Question

In year 1, Rim Corporation purchases 1,000 shares of treasury stock for $10 per share. In year 2, Rim reissues 100 shares of the treasury stock for $12 per share. In year 3, Rim reissues 500 shares of its treasury stock for $9 per share.
The journal entry to record the reissuance of treasury stock in year 3 will include which of the following entries? Check all that apply.

a) Credit paid-in capital treasury shares $500.
b) Debit paid-in capital-treasury shares $500.
c) Debit paid-in capital- treasury shares $200.
d) Debit retained earnings $300.

Answer 1

Answer:

The correct answers are:

C-debit paid-in capital treasury shares $200

D-Debit retained  earnings                     $300

Explanation:

The purchase of treasury stock  for $10 per share implies that the price paid per share is the par value of each share.

Upon issue of 100 shares at $12 the following entries are required:

Dr Cash (100*$12)                  $1,200

Cr Treasury stock(100*$10)                  $1,000

Cr Paid-in capital in excess of par        $200

However upon issue of 500 share at $9 per share which is $1 less than the par value, hence there is $500 discount on the issue.

The discount is recorded as follows:

Dr paid-in capital           $200

Dr Retained earnings    $300

The $200 posted to paid-in capital is the same premium  that posted in there earlier when 100 shares.