33E_4 - Horngren'S Financial And Managerial Accounting

Question

Determining the effect of stock dividends, stock splits, and treasury stock transactions

Many types of transactions may affect stockholders’ equity. Identify the effects of the following transactions on total stockholders’ equity. Each transaction is independent.

d. Sale of 600 shares of \(0.50 par treasury stock for \)9 per share. Cost of the treasury stock was $7 per share.

Step-by-Step Solution

Answer

The shareholders’ equity will be increased by the resale of treasury stock.

Step 1: Basic Introduction

$\begin{array}{rcl}\mathbf{Treasury}\mathbf{ }\mathbf{Stock}& \mathbf{=}& \mathbf{Number}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{Shares}\mathbf{\times }\mathbf{Price}\mathbf{ }\mathbf{Per}\mathbf{ }\mathbf{Shares}\\ & \mathbf{=}& \mathbf{600}\mathbf{\times }\mathbf{\$}\mathbf{9}\\ & \mathbf{=}& \mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{400}\end{array}$

Step 2: The effect of stock dividends, stock splits, and treasury stock transactions

When treasury stock is resold, the treasury stock account is decreased, and total shareholders' equity is increased through a credit. The shareholders’ equity will be increased by the amount the treasury stock has been issue i.e., $5,400.