Problem 13 - Accounting

Question

Tacoma Inc. bottles and distributes spring water. On June 12 of the current year, Tacoma Inc. reacquired 15,000 shares of its common stock at \(\$ 48\) per share. On August 10, Tacoma Inc. sold 9,000 of the reacquired shares at \(\$ 50\) per share. The remaining 6,000 shares were sold at \(\$ 47\) per share on December \(20 .\) a. Journalize the transactions of June 12, August 10, and December 20 . 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. For what reasons might Tacoma Inc. have purchased the treasury stock?

Step-by-Step Solution

Answer

a) Journal entries record acquisitions and sales. b) Paid-In Capital balance is \( \$12,000 \). c) It's under stockholders' equity on the balance sheet. d) Reasons include increasing EPS, employee compensation, and preventing takeovers.

Step 1: Journal Entry for Reacquisition of Shares on June 12

On June 12, Tacoma Inc. reacquired 15,000 shares of its common stock at \( \\(48 \) per share. To record this, we debit the Treasury Stock account and credit the Cash account.- Debit Treasury Stock: \( 15,000 \times 48 = \\)720,000 \)- Credit Cash: \( \\(720,000 \)**Journal Entry:** Debit: Treasury Stock \( \\)720,000 \) Credit: Cash \( \$720,000 \)

Step 2: Journal Entry for Sale of Reacquired Shares on August 10

On August 10, Tacoma Inc. sold 9,000 of the reacquired shares at \( \\(50 \) per share. First, calculate the cash received and compare it to the par value.- Cash received: \( 9,000 \times 50 = \\)450,000 \)- Cost of the shares sold: \( 9,000 \times 48 = \\(432,000 \)- Excess over cost (Paid-In Capital): \( \\)450,000 - \\(432,000 = \\)18,000 \)**Journal Entry:** Debit: Cash \( \\(450,000 \) Credit: Treasury Stock \( \\)432,000 \) Credit: Paid-In Capital from Sale of Treasury Stock \( \$18,000 \)

Step 3: Journal Entry for Sale of Remaining Shares on December 20

On December 20, Tacoma Inc. sold the remaining 6,000 shares at \( \\(47 \) per share. Calculate the cash received and the loss relative to the cost.- Cash received: \( 6,000 \times 47 = \\)282,000 \)- Cost of remaining shares: \( 6,000 \times 48 = \\(288,000 \)- Loss on sale: \( \\)288,000 - \\(282,000 = \\)6,000 \)**Journal Entry:** Debit: Cash \( \\(282,000 \) Debit: Paid-In Capital from Sale of Treasury Stock \( \\)6,000 \) Credit: Treasury Stock \( \$288,000 \)

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

After selling all the reacquired shares, we aggregate the impact on the Paid-In Capital account.- Excess from August sale: \( \\(18,000 \)- Offset by loss in December: \( -\\)6,000 \)Remaining Paid-In Capital balance: \( \\(18,000 - \\)6,000 = \$12,000 \)

Step 5: Reporting of Paid-In Capital on Balance Sheet

The balance of \( \$12,000 \) in Paid-In Capital from Sale of Treasury Stock is reported in the stockholders' equity section of the balance sheet, typically under the subheading of additional paid-in capital.

Step 6: Reasons for Purchasing Treasury Stock

Companies might purchase treasury stock for several reasons such as: - To increase earnings per share by reducing the number of outstanding shares. - To have shares available for employee compensation plans. - To attempt to prevent a hostile takeover.

Key Concepts

Journal Entries

In accounting, journal entries are fundamental to record all financial transactions of a company. Each transaction affects at least two accounts and must balance, meaning total debits equal total credits.
When Tacoma Inc. reacquired its shares, the company made journal entries to reflect these transactions accurately.

• June 12 Reacquisition: Tacoma debited the Treasury Stock account by $720,000 and credited the Cash account by the same amount to record the purchase of 15,000 shares at $48 each.
• August 10 Sale: Upon selling 9,000 shares at $50 each, Tacoma debited Cash for $450,000. It credited Treasury Stock for the original cost of $432,000 and recognized a Paid-In Capital gain of $18,000, reflecting the excess received over cost.
• December 20 Sale: For the remaining 6,000 shares sold at $47, Tacoma Inc. recorded cash at $282,000, faced a loss by debiting Paid-In Capital by $6,000, and credited Treasury Stock by $288,000.

Each entry reflects Tacoma's focus on balancing entries to maintain accurate financial records.

Paid-In Capital

Paid-In Capital arises when a company sells its own stock above its par or stated value. It reflects the additional contributions from shareholders over the nominal value of shares issued.
For Tacoma Inc., the concept of Paid-In Capital comes into play significantly during the sale of treasury stock.

• August 10 Gain: The Paid-In Capital from the sale of treasury stock amounted to $18,000. This figure covers the surplus gained over the reacquisition cost during August's sale.
• December 20 Adjustment: In December's transaction, Paid-In Capital was reduced by $6,000 to account for the sale loss, resulting from selling below the reacquisition price.

By the year's end, Tacoma Inc. had a Paid-In Capital balance of $12,000, reinforcing its vital role in accurately reflecting shareholder equity contributions beyond the primary share issuance.

Stockholders' Equity

Stockholders' equity represents the owners' claim after all liabilities have been satisfied. It includes common stock, retained earnings, and paid-in capital.
The balance reported by Tacoma highlights critical aspects related to its stock transactions and equity management.

• Equity Position: Through treasury stock transactions, Tacoma Inc.'s equity section adjusts, either increasing with gains or reducing with losses when stock is resold.
• Balance Sheet Reporting: The $12,000 remaining in Paid-In Capital from the sale of treasury stock appears under additional paid-in capital. This falls within the broader stockholders' equity category, ensuring transparent disclosure of capital that extends beyond basic stock value.

Thus, stockholders' equity serves as a vital indicator of financial health, determined by Tacoma's strategic financial decisions.

Reacquisition of Shares

When a company reacquires its own shares, they become known as treasury stock. Reacquisition can pursue several strategic goals beneficial for the organization.
Tacoma Inc.'s actions illustrate typical motivations behind such transactions:

• Market Influence: By buying back shares, Tacoma could potentially manage stock prices, affecting supply and demand, thereby stabilizing or boosting their market value.
• Employee Incentives: Companies often reacquire shares to have stock available for employee compensation programs, which can enhance motivation and retention.
• Preventing Takeovers: Retaining shares may serve as a defensive strategy against hostile takeovers, limiting the shares available for unfriendly parties to purchase.

These acquisitions are integral to managing corporate control, rewarding stakeholders, and maintaining desired market positioning.