ONLY Prepare journal entry for the Treasury stock purchased on March 5, 2016 Bra
ID: 2484310 • Letter: O
Question
ONLY Prepare journal entry for the Treasury stock purchased on March 5, 2016 Bravo Co.'s stockholders' equity account balances at December 31, year 5, were as follows: Common Stock $800,000 Additional Paid in Capital 1,600,000 Retained Earnings 1,845,000 > Bravo's net income for 2016 was $240,000. The following 2016 transactions and other information relate to the stockholders' equity accounts: > Bravo had 400,000 authorized shares of $5 par common stock, of which 160,000 shares were issued and outstanding. > On March 5, 2016, Bravo acquired 5,000 shares of its common stock for $10 per share to hold as treasury stock. The shares were originally issued at $15 per share. Bravo uses the cost method to account for treasury stock. Treasury stock is permitted in Bravo's state of incorporation. > On July 15, 2016, Bravo declared and distributed a property dividend of inventory. The inventory had a $75,000 carrying value and a $60,000 fair market value. > On January 2, 2011, Bravo granted stock options to employees to purchase 20,000 shares of Bravo's common stock at $18 per share, which was the market price on that date. The options may be exercised within a three-year period beginning January 2, 2016. The measurement date is the same as the grant date. On October 1, 2016, employees exercised all 20,000 options when the market value of the stock was $25 per share. Bravo issued new shares to settle the transaction. The stock options were accounted for in accordance with the intrinsic value method, which was in effect at the time. CommentExplanation / Answer
When a company purchases its own shares they are called treasury stock. It should be shown separately on the financial statements by reducing from the common stock.
Bravo uses the cost method to account for treasury stock. Under cost method par value is ignored. Treasury stock is recorded at the actual price paid to purchase them.
Bravo acquired 5,000 shares for $10 per share. So the value of the treasury stock will be 5,000 * $10 = $50,000. The par value of $5 per share and original issue price of $15 per share is not considered under cost method. The journal entry will be as follows:
Date
Account Titles and Explanation
Debit
Credit
Mar 5, 2016
Treasury Stock A/c Dr.
$50,000
To Cash A/c
$50,000
(Purchase of 5,000 shares for $10 per share)
Only Mar 5 journal entry is posted as required.
Date
Account Titles and Explanation
Debit
Credit
Mar 5, 2016
Treasury Stock A/c Dr.
$50,000
To Cash A/c
$50,000
(Purchase of 5,000 shares for $10 per share)
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