Question

Five years ago, Dunn Trading Co. issued 2,500 ordinary shares. The shares have a P2 par value and sold at that time for P12 per share. On January 1, 2012, Dunn Trading Co. Purchased 1,000 of these shares for P24 per share. On September 30, 2012, Dunn reissued 500 of the shares for P28 per share. The journal entry to record the reissuance will include

A. A credit to cash P14,000.
B. A debit to Treasury Shares P12,000.
C. A credit to Treasury Shares P14,000.
D. A credit to Share Premium—Treasury P2,000.

Answer 1

Answer:

D. A credit to Share Premium—Treasury P2,000

Explanation:

Stock Repurchase is a method to reduce the outstanding shares and equity value of the company in the market, company pays the stockholder and purchases own shares, which can be reissued or cancelled later on.

Common stock value = 2,500 shares x P2  per share = P5,000

Additional Paid-in-Capital = 2,500 million shares x ( P12- P2 )per share = P25,000

January 1, 2012

Repurchase Value = 1,000 x P24 = P24,000

Stock was repurchased and recorded as follow

Dr. Treasury Shares  P24,000

Cr. Cash                     P24,000

September 30, 2012

Shares are reissued at this date

Cash received = 500 x P28 = P1,4000

Cost of reissued shares = 500 x P24 = P12,000

Difference between the re-issuance value and cost of reissued shares will be added to the Add-in-capital from treasury stock account.

Journal Entry for Re-issuance

Dr. Cash                                           $14,000

Cr. Share Premium treasury stock $2,000

Cr. Treasury stock                           $12,000