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  • May 8, 2008, 09:44 PM
    jahubb
    Journal entries
    Help, Help This is to confusing, I'm really trying I just don't understand
    Here is the questions:
    Little Flower Shop presented the stockholders' equity section of its balance sheet on 1/1/2008 as follows:
    Common Stock, $2 par, 10,000 shares issued and outstanding 20,000
    Additional Paid in Capital-Common 40,000
    Retained Earnings 10,000
    Total Stockholders Equity 70,000
    All Common Shares were originally sold for $6 ea. The following transactions occurred during 2008
    Feb. 15 Re acquired 3,000 shares of Common Stock at $15 per share
    June 1 Sold 2,000 shares of treasury stock at 20 per share.
    Required:
    A. Prepare the journal entries to record the transactions.
    B. How many shares of stock are outstanding at June 1, immediately after the sale of 2000
    Shares of treasury stock? Show your calculations. Please explain to me what to do first. I am overwhelmed.
  • May 9, 2008, 12:06 AM
    morgaine300
    Well, of course we're not here to do you homework for you, but I see from your other posts you're at least trying, so I'll see how well I can explain without actually doing it for you.

    Reacquiring shares of stock is called treasury stock. The stock is still issued, but it is owned by the company. Because it's still issued, it does not change the common stock account at all, nor does it change issued shares. But since the company is holding it, it does reduce equity. Treasury Stock is a contra equity account and therefore a debit balance. This will result in reducing the equity. (It's listed following retained earnings, by the way.) So whenever the company buys treasury shares, it goes into that account. And they actually paid for that purchase of shares, so what would the other account be?

    It's recorded at whatever was paid for it. The par and all the other jibberish is irrelevant. They bought it at $15 a share and that's all that counts.

    When they re-sell the treasury shares, they come back out of the Treasury Stock account, and they have to come out at whatever they went in for. I don't mean the total, I mean per share. So if they only sell part of them, you have to figure out how much that would be. And then take it out of Treasury Stock at that amount. Whatever they re-sold them for, that's how much cash they brought in. In any transaction involving the sale of stock, the difference between these two amounts is additional paid-in capital. I usually call it Paid-in capital from sale of Treasury Stock. It's similar to that $40,000 you have on the common stock -- that's from where it was sold in excess of the par amount. This is where it's sold in excess of the purchase amount. Same sort of deal. It's additional money they're bringing in either way. Since your problem is calling it Additional Paid-In Capital--Common, I think I would call this Additional Paid-In Capital--Treasury Stock. In the case of treasury stock, it can be debited or credited -- it's whatever makes the entry balance. (There's a technicality in that, but not one you have to worry about.)

    Give this another try and see how you do, even if it's just part of it. Remember you can always post your re-tries. (Although I personally will probably be signing off soon.)
  • May 9, 2008, 09:06 PM
    jahubb
    Still can't figure this out
  • May 10, 2008, 12:30 AM
    morgaine300
    Do you just not "get" what treasury stock is, or was my explanation of the entries just not quite there? Or even still having trouble with journal entries in general?

    Let me just give you an example.

    Say the company buys back 5000 shares of common stock for $30 per share. That's $150,000 total. The par and all that is irrelevant. You just want this total.

    You then debit the Treasury Stock and credit the Cash. When they buy these shares back, they are paying cash out, which is a credit. The Treasury Stock is an equity account, but it's contra equity because it reduces it. So it's a debit account.

    Later the company can then re-sell those shares, at a lower or higher price. Let's say they sell only 1000 shares, at $35 per share. We put the shares into Treasury Stock at $30 per share, so we need to remove them at the same $30 per share. So 1000 shares at $30 each is $30,000. So we have to credit the Treasury Stock account for that amount, so that the shares can come back out at the same amount they went in for. (Of course, the other 4000 shares are still left in there.) But the company issued them for $35 per share, and that's $35,000 total. If they issued them for that, they brought cash in, so the $35,000 is a debit to cash.

    Of course, we don't balance at this point because we have $35K debited to cash and only $30K credited to Treasury Stock. This is due to the $5 difference per share between what they originally purchased the shares for and what they are re-issuing them for. And $5 per share times 1000 shares is $5000. That's our difference. That's the excess of re-issue over purchase amount. And we're short on the credit side, so we'll credit that to the Additional Paid-In Capital account. Also, if you think about it, if they re-issue at a higher amount, they're bringing in more equity. Equity's a credit, so "more" equity is a credit. And with that $5000 credit, the entry now balances.

    This works the same every time you do it. The only thing that would change is if the shares were re-sold at a lower price than they were purchased at. And we don't need to deal with that right now.
  • May 12, 2008, 08:48 PM
    jahubb
    Ok, let's see if I have this right now,
    Treasury stock 45,000
    Cash 39,000
    Additional Paid in Capital 6,000
    To record the issuance of 10,000 shares at 2.00 per share

    Cash 40,000
    Treasury Stock 30,000
    Additional Paid in Capital 10,000
    To record the sale of Treasury stock
  • May 13, 2008, 07:34 PM
    morgaine300
    Quote:

    Treasury stock 45,000
    Cash 39,000
    Additional Paid in Capital 6,000
    To record the issuance of 10,000 shares at 2.00 per share
    Dump that description off that. There are already 10,000 shares with a PAR of $2 a share. That has nothing to do with this entry.

    This is getting much closer. Except -- don't know where you got the 39,000 from. They bought the shares at $15 a share -- i.e. 45,000. So that's what they paid for them. And there is no additional PIC when they buy the shares. They can only get additional capital by issuing shares. So that account would never be used in buying treasury shares. i.e. the credit is just the 45,000 to cash cause that's what they paid. It's not a compound entry.

    They bought 3000 shares at $15 per share, which equals $45,000. So you record the $45,000 of treasury stock and $45,000 of cash that was paid. That's all there is to that entry. You're trying to make it more complicated than it is.

    Quote:

    Cash 40,000
    Treasury Stock 30,000
    Additional Paid in Capital 10,000
    to record the sale of Treasury stock
    This one is correct. This is supposed to be the harder one but you got this one right. (Are you one of these people who always messes up the easy ones but gets the hard ones right? :D ) Has to come out of treasury stock at $15 a share cause that's what it went in for, which for 2000 sold = $30,000. But sold for $20, so brought in $40K in cash. The difference is the additional PIC. This is the only time you can have the additional capital.
  • May 13, 2008, 08:58 PM
    jahubb
    Thank You, I guess I am one of the people, but, thinking about it now I do that often.

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