Chapter 18, Problem 18.11E

Retirement of shares

• LO18–5

In 2018, Borland Semiconductors entered into the transactions described below. In 2015, Borland had issued 170 million shares of its $1 par common stock at $34 per share.

Required:

Assuming that Borland retires shares it reacquires, record the appropriate journal entry for each of the following transactions:

1. 1. On January 2, 2018, Borland reacquired 10 million shares at $32.50 per share.
2. 2. On March 3, 2018, Borland reacquired 10 million shares at $36 per share.
3. 3. On August 13, 2018, Borland sold 1 million shares at $42 per share.
4. 4. On December 15, 2018, Borland sold 2 million shares at $36 per share.

To determine

Retired stock:

Buy back of shares from the shareholders by paying cash and obtaining the status of “authorized but unissued shares” is known as retired shares.

To Journalize: The transactions for B Semiconductors.

Explanation of Solution

(1)

Prepare journal entry, to record the required shares on January 2, 2018.

Date	Account Titles and Explanation		Debit ($)	Credit ($)
2018
January	2	Common Stock	10,000,000
		Paid-in Capital–Excess of Par	330,000,000
		Paid-in Capital–Share       Repurchase		15,000,000
		Cash		325,000,000
		(To record retirement of common stock)

Table (1)

• Common Stock is a stockholders’ equity account and the amount has decreased due to re-acquisition of common stock. Therefore, debit Common Stock account with $10,000,000.
• Paid-in Capital–Excess of Par is a stockholders’ equity account and the amount has decreased due to decrease in capital. Therefore, debit Paid-in Capital–Excess of Par account with $330,000,000.
• Paid-in Capital–Share Repurchase is a stockholders’ equity account. The amount has increased because cash paid for reacquisition is less than cash received while original issue of shares. Therefore, credit Paid-in Capital–Share Repurchase account with $15,000,000.
• Cash is an asset account. The amount is decreased because cash is paid for stock re-acquisition; therefore, credit Cash account with $325,000,000.

Working Notes:

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value per share}\\ \text{= 10,000,000 shares × \$1}\\ \text{= \$10,000,000}\end{array}$ (1)

Compute excess of par value of shares.

$\begin{array}{c}\text{Excess of par value = Issue price –Par value}\\ \text{=\$34–\$1}\\ \text{=\$33}\end{array}$ (2)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares}\times \\ \text{Excess of par value per share}\end{array}\right\}\\ \text{= 10,000,000 shares}\times \text{\$33}\\ \text{= \$330,000,000}\end{array}$ (3)

Note: Refer to Equation (2) for values and computations of excess of par value per share.

Compute cash paid amount.

$\begin{array}{c}\text{Cash paid = Number of shares }\times \text{ Re-acquisition price per share}\\ \text{= 10,000,000 shares×\$32}\text{.50}\\ \text{= \$325,000,000}\end{array}$ (4)

Compute paid-in capital-share repurchase amount.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital–share }\\ \text{repurchase amount}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Common stock value + }\\ \text{Paid-in capital-excess of par value–}\\ \text{Cash paid}\end{array}\right\}\\ \text{=\$10,000,0000+\$330,000,000–\$325,000,000}\\ \text{=\$15,000,000}\end{array}$ (5)

Note: Refer to Equations (1), (3), and (4) for values and computations of common stock, paid-in capital-excess of par value, and cash paid.

(2)

Prepare journal entry, to record the required shares on March 3, 2018.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
March	3	Common Stock		10,000,000
		Paid-in Capital–Excess of Par		330,000,000
		Paid-in Capital–Share Repurchase		15,000,000
		Retained Earnings		5,000,000
		Cash			360,000,000
		(To record retirement of common stock)

Table (2)

