Question

1. The journal entry to record sale of repurchased stock is:

2. Describe the impact of a treasury stock transaction on total shareholder’s equity.

3. Explain why companies issue stock splits

---- Using a textbook example, compare the line items in equity before and after a stock split:

Before After

Split Split

Stockholders’ equity

Paid-in capital

Common stock, $10 par

Paid-in capital in excess of par value

Total paid-in capital

Retained earnings

Total stockholders’ equity

Outstanding shares

Answer 1

1. A company may elect to buy back its own shares, which are then called treasury stock.

If the treasury stock is resold at a later date, offset the sale price against the treasury stock account, and credit any sales.

Cost Method to record sale of repurchase

if additional capital paid

	debit	credit
cash	xxx
TO additional paid in capital		xxx
TO Treasury stock		xxx

2. impact of treasury stock transaction on equity shareholders

When a company buys stock back from its investors, it has the effect of reducing the company’s total equity. As a result, treasury stock is a contra-equity account -- its balance counts against the total value of the company’s equity. The reason for this is that shareholder’s equity represents the total amount of money owed by the company to its investors, and as investors are paid off, this amount is decreased. In addition, the company often uses cash to repurchase stock, which decreases its assets.

The company will decide to sell its treasury stock to investors. As would be expected, sales of treasury stocks by the company have the reverse effect. Equity is increased because shareholders invest more money into the company. It is important to remember that treasury stock is not always sold for the same price for which it was purchased. Any losses or gains on the sale of treasury stock are either debited or credited to additional paid-in capital from treasury stock -- an equity account that records capital invested in the company in excess of the value of its stock. If additional paid-in capital is depleted, the loss is drawn from retained earnings.

PURPOSE ISSUEING OF STOCK SPLITS

A stock split can be an important event for a company and its shareholders. Investors should understand what a stock split means for the shares of a company they own or are considering owning.

The purpose of a stock split is to lower the share price to a value that is attractive to investors. Many stock investors do not like to buy high priced stock, but will consider a stock after a split after the share price is lower.