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In: Accounting

National Supply’s shareholders’ equity included the following accounts at December 31, 2017: Shareholders' Equity ($ in...

National Supply’s shareholders’ equity included the following accounts at December 31, 2017:

Shareholders' Equity ($ in millions)
Common stock, 4 million shares at $1 par $ 4,000,000
Paid-in capital—excess of par 16,000,000
Retained earnings 73,000,000


Required:
1a. National Supply reacquired shares of its common stock in two separate transactions and later sold shares. Prepare the entries for each of the transactions under each of two separate assumptions: the shares are (a) retired and (b) accounted for as treasury stock.

February 15, 2018 Reacquired 140,000 shares at $7 per share.
February 17, 2019 Reacquired 140,000 shares at $4.50 per share.
November 9, 2020 Sold 80,000 shares at $6 per share (assume FIFO cost).


1b. Prepare the shareholders’ equity section of National Supply’s balance sheet at December 31, 2020, assuming the shares are (a) retired and (b) accounted for as treasury stock. Net income was $12 million in 2018, $13 million in 2019, and $14 million in 2020. No dividends were paid during the three-year period.

Solutions

Expert Solution

1a)

Retired

Date Particulars Debit Credit
Feb 15 Common stock 140000
Paid in capital - excess of par 560000
Retained earnings 280000
Cash    980000
Feb 17 Common stock 140000
Paid in capital - excess of par 560000
Paid in capital - Share repurchase 70000
Cash 630000
Nov 9 Cash a/c 480000
common stock 80000
Paid in capital- excess of par 400000

Treasury Stock

Date Particulars Debit Credit
Feb 15 Treasury stock 980000
cash 980000
Feb 17 Treasury stock 630000
Cash 630000
Nov 19 Cash a/c 480000
Retained earning 80000
Treasury stock 560000

2b)

Balance sheet

Particulars Retired Treasury stock
Paid in capital
common stock (note 1) 3800000 4000000
Paid in capital excess of par 15280000 16000000
Paid in cap - share repurchase 70000 0
Retained earning (note 2) 111720000 111920000
Less- treasury stock 0 (1050000)
TOTAL SHAREHOLDER EQUITY 130870000 130870000

Note 1) Common stock calculation after effect of journal entries

Retired = 4000000 - 140000 - 140000 + 80000 = 3800000

Treasury stock = 4000000

Note 2 Retained earning calculation

Retired = 73000000-280000+12000000+13000000+14000000 = 111720000

Treasury = 73000000-80000+12000000+13000000+14000000 = 111920000


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