Question

In: Accounting

Question text The original sale of the $10 par value ordinary shares of Gray Company was...

Question text The original sale of the $10 par value ordinary shares of Gray Company was recorded as follows: Cash............................................................................................. 430,000 Share Capital—Ordinary................................................. 350,000 Share Premium—Ordinary.............................................. 80,000 Instructions Record the treasury share transactions (given below) under the cost method: Transactions: (a) Bought 300 ordinary shares as treasury shares at $22. (b) Sold 90 shares of treasury shares at $19. (c) Sold 120 treasury shares at $28.

Solutions

Expert Solution

Under the cost method, the purchase of treasury stock is recorded by debiting treasury stock account by the actual cost of purchase. The cost method ignores the par value of the shares and the amount received from investors when the shares were originally issued.

A)

Purchase of Treasury Stock (Cost Method):

Treasury Stock dr 6600 (300*22)
To Cash 6600

B) Resale of Treasury Stock (Cost Method):

When treasury shares are later reissued, the treasury stock account is credited for the cost at which they were purchased i.e 22 per share, cash account is debited for the amount actually received i.e 19 per share and if the amount received on reissuance of treasury stock is:

  • less than the cost of treasury stock, the excess of cost of treasury stock over the amount received is debited to discount on capital account.

Journal :

Cash a/c dr 1710(19*90)
Discount on capital account dr (balancing figure) 270
To Treasury Stock 1980(22*90)

C) Resale of Treasury Stock (Cost Method):

When treasury shares are later reissued, the treasury stock account is credited for the cost at which they were purchased i.e 22 per share, cash account is debited for the amount actually received i.e 28 per share and if the amount received on reissuance of treasury stock is:

  • more than the cost of treasury stock, the difference between the amount received and the cost of the treasury stock is credited to additional paid-in capital.
Cash A/c dr 3380 (120*28)
To Treasury Stock 2640(120*22)
To Additional Paid-In Capital(balancing figure) 740

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