On October 10, the stockholders’ equity of Sherman Systems appears as follows: P
ID: 2472370 • Letter: O
Question
On October 10, the stockholders’ equity of Sherman Systems appears as follows:
Prepare journal entries to record the following transactions for Sherman Systems.
Purchased 5,000 shares of its own common stock at $25 per share on October 11.
Record the purchase 5,000 shares of its own common stock for $25 cash per share.
Common stock—$10 par value, 72,000 shares authorized, issued, and outstanding $ 720,000 Paid-in capital in excess of par value, common stock 216,000 Retained earnings 864,000 Total stockholders’ equity $ 1,800,000Explanation / Answer
Answer:
The following entries to be passed in the books of Sherman Systems for recording of Buyback of Common Stock
Date
Account Title & Explanation
Debit
Credit
Oct 11
Common Stock Dr.
(5,000 shares x $10)
$50,000
Paid In capital In excess of par value – Common Stock Dr.
(5,000 x $3)
$15,000
Retained Earnings (bal fig) Dr.
$60,000
To Treasury Stock (5,000 x $25)
$125,000
Oct 11
Treasury Stock
$125,000
To Cash
$125,000
Explanation --- In the balance sheet, Common Stock Is $720,000 and there is also Paid-in capital in excess of par value, common stock $216,000
It means originally the Common stock was issued at premium i.e. excess of par value that is the reason Paid In capital In excess of par value was created.
We need to find out the issue price per common stock in order to record the entry of repurchase (buyback) and the amount of Paid In Capital related to these buyback common stock should be cancelled.
Issue Price = (Par Value + Paid In Capital) / No. of shares issued = ($720,000 + $216,000) / 72,000 = $13
Premium = Issue Price – Par Value = $13 - $10 = $3
Now, to buyback of share --- we need to record reverse entry to cancel Common Stock capital (5,000 x 10) and Paid in Capital (5000 x $3)
Ans the balance part will reduce the retained earnings..
Date
Account Title & Explanation
Debit
Credit
Oct 11
Common Stock Dr.
(5,000 shares x $10)
$50,000
Paid In capital In excess of par value – Common Stock Dr.
(5,000 x $3)
$15,000
Retained Earnings (bal fig) Dr.
$60,000
To Treasury Stock (5,000 x $25)
$125,000
Oct 11
Treasury Stock
$125,000
To Cash
$125,000
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