Question

On October 10, the stockholders’ equity of Sherman Systems appears as follows:

Common stock—\(10 par value, 72,000 shares

authorized, issued, and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . \) 720,000

Paid-in capital in excess of par value, common stock . . . . . . . . . . . . . . 216,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 864,000

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(1,800,000

Prepare journal entries to record the following transactions for Sherman Systems.

a. Purchased 5,000 shares of its own common stock at \)25 per share on October 11.

b. Sold 1,000 treasury shares on November 1 for \(31 cash per share.

c. Sold all remaining treasury shares on November 25 for \)20 cash per share.

2. Explain how the company’s equity section changes after the October 11 treasury stock purchase and prepare the revised equity section of its balance sheet at that date.

Short answer

1. Given below

2. Total common stockholder equity after treasury stock $1,675,000

Step-by-step solution

Recording of Journal entries of Sherman Systems

a) Purchase treasury stock

Date	Account and explanation	Debit ($)	Credit($)
October 11	Treasury Stock, Common Cash Purchased 5,000 treasury shares at $25pershare	125,000	125,000

b) Sale of treasury stock at Profit

Date	Account and explanation	Debit ($)	Credit($)
November 01	Cash Treasury Stock, Common Paid-In Capital, Treasury Stock Received $31per share for 1000 treasury shares costing $ 25 per share.	31,000	25,000 6,000

c. sale of treasury stock at Loss

Date	Account and explanation	Debit ($)	Credit ($)
November 25	Cash Paid-In Capital, Treasury Stock Retained Earnings Treasury Stock, Common Received $20 per share for 4000 treasury shares costing $ 25 per share.	80,000 6,000 14,000	100,000

Company’s equity section changes after the October 11 treasury stock

Revised Equity

	Amount
Total stockholders’ equity – Before treasury stock	$ 1,800,000
Less: Treasury stock	(125,000)
Total stockholders’ equity – After treasury stock	$ 1,675,000