On July 1, Sheridan Company purchases 590 shares of its $7 par value common stock for the treasury at a cash price of $10 per share. On September 1, it sells 400 shares of the treasury stock for cash at $13 per share.

Journalize the two treasury stock transactions. (Record journal entries in the order presented in the problem. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

To record purchase of the Treasury stock

Debit: Treasury Stock ($10 by 590 shares) $5,900

Credit: Bank Account $5,900

To record sale of the shares

Debit: Bank ($13 by 400 shares) $5,200

Credit: Treasury Stock Account (with the cost of the shares - $10 by 400) $4,000

Credit: Paid in Capital from Treasury stock (with the price difference - $3 by 400 shares) $1,200

Explanation:

There are two method of accounting for Treasury Stocks.

The Cost method which was used to answer the question and the Par value method.

For purchase of Treasury Stocks.

Using the cost method, the purchase price paid on the stocks is debited to the Treasury Stock account and credited to Bank which is paying.

For sale of Treasury stock

When the company sells its Treasury stock, the inflow received is debited to Bank as usual while the cost of the shares sold is the shareholders equity stock account. The difference in the purchase and selling price rather than go to the Income statement as a gain or loss is instead credited to another stockholder equity account. This is because accounting-wise, a company cannot recognize gain or loss on treasury stock because it is a complete insider information transaction.