Question

National Supply’s shareholders’ equity included the following accounts at December 31, 2020:

Shareholders' Equity
Common stock, 6 million shares at $1 par $ 6,000,000
Paid-in capital—excess of par 36,000,000
Retained earnings 76,000,000

Required:
1. National Supply reacquired shares of its common stock in two separate transactions and later sold shares. Prepare the entries for each of the transactions under each of two separate assumptions: the shares are (a) retired and (b) accounted for as treasury stock.
February 15, 2021 Reacquired 180,000 shares at $9 per share.
February 17, 2022 Reacquired 180,000 shares at $6.50 per share.
November 9, 2023 Sold 110,000 shares at $8 per share (assume FIFO cost).

2. Prepare the shareholders’ equity section of National Supply’s balance sheet at December 31, 2023, assuming the shares are (a) retired and (b) accounted for as treasury stock. Net income was $14 million in 2021, $15 million in 2022, and $16 million in 2023. No dividends were paid during the three-year period.

Answer 1

When National Supply reacquires and sells shares of its common stock, the entries in the accounting records depend on whether the shares are retired or accounted for as treasury stock. The shareholders' equity section of National Supply's balance sheet at December 31, 2023, can be prepared assuming the shares are retired or accounted for as treasury stock, by adjusting various accounts. The net income for each year and any dividends paid are taken into account.

Step-by-step explanation:

When National Supply reacquires shares of its common stock, the entries for each transaction can be prepared assuming that the shares are retired or accounted for as treasury stock. In the first transaction on February 15, 2021, National Supply reacquired 180,000 shares at $9 per share. If the shares are retired, the entry would involve decreasing the common stock and paid-in capital—excess of par accounts. If the shares are accounted for as treasury stock, the entry would involve increasing the treasury stock and decreasing the common stock and paid-in capital—excess of par accounts. The second transaction on February 17, 2022, involved reacquiring 180,000 shares at $6.50 per share. The entries for this transaction would be similar to the first transaction. Finally, on November 9, 2023, National Supply sold 110,000 shares at $8 per share. The entry for this transaction would involve increasing cash and either decreasing retained earnings (if the shares are retired) or increasing treasury stock and decreasing retained earnings (if the shares are accounted for as treasury stock).

To prepare the shareholders' equity section of National Supply's balance sheet at December 31, 2023, assuming the shares are retired, you would decrease the common stock and paid-in capital—excess of par accounts by the amount of shares reacquired in each transaction. Then, you would increase retained earnings by the net income for each year (which are given in the question) and decrease retained earnings by any dividends paid, if applicable. Finally, to prepare the shareholders' equity section assuming the shares are accounted for as treasury stock, you would increase the treasury stock by the amount of shares reacquired in each transaction. The other accounts, such as common stock, paid-in capital—excess of par, and retained earnings, would be adjusted in the same way as described earlier.

Answer 2

We've created journal entries for both scenarios when National Supply's shares are either retired or treated as treasury stock upon reacquisition and subsequent sale. The shareholders' equity sections also have been prepared for both scenarios reflecting the transactions and net income earned over the years without dividend distribution.

Step-by-step explanation:

To address the question, let's first lay out the transactions and record the journal entries for both scenarios: shares being retired and shares being accounted for as treasury stock. Next, we'll prepare the shareholders' equity section for each scenario considering the net income accumulated and not paying any dividends during 2021-2023.

Transactions:

1. Reacquired 180,000 shares at $9 per share on February 15, 2021.
2. Reacquired 180,000 shares at $6.50 per share on February 17, 2022.
3. Sold 110,000 shares at $8 per share on November 9, 2023.

Journal Entries for Shares Retired:

• 
  
• Debit Treasury Stock for $1,620,000 (180,000 shares × $9) and credit Cash for $1,620,000 on February 15, 2021.
• 
  
• Debit Treasury Stock for $1,170,000 (180,000 shares × $6.50) and credit Cash for $1,170,000 on February 17, 2022.
• 
  
• Debit Cash for $880,000 (110,000 shares × $8), debit Treasury Stock (for the FIFO cost of shares reacquired) and credit Paid-in Capital - Treasury if there is a gain, or Retained Earnings if there is a loss, on November 9, 2023.

Shareholders' Equity Section as of December 31, 2023 (if shares are retired):

Common Stock, 5.62 million shares at $1 par: $5,620,000
Paid-in Capital - Excess of Par: $36,000,000
Retained Earnings (76 + 14 + 15 + 16 million and less the net cost of shares retired): Adjusted accordingly

Journal Entries for Treasury Stock:

• 
  
• Debit Treasury Stock for $1,620,000 and credit Cash for $1,620,000 on February 15, 2021.
• 
  
• Debit Treasury Stock for $1,170,000 and credit Cash for $1,170,000 on February 17, 2022.
• 
  
• Debit Cash for $880,000, debit Treasury Stock for the FIFO cost of treasury shares, and credit Treasury Stock or Paid-in Capital from Treasury Stock depending on if the sale price is above or below the cost of treasury shares on November 9, 2023.

Shareholders' Equity Section as of December 31, 2023 (if shares are accounted for as treasury stock):

Common Stock: $6,000,000
Paid-in Capital - Excess of Par: $36,000,000
Retained Earnings (76 + 14 + 15 + 16 million): $121,000,000
Treasury Stock: Adjusted for cost of treasury shares still held