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Homework answers / question archive / AC Co
AC Co. began Operations in 2001 and has never been audited. You have been hired to audit their 12/31/04 financial statements. The books are kept on a cash basis. In the past the bookkeeper has prepared the tax return on the same basis as the books, thus no temporary differences were recognized. You are, therefore, assuming that the same errors were made on the tax return and will be corrected by amended returns, except the temporary differences created by the Warranty expense, unreal gain/loss on trading securities, and the unreal gain/loss on available for sale securities. The tax rate is 30% for all 4 yrs and it is more likely than not that AC Co. will be profitable in the future.
Prepare correcting entries for the following, rounding to the nearest dollar:
8) On 7/1/03 Company management purchased 600 shares of the company's common stock in order to get rid of a trouble-making shareholder. The company paid $15.99/share (the bookkeeper debited Treasury Stock Expense and credited cash) to reacquire the stock, which had been originally issued for $12/share (all of the company's outstanding $10 par value common stock had been issued for $12/share). You and company management agree that the par value method of accounting for treasury stock is appropriate since they have no intention of releasing the stock.
The bookkeeper used the cost method which is more commonly used than the par value method. We know that treasury stock reduces stockholders' equity in the company, but the par value method says the following: 'In the par value method, when the stock is purchased back from the market the books will reflect the action as a retirement of the shares. Therefore, common stock is debited and treasury stock is credited." http://en.wikipedia.org/wiki/Treasury_stock
The adjusting entry will not bring on a prior period adjustment involving the income statement because there is no profit or loss on treasury stock transactions.
The treasury stock account should have a balance of $9594 (15.99 x 600). You should debit common stock for $6000 (600 x 10) and credit treasury stock. The $12 value stated in the problem simply means that $2 of the all the sales were recorded to paid in capital.
