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Chapter 15: Question 17Q (page 810)

Satchel Inc. purchases 10,000 shares of its own previously issued \(10 par common stock for \)290,000. Assuming the shares are held in the treasury with intent to reissue, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders鈥� equity?

Short Answer

Expert verified

Treasury stock poses different effects on different transactions. Sometimes it reduces with it, and in some cases, it has no impact on the transaction.

Step by step solution

01

Meaning of Treasury Stock

Treasury shares are those that are on the issuing company's balance sheet. For instance, if a firm issues shares and subsequently buys back a fixed number of them and accepts them on its balance sheet, they are referred to as treasury shares.

02

Effect of Transaction 

Treasury Stock is a type of equity account for stockholders, whereas Cash is a type of asset. As a result, this transaction has:

1. Net Income

It has no impacton net income.

2. Total Assets

It reduces total assets.

3. Total Paid-in Capital

It has no impacton total paid-in capital.

4. Total Stockholders鈥� Equity

Reduces total stockholders' equity.

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Most popular questions from this chapter

Ravonette Corporation issued 300 shares of \(10 par value common stock and 100 shares of \)50 par value preferred stock for a lump sum of \(13,500. The common stock has a market price of \)20 per share, and the preferred stock has a market price of $90 per share. Prepare the journal entry to record the issuance.

Indicate how each of the following accounts should be classified in the stockholders鈥� equity section.

  1. Common Stock.
  2. Retained Earnings.
  3. Paid-in Capital in Excess of Par鈥擟ommon Stock.
  4. Treasury Stock.
  5. Paid-in Capital from Treasury Stock.
  6. Paid-in Capital in Excess of Stated Value鈥擟ommon Stock.
  7. Preferred Stock.

Lindsey Hunter Corporation is authorized to issue 50,000 shares of \(5 par value common stock. During 2017, Lindsey Hunter took part in the following selected transactions.

  1. Issued 5,000 shares of stock at \)45 per share, less costs related to the issuance of the stock totaling \(7,000.
  2. Issued 1,000 shares of stock for land appraised at \)50,000. The stock was actively traded on a national stock exchange at approximately \(46 per share on the date of issuance.
  3. Purchased 500 shares of treasury stock at \)43 per share. The treasury shares purchased were issued in 2013 at $40 per share.

Instructions

  1. Prepare the journal entry to record item 1.
  2. Prepare the journal entry to record item 2.
  3. Prepare the journal entry to record item 3 using the cost method.

(Trading on the Equity Analysis) Presented below is information from the annual report of Emporia Plastics, Inc.

Operating income

\( 532,150

Bond interest expense

135,000

397,150

Income taxes

183,432

Net income

\) 213,718

Bonds payable

$1,000,000

Common stock

875,000

Retained earnings

375,000

Instructions

  1. Compute the return on common stockholders鈥� equity and the rate of interest paid on bonds. (Assume balances for debt and equity accounts approximate averages for the year.)
  2. Is Emporia Plastics, Inc. trading on the equity successfully? Explain.

What are the different bases for stock valuation when assets other than cash are received for issued shares of stock?
See all solutions

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