Question

Mystic Lake Inc. bottles and distributes spring water. On July 9 of the current year, Mystic Lake reacquired 40,300 shares of its common stock at $42 per share. On September 22, Mystic Lake sold 32,400 of the reacquired shares at $49 per share. The remaining 7,900 shares were sold at $41 per share on November 23.

Required: a. Journalize the transactions of July 9, September 22, and November 23. Refer to the Chart of Accounts for exact wording of account titles. b. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year? c. For what reasons might Mystic Lake Inc. have purchased the treasury stock?

b. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year?

c. For what reasons might Mystic Lake Inc. have purchased the treasury stock? Check all that apply.

For reissuance to employees as a bonus according to stock purchase agreements.

The company wishes to receive more of its own dividends.

To support the market price of the stock.

The company wishes to increase the par value of its stock.

To provide shares for resale to employees.

Answer 1

Solution:

We need to know the accounting treatment of Treasury Stock and Sale of Treasury stock. Here is the explanation:

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)

Part a - Journalize the transactions of July 9, September 22, and November 23

Date	Account Titles and Explanation	Debit	Credit
July.9	Treasury Stock (40,300 Shares at $42)	$1,692,600
	Cash		$1,692,600
	(To record reacquisition of stock)
Sept.22	Cash (32,400 Shares at $49)	$1,587,600
	Treasury Stock (32,400 Shares at Cost $42)		$1,360,800
	Paid in Capital from Sale of Treasury Stock (bal fig)		$226,800
	(To record sale of treasury stock)
Nov.23	Cash (7,900 Shares at $41)	$323,900
	Paid in Capital from Sale of Treasury Stock (bal fig)	$7,900
	Treasury Stock (7,900 Shares at Cost $42)		$331,800
	(To record sale of treasury stock)

Part b –

The balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year = $226,800 - $7,900 = $218,900

Part c –

The correct option is To support the market price of the stock.

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