Question

In: Accounting

Change in Accounting Principle. In keeping with a modernization of corporate statutes in its home state,...

  1. Change in Accounting Principle. In keeping with a modernization of corporate statutes in its home state, in 2019 UMC Corporation discontinued accounting for reacquired shares as treasury stock. Instead, shares repurchased will be viewed as having been retired. To implement this change, existing treasury shares were reclassified as retired stock. At December 31, 2018, UMC’s balance sheet reported the following shareholders’ equity:

(In $Millions)

Common Stock ($1 par)                                            $80

Paid-in-capital; excess of par                                 1,120

Retained earnings                                                   1,425

Treasury Stock, at cost (6 million shares)             (150)

            Total Shareholders’ Equity                        $2,475

  1. Prepare the journal entry to be recorded to adjust the equity accounts as of the beginning of 2019 to affect the reclassification of the treasury shares as retired shares.
  2. What other steps should UMC take related to this change in accounting principle.

Solutions

Expert Solution

a. Common Stock (6 million * $1) ..........................................DR. $6,000,000

Paid-in-Capital excess of par [6 million * ($15 - $1)].........DR. $84,000,000

Retained Earnings [6 million * ($25 - $15)] ......................DR. $60,000,000

Treasury Stock ..............................................................................CR. $150,000,000

Working Note:

Purchase price of treasury stock = $150,000,000 / 6 million shares

= $25

Total number of shares outstanding = common stock / par value

= $80,000,000 / $1

= 80 million

Issue Price of shares = (common stock + paid-in-capital excess of par) / 80 million shares

= ($80,000,000 + $1,120,000,000) / 80 million shares

= $15

b. Any Change in the accounting principle should be properly disclosed in the financial statements of the company. The change and effect of the change shall be disclosed in the financial statement by UMC.

  


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