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Chapter 12: Problem 11

Aspen Inc. bottles and distributes spring water. On August 1 of the current year, Aspen Inc. reacquired 12,000 shares of its common stock at \(\$ 36\) per share. On September 23 , Aspen Inc. sold 7,500 of the reacquired shares at \(\$ 38\) per share. The remaining 4,500 shares were sold at \(\$ 33\) per share on December \(29 .\) a. Journalize the transactions of August 1, September 23 , and December \(29 .\) b. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year? c. Where will the balance in Paid-In Capital from Sale of Treasury Stock be reported on the balance sheet? d. 1_. For what reasons might Aspen Inc. have purchased the treasury stock?

Short Answer

Expert verified
Paid-In Capital from Sale of Treasury Stock is $1,500, reported under stockholders' equity on the balance sheet.

Step by step solution

01

Reacquire Treasury Stock

On August 1, Aspen Inc. reacquired 12,000 shares of its common stock at \(36 per share. To record this transaction, debit 'Treasury Stock' and credit 'Cash'. The calculation for the total cost is as follows:\[12,000 \text{ shares} \times \\)36/ \text{share} = \\(432,000\]**Journal Entry:**- Debit Treasury Stock: \)432,000- Credit Cash: $432,000
02

Sell Part of Treasury Stock at a Gain

On September 23, Aspen Inc. sold 7,500 of the reacquired shares at \(38 per share. Since the selling price is higher than the reacquisition price (\)36), there is a gain. Calculate the gain:Selling price per share: \(38Cost price per share: \)36Gain per share: \(38 - \)36 = \(2Total Gain: \[7,500 \text{ shares} \times \\)2/ \text{share} = \\(15,000\]**Journal Entry:**- Debit Cash: \)285,000 - Credit Treasury Stock: \(270,000- Credit Paid-In Capital from Sale of Treasury Stock: \)15,000
03

Sell Remaining Treasury Stock at a Loss

On December 29, the remaining 4,500 shares were sold at \(33 per share. Since the selling price is lower than the original reacquisition price, there is a loss. Calculate the loss:Selling price per share: \)33Cost price per share: \(36Loss per share: \)36 - \(33 = \)3However, this loss is adjusted against the Paid-In Capital from Sale of Treasury Stock.Loss in Total: \[4,500 \text{ shares} \times \\(3/ \text{share} = \\)13,500\]**Journal Entry:**- Debit Cash: \(148,500- Debit Paid-In Capital from Sale of Treasury Stock: \)13,500- Credit Treasury Stock: $162,000
04

Calculate Ending Balance of Paid-In Capital

To find the balance in Paid-In Capital from Sale of Treasury Stock on December 31, subtract the loss from the prior gain:Initial Gain: \(15,000Less: Loss Adjusted: \)13,500Ending Balance: \[\\(15,000 - \\)13,500 = \$1,500\]
05

Report Paid-In Capital on Balance Sheet

The balance in Paid-In Capital from Sale of Treasury Stock is reported as part of 'Additional Paid-In Capital' in the stockholders' equity section of the balance sheet.
06

