Question

In keeping with modernization of corporate statutes in its home state, UMC Corporation decided in 2016 to discontinue accounting for reacquired shares as treasury stock. Instead, shares repurchased will be viewed as having been retired, reassuming the status of unissued shares.
As part of the change, treasury shares held were reclassified as retired stock. At December 31, 2015, UMC's balance sheet reported the following shareholders' equity:
($ in millions)
Common stock, $1 par $225
Paid-in capital - excess of par 900
Retained earnings 1,020
Treasury stock (6 million shares at cost) (35)
Total shareholders' equity $2,110
Required:
a. Identify the type of accounting change this decision represents.
1. This is a change in accounting estimate
2. change in accounting method
3. change in reporting entry
4. change in accounting principle .
b. Prepare the journal entry to effect the reclassification of treasury shares as retired shares. (If no entry is required for a transaction/event, record "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)
Record the entry to reclassify treasury shares as retired shares.

Answer 1

Answer:

A. This is a change in accounting principles

B.

Dr Common stock 6

Dr Paid-in capital—excess of par 24

Dr Retained earnings 5

Cr Treasury stock 35

Explanation:

A. This is a change in accounting principle

B. Entry to reclassify treasury shares as retired shares.

General Journal

Dr Common stock 6

Dr Paid-in capital—excess of par 24

Dr Retained earnings 5

Cr Treasury stock 35

Common stock ($1 par × 6million shares retired) $6 million.

Paid-in capital—excess of par

$900 million ÷ 225 million shares = $4

$4 × 6million shares retired = $24 million.