United Resources Company obtained a charter from the state in January of this ye
ID: 2580912 • Letter: U
Question
United Resources Company obtained a charter from the state in January of this year. The charter authorized 203,000 shares of common stock with a par value of $2. During the year, the company earned $476,000 Also during the year, the following selected transactions occurred in the order given:
a. Sold 90,000 shares of the common stock in an initial public offering at $17 cash per share.
b. Repurchased 24,000 shares of the previously issued shares at $20 cash per share.
c. Resold 11,000 of the shares of the treasury stock at $23 cash per share.
Required:
Prepare the stockholders' equity section of the balance sheet at the end of the yea
Explanation / Answer
Solution:
We need to prepare first the journal entries related to these transaction and then we can prepare the Stockholders’ Equity Section.
Journal Entries
Transaction
General Journal
Debit
Credit
a
Cash (90,000 Shares x $17)
$1,530,000
Common Stock (90,000 Shares x par $2)
$180,000
Paid in capital in excess of par - common stock
$1,350,000
b
Treasury Stock (24,000 Shares x $20)
$480,000
Cash
$480,000
c
Cash (11,000 Shares x 23)
$253,000
Treasury Stock (11,000 Shares x Cost $20)
$220,000
Pain in Capital - Treasury Stock (Bal fig)
$33,000
Stockholders’ Equity Section
Stockholders' Equity
Capital Stock
Common Stock, $2 Par value, 203,000 Shares authorized.
90,000 Shares issued and outstanding (90,000 x $2 par)
$180,000
Additional Paid in Capital
Paid in Capital in Excess of Par - Common Stock (90,000 Shares x $15)
$1,350,000
Paid in Capital from Treasury Stock (11,000 Shares x $3)
$33,000
Retained Earnings
$476,000
Less: Treasury Stock (24,000 - 11,000)*$20
($260,000)
Total Stockholders' Equity
$1,779,000
Note – Treatment of Treasury Stock
Treasury Stock
Treasury Stock is the shares that a company repurchased from the market or from its shareholders.
Under cost method, the cost of shares purchased is debited to Treasury Stock Account.
On sale of treasury stock
(i) If selling price is higher than cost
- the relevant COST of treasury stock share is credited to Treasury Stock Account and Cash is debited with the total selling price and the difference is credited to Paid In Capital from treasury stock.
(ii) If selling price is lower than cost
Debit: Cash (with the selling price)
Debit: Retained Earnings (Difference between selling price and cost)
Credit: Treasury Stock (with the cost of share)
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Transaction
General Journal
Debit
Credit
a
Cash (90,000 Shares x $17)
$1,530,000
Common Stock (90,000 Shares x par $2)
$180,000
Paid in capital in excess of par - common stock
$1,350,000
b
Treasury Stock (24,000 Shares x $20)
$480,000
Cash
$480,000
c
Cash (11,000 Shares x 23)
$253,000
Treasury Stock (11,000 Shares x Cost $20)
$220,000
Pain in Capital - Treasury Stock (Bal fig)
$33,000
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