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What type of account is treasury stock? What is its normal balance? Where is it reported in the financial statements? What are some reasons companies repurchase their own shares? What is the most common reason? In your opinion is it effective? What is the effect on total equity when a company repurchases its own shares?

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Deanna Hettinger
Deanna HettingerLv2
29 Sep 2019

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The stockholders' meeting for Percival Corporation has been in progress for some time. The chief financial officer for Percival is presently reviewing the company's financial statements and is explaining the items that comprise the stockholders' equity section of the balance sheet for the current year. The stockholders' equity section of Percival Corporation at December 31, 2017, is as follows.

Percival Corporation

Balance Sheet (partial)

December 31, 2017

Paid in Capital

Capital Stock

Preferred stock, authorized 1,000,000 shares

Cumulative, $100 par value, $8 per share, 6000

Shares issued and outstanding $600,000

Common stock, authorized 5,000,000 shares, $1 par

Value, 3,000,000 shares, issued and 2,700,000 outstanding 3,000,000

Total Capital stock 3,600,000

Additional paid in capital

In excess of par- preferred stock $50,000

In excess of par- common stock 25,000,000

Total additional pain in capital 25,050,000

Total paid in capital 28,650,000

Retained Earnings 900,000

Total paid in capital and retained earnings 29,550,000

Less: Treasury Stock (300,000 common shares) 9,300,000

Total Stockholder’s equity $20,250,000

At the meeting, stockholders have raised a number of questions regarding the stockholders' equity section.

Instructions

With the class divided into groups, answer the following questions as if you were the chief financial officer for Percival Corporation.

(a) “What does the cumulative provision related to the preferred stock mean?”

Answer:

(b) “I thought the common stock was presently selling at $29.75, but the company has the stock stated at $1 per share. How can that be?”

Answer:

(c) “Why is the company buying back its common stock? Furthermore, the treasury stock has a debit balance because it is subtracted from stockholders' equity. Why is treasury stock not reported as an asset if it has a debit balance?”

On March I, 2009, the Miranda Company purchased 2,000 shares ofits common stock for $25 per share for
the treasury. On July I, 2009, 1,000 of the treasury shares weresold for $30 per share. On October I, 2009, 1,000 of the treasuryshares were sold at $15 per share.

On January I, 2009, Miranda's balance in Retained Earnings was$100,000. During the year, the company
had net income of $20,000 and paid dividends of $5,000

43. Refer to question #56. By what amount did Treasury Stockchange, if at all? (If the account
balance or amount did not change, state your answer as "$0.")

44. Refer to question #56. By what amount did Total Equitychange, if at all? (If the account
balance or amount did not change, state your answer as "$0.")

45. Which of the following is true regarding the sale oftreasury stock on October I?
a. Treasury stock decreased and Total Equity decreased
b. Treasury stock decreased and Total Equity increased
c. Treasury stock increased and Total Equity decreased
d. Treasury stock increased and Total Equity increased
e. None of the above

46. Refer to question #59. By what amount did Treasury Stockchange, if at all? (If the account
balance or amount did not change, state your answer as "$0.")

47 Refer to question #59. By what amount did Total Equitychange, if at all? (If the account
balance or amount did not change, state your answer as "$0.")

48. What is the balance in Retained Earnings at the end of theyear?

Use the following information to answer the next 10questions:
A company with I 00,000 authorized shares of $4 par common stockissued 50,000 shares at $9 per share Subsequently, the companydeclared and issued a I0% stock dividend. The market price of theshares is $20 per share.

49. What is the effect of the dividend on RetainedEarnings?
a. Retained earnings decreased
b. Retained earnings increased
c. Retained earnings remained the same
d. None of the above

50. Refer to the previous question. By what amount did RetainedEarnings change, if at all? (If the account balance or
amount did not change,_ state your answer·as "$0.")

51. What is the effect of the dividend on Common Stock?
a. Common Stock decreased
b. Common Stock increased
c. Common Stock remained the same
d. None of the above

54. Refer to the previous question. By what amount did Paid-inCapital change, if at all? (If the account balance or amount didnot change, state your answer as "$0.")

55. What is the effect of the dividend on the number of sharesoutstanding?
a. The number decreased
b. The number increased
c. The number remained·the same
d. None of the above

56. Refer to the previous question. By what amount did thenumber of shares outstanding change, if at all? (If theaccount
balance or amount did not change, state your answer as "$0.")

57. What is the effect of the dividend on total equity and totalassets?
a. Total equity decreased and total assets decreased
b. Total equity decreased and total assets increased
c. Total equity increased and total assets decreased
d. Total equity increased and total assets increased
e. None of the above

Wells Fargo & Company, headquartered in San Francisco, is one of the nation’s largest financial institutions. Suppose it reported the following selected accounts (in millions) as of December 31, 2017.

Retained earnings $41,200
Preferred stock 8,600
Common stock—$1 2/3 par value, authorized 6,000,000,000 shares; issued 5,245,971,422 shares 8,860
Treasury stock—67,346,829 common shares (2,420 )
Paid-in capital in excess of par value—common stock 53,200
Accumulated Other Comprehensive Income 8,260


Prepare the stockholders’ equity section of the balance sheet for Wells Fargo as of December 31, 2017. (Enter account name only and do not provide descriptive information.)

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