Problem 12 - Accounting

Question

Azalea Gardens Inc. develops and produces spraying equipment for lawn maintenance and industrial uses. On September 9 of the current year, Azalea Gardens Inc. reacquired 12,000 shares of its common stock at \(\$ 89\) per share. On October \(31,10,500\) of the reacquired shares were sold at \(\$ 92\) per share, and on December 4,900 of the reacquired shares were sold at \(\$ 95\). a. Journalize the transactions of September 9 , October 31 , and December 4 . b. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year? c. What is the balance in Treasury Stock on December 31 of the current year? d. How will the balance in Treasury Stock be reported on the balance sheet?

Step-by-Step Solution

Answer

a. Debit Treasury Stock $1,068,000, Credit Cash $1,068,000; Debit Cash $966,000, Credit Treasury Stock $934,500, Credit Paid-In Capital $31,500; Debit Cash $465,500, Credit Treasury Stock $436,100, Credit Paid-In Capital $29,400. b. $60,900. c. $0. d. $0 in Treasury Stock; Paid-In Capital from Sale reported under equity.

Step 1: Record the Reacquisition of Treasury Stock

On September 9, Azalea Gardens Inc. bought back 12,000 shares of its common stock at \(89 per share. This transaction is recorded as follows:\[\text{Treasury Stock} = 12,000 \times 89 = 1,068,000\]Journal entry:- Debit Treasury Stock \)1,068,000- Credit Cash $1,068,000This records the company’s purchase of its own stock as treasury stock.

Step 2: Record the Sale of Treasury Stock on October 31

On October 31, Azalea Gardens Inc. sold 10,500 of the reacquired shares at \(92 per share. We will calculate both the cash received and the gain on the sale of treasury stock:\[\text{Cash Received} = 10,500 \times 92 = 966,000\]\[\text{Cost of Treasury Stock Sold} = 10,500 \times 89 = 934,500\]\[\text{Gain (Paid-In Capital)} = 966,000 - 934,500 = 31,500\]Journal entry:- Debit Cash \)966,000- Credit Treasury Stock \(934,500- Credit Paid-In Capital from Sale of Treasury Stock \)31,500The gain from selling the treasury stock above cost is recorded as Paid-In Capital from Sale of Treasury Stock.

Step 3: Record the Sale of Treasury Stock on December 4

On December 4, Azalea Gardens Inc. sold 4,900 shares at \(95 per share. We calculate the cash received and the gain as follows:\[\text{Cash Received} = 4,900 \times 95 = 465,500\]\[\text{Cost of Treasury Stock Sold} = 4,900 \times 89 = 436,100\]\[\text{Gain (Paid-In Capital)} = 465,500 - 436,100 = 29,400\]Journal entry:- Debit Cash \)465,500- Credit Treasury Stock \(436,100- Credit Paid-In Capital from Sale of Treasury Stock \)29,400This records the additional Paid-In Capital from selling treasury stock at a price higher than cost.

Step 4: Calculate Total Paid-In Capital from Sale of Treasury Stock

By adding the gains from both sales recorded previously, we find the total Paid-In Capital from Sale of Treasury Stock:\[\text{Total Paid-In Capital} = 31,500 + 29,400 = 60,900\]Thus, the balance in Paid-In Capital from Sale of Treasury Stock on December 31 is $60,900.

Step 5: Calculate the Balance in Treasury Stock

After selling a total of 15,400 shares (10,500 in October and 4,900 in December), we calculate the remaining treasury stock:\[\text{Remaining Treasury Shares} = 12,000 - 15,400 = 2,600\]Since all shares were resold, \[\text{Balance in Treasury Stock on December 31} = 0\]

Step 6: Reporting Treasury Stock on the Balance Sheet

Treasury Stock is reported under the shareholders' equity section of the balance sheet. After completing the transactions of buying and selling treasury stock: - Treasury Stock will appear as $0 since all shares have been resold. - Paid-In Capital from Sale of Treasury Stock will be separately disclosed if material, showing the gain recognized from selling treasury stock above its reacquisition cost.

Key Concepts

Journal Entries

When a company conducts financial operations, journal entries are crucial for recording these transactions. They help in tracking the movement of financial data within the company. For Azalea Gardens Inc., the journal entries involve reacquiring and selling treasury stock.

There are key stages in the journal entry process:

• Debit and Credit: Each transaction affects two accounts - one is debited, and another is credited.
• Recording Treasury Stock Purchases: When purchasing treasury stock, the entry would debit 'Treasury Stock' and credit 'Cash'. This reflects an increase in treasury stock assets and a reduction in cash.
• Recording Sales of Treasury Stock: If the stock is sold, record 'Cash' as a debit. Then, credit 'Treasury Stock' and reflect any gains in 'Paid-In Capital from Sale of Treasury Stock'.

By understanding these components, Azalea Gardens Inc. can accurately track its treasury stock transactions and manage its financials effectively.

Treasury Stock

Treasury stock refers to shares that a company has issued and subsequently reacquired. For Azalea Gardens Inc., reacquiring 12,000 shares at $89 each amounted to a significant investment in its own equity.

Some considerations around treasury stock include:

• Company Control: Reacquiring shares can help a company reduce market supply and exert more control.
• Balance Sheet Reporting: Treasury stock is not considered an asset; instead, it reduces shareholder equity until resold.
• Potential Gains: Selling treasury stock above its reacquisition price can result in gains that are not recorded as income but as Paid-In Capital.

Azalea Gardens Inc. utilized its treasury stock strategically, repurchasing and reselling shares to provide flexibility in managing equity financing.

Paid-In Capital

Paid-In Capital arises when treasury stock is sold at a price higher than its initial cost, representing the company's ability to earn profits from equity transactions.

Three facts about Paid-In Capital include:

• Equity Section of Financials: It is reflected in the equity section of the balance sheet as it denotes additional investment by shareholders.
• Non-Revenue Source: Gains from Paid-In Capital are not considered operating revenue but are part of shareholders' equity.
• Impact on Shareholder Equity: Positive balances in Paid-In Capital can increase overall shareholder equity, signifying good financial health.

For Azalea Gardens Inc., after sales transactions in October and December, a collection of Paid-In Capital from Treasury Stock reached $60,900, enhancing the company's equity standing.

Balance Sheet Reporting

Balance sheet reporting involves presenting financial data in a manner that communicates the company's economic standing at a specific point in time. For Azalea Gardens Inc., multiple components are relevant:

Key points about balance sheet reporting include:

• Equity Section: Both treasury stock and Paid-In Capital from Sale of Treasury Stock impact the shareholders' equity section.
• Treasury Stock Display: In this case, since all reacquired shares were resold, treasury stock is noted at $0 on the balance sheet.
• Disclosure of Paid-In Capital: If it is materially substantial, gains in Paid-In Capital from the sale of treasury stock serve as a separate line item.

For effective balance sheet presentation, Azalea Gardens Inc. needs to clearly display any changes in equity from treasury activities, ensuring transparency for stakeholders.