• Common Stock is a stockholders’ equity account and the amount has decreased due to re-acquisition of common stock. Therefore, debit Common Stock account with $10,000,000.
• Paid-in Capital–Excess of Par is a stockholders’ equity account and the amount has decreased due to decrease in capital. Therefore, debit Paid-in Capital–Excess of Par account with $330,000,000.
• Paid-in Capital–Share Repurchase is a stockholders’ equity account. The amount has decreased because cash paid for reacquisition is more than cash received while original issue of shares. Therefore, debit Paid-in Capital–Share Repurchase account with $15,000,000.
• Retained Earnings is a shareholders’ equity account. The amount has decreased because cash paid for reacquisition is more than cash received while original issue of shares. Therefore, debit Retained Earnings account with $5,000,000.
• Cash is an asset account. The amount is decreased because cash is paid for stock re-acquisition; therefore, credit Cash account with $360,000,000.

Working Notes:

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value per share}\\ \text{= 10,000,000 shares × \$1}\\ \text{= \$10,000,000}\end{array}$ (6)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares}\times \\ \text{Excess of par value per share}\end{array}\right\}\\ \text{= 10,000,000 shares}\times \text{\$33}\\ \text{= \$330,000,000}\end{array}$ (7)

Note: Refer to Equation (2) for values and computations of excess of par value per share.

Compute cash paid amount.

$\begin{array}{c}\text{Cash paid = Number of shares }\times \text{ Re-acquisition price per share}\\ \text{= 10,000,000 shares×\$36}\\ \text{= \$360,000,000}\end{array}$ (8)

Compute retained earnings amount.

$\begin{array}{c}\begin{array}{l}\text{Retained }\\ \text{earnings }\\ \text{amount}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Cash paid–}\\ \text{Common stock value – }\\ \text{Paid-in capital–excess of par value–}\\ \text{Paid-in capital–share repurchase value}\end{array}\right\}\\ \text{=\$360,000,0000–\$10,000,000–\$330,000,000–\$15,000,000}\\ \text{=\$5,000,000}\end{array}$

Note: Refer to Equations (8), (6), (7), and (5) for values and computations of cash paid, common stock, paid-in capital-excess of par value, and paid-in capital–share repurchase values respectively.

(3)

Prepare journal entry, to record the sale of shares on August 13, 2018.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
August	13	Cash		42,000,000
		Common Stock			1,000,000
		Paid-in Capital–Excess of Par			41,000,000
		(To record issuance of common stock)

Table (3)

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $42,000,000.
• Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $1,000,000.
• Paid-in Capital–Excess of Par is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid-in Capital–Excess of Par account with $41,000,000.

Working Notes:

Compute cash received.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Price per share}\\ \text{= 1,000,000 shares × \$42}\\ \text{= \$42,000,000}\end{array}$ (9)

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value of common stock}\\ \text{= 1,000,000 shares × \$1}\\ \text{= \$1,000,000}\end{array}$ (10)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Common stock value }\end{array}\right)\\ \text{= \$42,000,000 – \$1,000,000}\\ \text{= \$41,000,000}\end{array}$

Note: Refer to Equations (9) and (10) for values and computations of cash received and common stock value.

(4)

Prepare journal entry, to record the sale of shares on December 15, 2018.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2018
December	15	Cash		72,000,000
		Common Stock			2,000,000
		Paid-in Capital–Excess of      Par			70,000,000
		(To record issuance of common stock)

Table (4)

• Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $72,000,000.
• Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $2,000,000.
• Paid-in Capital–Excess of Par is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid-in Capital–Excess of Par account with $70,000,000.

Working Notes:

Compute cash received.

$\begin{array}{c}\text{Cash received = Number of shares }\times \text{ Price per share}\\ \text{= 2,000,000 shares × \$36}\\ \text{= \$72,000,000}\end{array}$ (11)

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Par value of common stock}\\ \text{= 2,000,000 shares × \$1}\\ \text{= \$2,000,000}\end{array}$ (12)

Compute paid-in capital in excess of par value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of par value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Common stock value }\end{array}\right)\\ \text{= \$72,000,000 – \$2,000,000}\\ \text{= \$70,000,000}\end{array}$

Note: Refer to Equations (9) and (10) for values and computations of cash received and common stock value.