Question

Problem 18-2 Share buyback-comparison of retirement and treasury stock treatment [LO18-5]

The shareholders’ equity section of the balance sheet of TNL Systems Inc. included the following accounts at December 31, 2017:

Shareholders' Equity	($ in millions)
Common stock, 210 million shares at $1 par	$	210
Paid-in capital—excess of par		1,260
Paid-in capital—share repurchase		1
Retained earnings		1,200

Required:
1. During 2018, TNL Systems reacquired shares of its common stock and later sold shares in two separate transactions. 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.

1. On February 5, 2018, TNL Systems purchased 9 million shares at $10 per share.
2. On July 9, 2018, the corporation sold 3 million shares at $12 per share.
3. On November 14, 2020, the corporation sold 3 million shares at $7 per share.

2. Prepare the shareholders’ equity section of TNL Systems’ balance sheet at December 31, 2020, comparing the two approaches. Assume all net income earned in 2018–2020 was distributed to shareholders as cash dividends.

Answer 1

Solution 1:

TNL Systems Inc.
Journal Entries
(a) Assuming Shares are retired (In millions)
No.	Date	Account Name	Debit	Credit
1	05-Feb	Common stock Dr (9 x $1)	$9
		Paid-in capital—excess of par Dr ($1260/210*9)	$54
		Paid-in capital—share repurchase Dr	$1
		Retained earnings Dr	$26
		To Cash (9*$10)		$90
2	09-Jul	Cash Dr (3 x $12)	$36
		To Common stock Dr (3 x $1)		$3
		To Paid-in capital—excess of par		$33
3	14-Nov	Cash Dr (3 x $7)	$21
		To Common stock (3 x $1)		$3
		To Paid-in capital—excess of par		$18

Journal Entries
(b) Assuming Shares are Viewed as Treasury Stock (In millions)
No.	Date	Account Name	Debit	Credit
1	05-Feb	Treasury stock Dr (9 x $10)	$90
		To Cash		$90
2	09-Jul	Cash Dr (3 x $12)	$36
		To Paid-in capital—share repurchase		$6
		To Treasury stock (3 x $10)		$30
3	14-Nov	Cash Dr (3 x $7)	$21
		Paid-in capital—share repurchase Dr	$7
		Retained earnings Dr	$2
		To Treasury stock (3 x $10)		$30

Solution 2:

Shareholder's Equity	Retirement	Treasury Stock
Paid in Capital:
Common stock	$207	$210
Paid-in capital—excess of par	$1,257	$1,260
Retained earnings	$1,174	$1,198
Less: treasury Stock	$0	$30
Total Shareholder's Equity	$2,638	$2,698