Question

Intermediate Accounting by authors: Spiceland, Nelson, and Thomas. Ch.18 P-2. Question #1-b.-b.) (the part that says its viewed as TREASURY STOCK).

The shareholders' equity section of the balance sheet of TNL Systems Inc. included the following accounts at December 31, 2017: (Sin millions) Shareholders' Equity 240 1,680 Common stock, 240 million shares at $1 par Paid-in capital-excess of par Paid-in capital-share repurchase Retained earnings 1 1,100 Required: 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

Since $12 *2,000,000 shares is 24,000,000 wouldn't you simply credit Treasury Stock by that much? Where do they get 20,000,000 from and how did they get share repurchase of 4,000,000? I understand how cash is debited by 24,000,000. Please explain in detail; THIS QUESTION IS NOT TOO LONG!

Answer 1

Solution:

The accounting for treasury stock above is explained as :

1) When we repurchased stock we would have recorded the entire amount of purchase in treasury stock account which is 6 million shares x $10 per share = $60,000,000

2) When we resold the treasury stock , we offset the sale price which is $ 12 per share in this case against the treasury stock account which is recorded at $ 10 per share and we credit any sales exceeding the repurchase cost to the additional paid up capital. In the above case , 2 million shares are resold which were purchased at $10 so amount of $2 million shares x $10 = $20,000,000 would be credited to treasury stock account and $2 million shares x $(12-10)= $4,000,000 would be credited to paid in capital- share repurchase account.