Question

In: Accounting

On January 1, Lorain Corporation had 2,000 shares of $5 par common stock authorized and outstanding....

On January 1, Lorain Corporation had 2,000 shares of $5 par common stock authorized and outstanding. These shares were originally issued at a price of $26 per share. In addition, 500 shares of $50 par preferred stock were outstanding. These were issued at a price of $75 per share. During the year, the following stock transactions occurred:

1. March 3: Lorain reacquired 100 shares of its own common stock at a cost of $24 per share.

2. April 27: It sold 25 shares of the common stock acquired on March 3 for $33 per share.

3. July 10: It sold 25 shares of the common stock acquired on March 3 for $22 per share.

4. October 12: It retired the remaining shares acquired on March 3.

Expert Solution

Solution:

It is assumed that the company is following Cost method for Purchase and Sale of Treasury Stock.

Sometimes companies buyback their own shares (Treasury Stock) with the intention to either retire them permanently or reissue them at a future date. Treatment of Treasury Stock Under cost method

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)

Journal Entries will be as follows:

Date	General Journal	Debit	Credit
March'3	Treasury Stock (100 Shares x $24)	$2,400
	Cash		$2,400

April'27	Cash (25 shares x 33)	$825
	Treasury Stock (25 shares x Cost $24)		$600
	Additional Paid in Capital - Treasury Stock (Bal fig)		$225

July'10	Cash (25 shares x 22)	$550
	Additional Paid in Capital - Treasury Stock (Bal. fig)	$50
	Treasury Stock (25 shares x Cost $24)		$600

October'12	Common Stock (50 Shares x Par Value $5)	$250
	Additional Paid in Capital - Treasury Stock (225 - 50)	$175
	Retained Earnings (Bal. fig)	$775
	Treasury Stock (2400 -600 - 600)		$1,200

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

ekkarill92 answered 2 years ago

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