Question

a company purchases a large block of its common stock from a major shareholder. The total number of shares purchased is 10,000 and these shares are to be held as treasury shares. the company uses the cost method to account for treasury shares.This shareholder had a controlling interest before the transaction. After the transaction this shareholder no longer has a controlling interest. to induce the shareholder to sell the block of stock the company was forced to pay an amount in excess of the current market price of the stock. They paid the shareholder $100 per share when the market price was $90 per share.

what would the journal entry be?

Answer 1

• When a company purchases its own shares as Treasury Stock, they are recorded as a debit to a separate “treasury stock” account. This account is a contra – equity account and it is deducted from Total paid in capital and Retained earnings while disclosing Total Stockholder’s Equity.
• Treasury Stocks are recorded at a cost that is paid to re acquire them.
• In given question, 10,000 shares are repurchased at $ 100 per share.
• Journal Entry would be:

Treasury Stock debited by $ 1,000,000 and
Cash Credited by $ 1,000,000

Accounts title	Debit	Credit
Treasury Stock	$     1,000,000.00
Cash		$ 1,000,000.00
(Shares acquired as Treasury Stock)