Reasons for Purchasing Treasury Stock

Companies like Aspen Inc. might purchase treasury stock to increase earnings per share by reducing the number of shares outstanding, to provide shares for employee compensation programs, or to attempt to influence the stock price.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Journal Entries
Journal entries are a way to record financial transactions in the accounting books of a company. They ensure every transaction is captured accurately using a double-entry system, meaning one account is debited and another is credited. For Aspen Inc., when they reacquired 12,000 shares on August 1 at \(\\(36\) per share, a journal entry was made. Here, 'Treasury Stock' was debited, showing an increase in the company's reacquired shares, and 'Cash' was credited, indicating a cash outflow.
  • August 1: Debit Treasury Stock: \(\\)432,000\); Credit Cash: \(\\(432,000\)
  • September 23: Debit Cash: \(\\)285,000\); Credit Treasury Stock: \(\\(270,000\); Credit Paid-In Capital from Sale of Treasury Stock: \(\\)15,000\)
  • December 29: Debit Cash: \(\\(148,500\); Debit Paid-In Capital from Sale of Treasury Stock: \(\\)13,500\); Credit Treasury Stock: \(\$162,000\)
These journal entries are crucial in maintaining transparency and accuracy in the company's financial reports.
Stockholders' Equity
Stockholders' equity represents the owners' claim after all liabilities have been paid off. It's crucial in understanding a company鈥檚 financial health. When a company purchases its own shares, known as treasury stock, this action reduces total stockholders' equity because treasury stock is deducted when calculating equity. For Aspen Inc., when they reacquired stock, their equity was temporarily reduced, but selling portions of it back at a gain contributes positively.
  • Treasury stock purchase reduces equity.
  • Sale at a gain brings incremental value back into equity.
  • Sale at a loss reduces "Paid-In Capital from Sale of Treasury Stock."
Understanding the fluctuations in stockholders' equity is essential for investors and management to gauge the financial status and strategies, such as stock buybacks.
Paid-In Capital
Paid-in capital, sometimes referred to as contributed capital, is the amount shareholders have invested in the company. This can exceed the par value or stated value of the stock. When Aspen Inc. sold some of its treasury stock at a price above the reacquisition cost, the excess became part of "Paid-In Capital from Sale of Treasury Stock."
  • Gain Addition: Selling shares at above cost price increases this account.
  • Loss Offset: Selling below cost price can reduce the paid-in capital.
  • Any adjustments here are reported in the "Additional Paid-In Capital" section.
By understanding paid-in capital changes, one can assess the effectiveness of shares transactions relative to company investments and financial strategy.
Reacquisition of Stock
The reacquisition of stock, or buying back shares, allows a company like Aspen Inc. to reduce the number of shares available on the market. This can be done for several strategic reasons, such as enhancing earnings per share (by spreading profits over fewer shares), having shares available for employee compensation, or simply seeking to influence the market price of the shares.
  • Increases control over the company by reducing shares outstanding.
  • Can provide protection against hostile takeovers.
  • May signal to investors that management believes the stock is undervalued.
Reacquisition requires careful financial planning and consideration of existing cash flows and future market conditions.

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Most popular questions from this chapter

On February 20, Mudguard Corp., a carpet wholesaler, issued for cash 100,000 shares of no-par common stock (with a stated value of \(\$ 10\) ) at \(\$ 15\), and on April 30 , it issued for cash 4,000 shares of \(\$ 25\) par preferred stock at \(\$ 30\). a. Journalize the entries for February 20 and April 30 , assuming that the common stock is to be credited with the stated value. b. What is the total amount invested (total paid-in capital) by all stockholders as of April 30?

eBay developed a Web-based marketplace at http://www.ebay.com, in which individuals can buy and sell a variety of items. eBay also developed PayPal, an online payments system that allows businesses and individuals to send and receive online payments securely. In a recent annual report, eBay published the following dividend policy: We bave never paid casb dividends on our stock, and currently anticipate that we will continue to retain any future earnings to finance the growtb of our business. Given eBay's dividend policy, why would an investor be attracted to its stock?

Big Boy Toys Inc. retails racing products for BMWs, Porsches, and Ferraris. The following accounts and their balances appear in the ledger of Big Boy Toys Inc. on October 31 , the end of the current year: \(\begin{array}{lr}\text { Common Stock, \$4 par } & \$ 600,000 \\ \text { Paid-In Capital in Excess of Par-Common Stock } & 210,000 \\ \text { Paid-In Capital in Excess of Par-Preferred Stock } & 78,000 \\ \text { Paid-In Capital from Sale of Treasury Stock - Common } & 42,000 \\ \text { Preferred 2\% Stock, \$100 par } & 480,000 \\ \text { Retained Earnings } & 3,903,000 \\\ \text { Treasury Stock-Common } & 120,000\end{array}\) Ten thousand shares of preferred and 250,000 shares of common stock are authorized. There are 12,000 shares of common stock held as treasury stock. Prepare the Stockholders' Equity section of the balance sheet as of October 31 , the end of the current year.

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