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Mystic Lake Inc. bottles and distributes spring water. On July 9 of the current year, Mystic Lake reacquired 60,000 shares of its common stock at $42 per share. On September 22, Mystic Lake sold 45,000 of the reacquired shares at $51 per share. The remaining 15,000 shares were sold at $40 per share on November 23.
Required:
A. Journalize the transactions of July 9, September 22, and November 23. Refer to the Chart of Accounts for exact wording of account titles.
B. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year?
C. For what reasons might Mystic Lake have purchased the treasury stock?

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Answer:

A. Journalize the transactions

July 9, purchase of 60,000 treasury stocks

Dr Treasury stocks 2,520,000

    Cr Cash 2,520,000

September 22, 45,000 treasury stocks sold

Dr Cash 2,295,000

    Cr Treasury stocks 1,890,000

    Cr Additional paid in capital 405,000

November 23

Dr Cash 600,000

Dr Additional paid in capital 30,000

    Cr Treasury stocks 630,000

   

B. What is the balance in Paid-In Capital from Sale of Treasury Stock on December 31 of the current year?

Additional paid in capital = $405,000 - $30,000 = $375,000

December 31 balance:

Additional paid in capital $375,000

C. For what reasons might Mystic Lake have purchased the treasury stock?

  • management believed that the stock was underpriced
  • they have excess cash and no immediate projects to invest in
  • it is a way to increase the price of stocks since lower equity with the same profits means that each remaining stock will earn more returns

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