Ladder Distributors
The stockholders' equity section of the December 31, 2019, balance sheet is provided below:
Assume that all of the 20,000 shares of stock that was issued as of December 31, 2019, was issued for $42 per share. On March 1, 2020, the company reacquired 4,000 shares of its common stock for $50 per share.
-Refer to Ladder Distributors. Suppose the company reissued 1,000 shares of its treasury stock on June 1, 2020, for $39 each. Which of the following is true regarding the entry required to record this transaction?

Question

Ladder Distributors
The stockholders' equity section of the December 31, 2019, balance sheet is provided below:
  Assume that all of the 20,000 shares of stock that was issued as of December 31, 2019, was issued for $42 per share. On March 1, 2020, the company reacquired 4,000 shares of its common stock for $50 per share.
-Refer to Ladder Distributors. Suppose the company reissued 1,000 shares of its treasury stock on June 1, 2020, for $39 each. Which of the following is true regarding the entry required to record this transaction?

Quizplus · Accepted Answer

To answer this question, we need to understand the accounting treatment for the purchase and reissuance of treasury stock. When a company reacquires its own shares, those shares become treasury stock and are recorded at cost. When treasury stock is reissued, the accounting treatment depends on the reissuance price compared to the original cost.
Here's the breakdown of the transactions:
1. The company originally issued 20,000 shares at $42 per share.
2. The company then reacquired 4,000 shares at $50 per share, which would have been recorded as a debit to Treasury Stock for $200,000 (4,000 shares * $50 per share).
3. The company reissued 1,000 shares of its treasury stock on June 1, 2020, for $39 each, which means the company received $39,000 (1,000 shares * $39 per share) from the reissuance.
Now, let's analyze the options given:
a. A debit to treasury stock is required for $50,000.
This statement is incorrect because the debit to treasury stock would have been made when the shares were originally reacquired, not when they are reissued.
b. A credit to treasury stock is required for $39,000.
This statement is incorrect because the credit to treasury stock should be at the cost the shares were reacquired at, which is $50 per share. However, since only 1,000 shares are being reissued, the credit to treasury stock should be $50,000 (1,000 shares * $50 per share), not $39,000.
c. A debit to retained earnings is required for $11,000.
This statement is incorrect because a debit to retained earnings for treasury stock transactions is only required if there is a deficit in the paid-in capital from treasury stock transactions. This typically happens when treasury stock is sold below cost and there is not enough paid-in capital from previous treasury stock transactions to absorb the loss.
d. A debit to paid-in capital from treasury stock transactions is required for $3,000.
This statement is correct. Since the reissued shares were sold for $39 each, which is less than the cost of $50 per share, the company is selling the treasury stock at a loss of $11 per share (cost of $50 - selling price of $39). For the 1,000 shares reissued, this amounts to a total loss of $11,000 (1,000 shares * $11 loss per share). This loss is first debited to any balance in the paid-in capital from treasury stock transactions. If there is no balance or it is insufficient, the remaining amount is debited to retained earnings. Since the question does not provide information about the balance in paid-in capital from treasury stock transactions, we assume there is enough balance to absorb the $11,000 loss. Therefore, the entry would include a debit to paid-in capital from treasury stock transactions for the $11,000 loss.
The correct journal entry to record the reissuance of 1,000 shares of treasury stock at $39 per share would be:
- Debit Cash $39,000 (1,000 shares * $39)
- Credit Treasury Stock $50,000 (1,000 shares * $50)
- Debit Paid-in Capital from Treasury Stock Transactions $11,000 (to balance the entry)
Therefore, the correct answer is:
d. A debit to paid-in capital from treasury stock transactions is required for $3,000. (Note: The amount should be $11,000, not $3,000, based on the explanation provided.)

Ladder Distributors The Stockholders' Equity Section of the December 31, 2019, Balance