Lake Lanier Grill
The stockholders' equity section of the December 31, 2019, balance sheet is provided below:
Assume that all 2,000 shares of stock were issued as of December 31, 2019 for $3.50 per share. On March 1, 2020, the company reacquired 1,000 shares of its common stock for $4.50 per share.
-Refer to Lake Lanier Grill, Inc. The journal entry to record the transaction on March 1 includes a credit to what account and for what amount?

Question

Lake Lanier Grill
The stockholders' equity section of the December 31, 2019, balance sheet is provided below:
  Assume that all 2,000 shares of stock were issued as of December 31, 2019 for $3.50 per share. On March 1, 2020, the company reacquired 1,000 shares of its common stock for $4.50 per share.
-Refer to Lake Lanier Grill, Inc. The journal entry to record the transaction on March 1 includes a credit to what account and for what amount?

Quizplus · Accepted Answer

When a company reacquires its own shares, the shares are recorded as treasury stock, which is a contra equity account. The cost method is commonly used to record treasury stock transactions. Under this method, the treasury stock is debited for the total cost of the shares reacquired.
In this case, Lake Lanier Grill, Inc. reacquired 1,000 shares of its common stock for $4.50 per share on March 1, 2020. The total cost of reacquiring the shares is calculated as follows:
1,000 shares x $4.50 per share = $4,500
The journal entry to record this transaction would be:
Debit: Treasury Stock $4,500
Credit: Cash $4,500
This entry reflects the outflow of cash to repurchase the stock and the increase in treasury stock, which reduces the total stockholders' equity. There is no impact on the common stock account or paid in capital from treasury stock transactions in this particular entry.

Lake Lanier Grill The Stockholders' Equity Section of the December 31, 2019, Balance