,000,000

Note
9-Jul	Since on July 9, treasury stock is sold @ $12 which is more than cost @ $10
	difference between cost and sale price is taken to Paid in Capital -Share Repurchase
14-Nov	Since on Nov 14, treasury stock is sold @ $7 which is less than cost @ $10
	difference between cost and sale price is first adjusted to Paid in Capital -Share Repurchase till it becomes 0
	and then balance difference if any is taken to Retained Earnings
	So, difference between sale price of $20 million less cost of $14 million = $6 million
	First adjusted against Paid in Capital -Share Repurchase balance of $5 million (as per above workings)
	then $6 million less $5 million = $1 million is taken to Retained Earnings