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Chapter 15: Question 17Q (page 810)

Satchel Inc. purchases 10,000 shares of its own previously issued \(10 par common stock for \)290,000. Assuming the shares are held in the treasury with intent to reissue, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?

Short Answer

Expert verified

Treasury stock poses different effects on different transactions. Sometimes it reduces with it, and in some cases, it has no impact on the transaction.

Step by step solution

01

Meaning of Treasury Stock

Treasury shares are those that are on the issuing company's balance sheet. For instance, if a firm issues shares and subsequently buys back a fixed number of them and accepts them on its balance sheet, they are referred to as treasury shares.

02

Effect of Transaction 

Treasury Stock is a type of equity account for stockholders, whereas Cash is a type of asset. As a result, this transaction has:

1. Net Income

It has no impacton net income.

2. Total Assets

It reduces total assets.

3. Total Paid-in Capital

It has no impacton total paid-in capital.

4. Total Stockholders’ Equity

Reduces total stockholders' equity.

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Most popular questions from this chapter

Why is a preemptive right important?

(Computation of Book Value per Share) Morgan Sondgeroth Inc. began operations in January 2015 and reported the following results for each of its 3 years of operations.

2015 \(260,000net loss 2016 \)40,000 net loss 2017 \(800,000 net income

At December 31, 2017, Morgan Sondgeroth Inc. capital accounts were as follows.

8% cumulative preferred stock, par value \)100;

authorized, issued, and outstanding 5,000 shares \(500,000

Common stock, par value \)1.00; authorized 1,000,000 shares;

issued and outstanding 750,000 shares \(750,000

Morgan Sondgeroth Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Sondgeroth began operations. The state law permits dividends only from retained earnings.

Instructions

  1. Compute the book value of the common stock on December 31, 2017.
  2. Compute the book value of the common stock on December 31, 2017, assuming that the preferred stock has a liquidating value of \)106 per share.

For what reasons might a corporation purchase its own stock?

How are restrictions of retained earnings reported?

(Stock and Cash Dividends) Earnhart Corporation has outstanding 3,000,000 shares of common stock with a par value of \(10 each. The balance in its Retained Earnings account at January 1, 2017, was \)24,000,000, and it then had Paid-in Capital in Excess of Par—Common Stock of \(5,000,000. During 2017, the company’s net income was \)4,700,000. A cash dividend of \(0.60 a share was declared on May 5, 2017, and was paid June 30, 2017, and a 6% stock dividend was declared on November 30, 2017, and distributed to stockholders of record at the close of business on December 31, 2017. You have been asked to advise on the proper accounting treatment of the stock dividend.

The existing stock of the company is quoted on a national stock exchange. The market price of the stock has been as follows.

October 31, 2017 \)31

November 30, 2017 \(34

December 31, 2017 \)38

Instructions

  1. Prepare the journal entry to record the declaration and payment of the cash dividend.
  2. Prepare the journal entry to record the declaration and distribution of the stock dividend.
  3. Prepare the stockholders’ equity section (including schedules of retained earnings and additional paid-in capital) of the balance sheet of Earnhart Corporation for the year 2017 on the basis of the foregoing information. Draft a note to the financial statements setting forth the basis of the accounting for the stock dividend, and add separately appropriate comments or explanations regarding the basis chosen.
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