Question

1. What is treasury stock? Why do corporations purchase and issue treasury stock?

2. How do you record the purchase of treasury stock? How does treasury stock affect the equity section of the balance sheet?

3. How would you record the reissuance of treasury stock if the proceeds obtained are:

A. At cost of the treasury stock?

B. Less than the cost of the treasury stock?

C. More than the cost of the treasury stock?

4. What is the main difference between notes payable and bonds payable?

5. What is the main difference between a bond and a share of stock?

6. What does it mean to issue bonds at

A. Par?

B. Discount?

C. Premium?

7. What is the contract rate and the market rate for bonds?

8. How do you compute total bond interest expense when a bond is sold at a discount? Explain your answer.

9. How do you compute bond interest expense when a bond is sold at a premium? Explain your answer.

10. What accounts are affected when recording the issue date of a discount bond? What accounts are affected when recording interest and amortization? Which accounts are credited and which accounts are debited when creating journal entries?

11. What accounts are affected when recording the issue date of a premium bond? What accounts are affected when recording interest and amortization? Which accounts are credited and which accounts are debited when creating journal entries?

12. What accounts are affected when a bond matures? Which accounts are credited and which accounts are debited when creating journal entries?

Please answer all of the questions, if you can not answer all of the questions do not reply.

Answer 1

Since, multiple questions have been posted, I have answered the first two.

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Question 1:

Treasury stock indicates the shares that have been issued earlier by the company and are reacquired by the company from the market. Such an acquisition reduces the number of outstanding shares. Shares are generally bought back by the company when the shares already trading in the market appear to be underpriced/undervalued. Such a buy back will help in improving the share price in the market and provide better returns to the remaining shareholders. Another reason could be to issue the shares to employees as a part of their employee stock plan. Further, the shares may be reacquired to increase the owner's controlling interest in the company. This is particularly done to prevent any attempts of hostile takeover by the competitors. Finally, reduction in the number of outstanding shares (as a result of buy back) will help in improving financial ratios such as earnings per share and divdend per share. These ratios are frequently used by investors/analysts while evaluating the financial position of the company.

Reacquired shares may be resold to fund the company's future expansion plans/investment projects. It is possible that the price of company's share has increased since the date of buy back. Reselling the treasury stock at a higher price would provide the company with additional funds to meet its business requirements.

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Question 2:

Purchase of treasury stock will include a debit to treasury stock account and a credit to cash account. The purchase of treasury stock is recorded with the use of following journal entry:

Account Titles	Debit	Credit
Treasury Stock	XXXX
Cash		XXXX
(To record purchase of treasury stock at cost)

The value of treasury stock so acquired will be reported as a reduction in the stockholder's equity section of the balance sheet. In other words, the reacquistion of shares this will reduce the value of stockholder's equity. This transaction will also result in a reduction in the cash balance as reported on the asset side of the balance sheet. The balance of treasury stock (if any) will increase.