The Big Foam Brewery Company has 30,000 shares of $10 par value common stock authorized and 20,000 shares issued and outstanding. On August 15, 2007, Big Foam Brewery Company purchased 1,000 shares of treasury stock for $16 per share. Big Foam Brewery Company uses the cost method to account for treasury stock. On September 14, 2007, Big Foam Brewery Company sold 500 shares of the treasury stock for $20 per share. In October 2007, Big Foam Brewery Company declared and distributed 1,950 shares as a stock dividend from unissued shares when the market value of the common stock was $21 per share. On December 20, 2007, Big Foam Brewery Company declared a $1 per share cash dividend, payable on January 10, 2008, to shareholders of record on December 31, 2007.
a. How should the Big Foam Brewery Company account for the purchase and sale of the treasury stock, and how should the treasury stock be presented in the balance sheet at December 31, 2007?
b. How should the Big Foam Brewery Company account for the stock dividend, and how would it affect the stockholders' equity at December 31, 2007? Why?
c. How should the Big Foam Brewery Company account for the cash dividend, and how would it affect the balance sheet at December 31, 2007? Why?
a. Under the cost method of accounting for treasury stock which consists of common stock, the purchase of the stock is recorded by crediting Cash and debiting the stockholder's equity account "Treasury Shares-Common" for the actual amount paid. When treasury shares are sold, Cash is debited, the "Treasury Shares-Common" account is credited for the cost of the shares sold, and the difference is debited or credited to "Additional Paid-In Capital-Treasury Shares-Common."
Thus, in this case, the entry to show the purchase of the treasury shares is:
Treasury Shares-Common 16,000
To record the purchase of 1,000 shares of common stock as treasury stock at $16 per share.
The sale is recorded thusly:
This solution presents the accounting treatment for the purchase and re-issuance of treasury stock, as well as for stock and cash dividends.