Question

Washington Company has the following stockholders' equity accounts at December 31, 2020.
Common Stock ($100 par value, authorized 8,000 shares) $480,000
Retained Earnings 294,000
Required:
a. Prepare entries in journal form to record the following transactions, which took place during 2021.
1. 280 shares of outstanding stock were purchased at $97 per share. (These are to be accounted for using the cost method.)
2. A $20 per share cash dividend was declared.
3. The dividend declared in (2) above was paid.
4. The treasury shares purchased in (1) above were resold at $102 per share.
5. 500 shares of outstanding stock were purchased at $105 per share.
6. 350 of the shares purchased in (5) above were resold at $96 per share.
b. Prepare the stockholders' equity section of Washington Company's balance sheet after giving effect to these transactions, assuming that the net income for 2021 was $94,000. State law requires restriction of retained earnings for the amount of treasury stock.

Answer 1

Answer:

Washington Company:

a) Journal:

1. Debit Treasury Stock with $27,160

Credit Cash with $27,160

To record purchase of outstanding stock at $97 per share.

2. Debit Retained Earnings with $90,400

Credit Dividends Payable with $90,400

To record a $20 per share cash dividend declared on outstanding shares (4,800 - 280 = 4,520)

3. Debit Dividends Payable with $90,400

Credit Cash with $90,400

To record cash payment of dividends.

4. Debit Cash with $28,560

Credit Treasury Stock with $28,560

To record resale of 280  treasury stock at $102 per share.

5. Debit Treasury Stock with $52,500

Credit Cash with $52,500

To record purchase of 500 shares at $105 per share.

6. Debit Cash with $33,600

Credit Treasury Stock with $33,600

To record resale of 350 treasury stock at $96 per share.

b) Stockholders' Equity Section:

Common Stock ($100 par value, authorized 8,000 shares) = $480,000

Retained Earnings ($294,000 + $94,000 - $90,400) = $297,600

Less Treasury Stock 150 shares = $17,500

Total Equity = $760,100

Explanation:

a) The cost method for reporting Treasury Stock requires that all treasury stock transactions are recorded between the Treasury Stock and the Cash Account.

It is unlike the par value method where the differences in par value and repurchase and resale prices are taken to the Additional Paid-in Capital and only the par values or repurchase and resale are accounted for in the Treasury Stock.

b) The balance in the Treasury Stock was calculated as follows, using the cost method:

1. Repurchase of 280 at $97 = $27,160

4. less Resale of 280 at $102 = ($28,560)

5. Repurchase of 500 at $105 = $52,500

6. less Resale of 350 at $96 = ($33,600)

Total = 150 shares valued at $17,500

c) Retained Earnings balance was calculated as follows:

Opening Balance = $294,000

Add Net Income = $94,000

Less Dividends = ($90,400)

Closing Balance = $297,600

d) Dividends = 4,800 - 280 = 4,520 x $20 = $90,400