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In: Accounting

Company H has one class of Common Stock – Class A. There are 15 million Class...

Company H has one class of Common Stock – Class A.

There are 15 million Class A shares and they each carry a Par Value of $ 1. The Class A shares were issued at a market price of $ 30 per share. The shares are publicly traded on the New York Stock Exchange.

  1. Show the Journal Entry for the issuance of the Class A shares.
  1. Company H proposes to buy land which does not have a specified fair value. It offers the land owner 100,000 shares when the stock price for Class A shares has risen to $ 50 per share. Assuming this arrangement is concluded show the journal entry that would be made.

  1. The company decides to have an active repurchase and reselling program for the Class A shares.
    1. 100,000 Class A shares are repurchased at a price of $ 40 each. Show the entry for this.

  1. Of those shares 50,000 are resold at a price of $45 each. Show the entry for this.

  1. Then 25,000 shares are resold at a price of $ 20 per share. Show the entry for this.

  1. After these three transactions:
    1. How many Shares are left in the Treasury Share account?

  1. What is the balance in the Treasury Share account?

  1. It is a Debit or Credit Balance?

Does this mean that Equity is increased or decreased to the extent of this final balance in the Treasury Share account?

Solutions

Expert Solution

All the amounts are specified in million for easier understanding.

1) The Class A shares were issued at a market price of $ 30 per share.

Share capital will always be shown at its par value of $1, balance $29 (ie. $30-$1) aill be treated as securities premium.

2) It offers the land owner 100,000 shares when the stock price for Class A shares has risen to $ 50 per share.

Since the fairvalue of asset is not know, asset will be recognized at fair value of shares issued. further as above share capital will always be shown at its par value of $1, balance $49 (ie. $50-$1) aill be treated as securities premium.

3) 100,000 Class A shares are repurchased at a price of $ 40 each.

Treasury stocks are recognised using cost method.

4) Of those shares 50,000 are resold at a price of $45 each. Show the entry for this.

Additional amount received from sale of treasury stocks are "additional paid in capital" amount.

5)Then 25,000 shares are resold at a price of $ 20 per share. Show the entry for this.

Treasury stocks sold, lower than purchase price is first adjusted to "additional paid in capital" and then to "retained earnings"

After these three transactions:

How many Shares are left in the Treasury Share account?

Shares left as treasury stock = Repurchased - Resold = 100,000 - 50,000 - 25,000 = 25,000 shares

What is the balance in the Treasury Share account?

Closing balance in treasury = $4 (from SI.3) - $2(from SI.4) - $1(from SI.5) = $1 million

It is a Debit or Credit Balance?

Treasury stocks have debit balance

Does this mean that Equity is increased or decreased to the extent of this final balance in the Treasury Share account?

This means that outstanding equity is decresed (ie. the shares available in the market)

ekkarill92 answered 2 years ago
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