Question

lava lake inc bottles and distributes spring water. om February 11 of the current year.Lava lake required 180,000 shares of common stock at$17 per share. on April 30th lava lake inc.sold 90,000 of reacquired shares at $20 per share. on August 22nd lava lnc sold 30,000 shares at $15 per share.
a. journalize the transactions of February 11,April 30 and August 22.
b. what is the balance in paid in capital from sale
treasury stock on December 31 of the current year?
c. for what reason might lava lake inc have purchased the treasury stock?

Answer 1

Date	Particulars	Debit	Credit
Feb 11	Treasury Stock(180,000 * $17)	$3,060,000
	cash		$3,060,000
	(Being stock reacquired)
April 30	Cash(90,000* $20)	$1,800,000
	Treasury Stock(90,000 *17)		$1,530,000
	Paid-In Capital from Sale of Treasury Stock		$270,000
	(Being shares sold)
August 22	cash(30,000* $15)	$450,000
	Paid-In Capital from Sale of Treasury Stock	$60,000
	Treasury Stock(30,000 *$17)		$510,000

b)Balance in Paid-In Capital from Sale of Treasury Stock

$210,000($270,000-$60,000)

c)Reason:

Trasury stock is a term used to describe buy back of company's own share.it can be done because

i)If a company has no potential growth opportunity in sight , holding to all unused equity financing means sharing ownership for no good reason.buyback of some or all of share is a simple way ti oayoff investor and reduce overall cost of capital

ii)If a economy is slow , company might be forced to cut of its dividend payment which may not go down well with investors who want to recieve dividen thereby they sell stock and the market price of share reduces. so an alternate to this company buy back the stock , this way stock prices are likely to take a less impact

iii)If stock a re undervalued , comapny may decide to buyback its own shares , once the market gets corrected it reissue these shares

iv)By reducing the no. outstanding shares the company's Earning per share automaticlly increases.thereby improving company;s financial , in turn P/E increases and Market price also increases