On October 10, the stockholders' equity of Sherman Systems appears as follow: Common stock—$10 par value, 85, 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

1. Prepare journal entries to record the following transactions for Sherman Systems.
a. Purchased 6,300 shares of its own common stock at $38 per share on October 11.
b. Sold 1,325 treasury shares on November 1 for $44 cash per share.
c. Sold all remaining treasury shares on November 25 for $33 cash per share.

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

Sherman Systems

1. Journal Entries:

a. October 11:

Debit Treasury Stock $63,000

Debit Paid-in In Excess of Par $176,400

Credit Cash Account $239,400

To record the purchase of 6,300 shares at $38 per share.

b. November 1:

Debit Cash Account $58,300

Credit Treasury Stock $13,250

Credit Paid-in In Excess of Par $45,050

To record the resale of 1,325 treasury shares for $44

2. Sherman's equity section will reduce by $239,400 after the October 11 purchase of treasury stock with a direct reduction of $63,000 in the outstanding shares value and the balance in the Paid-in In Excess of Par account:

Revised Equity section as at October 11:

Stockholders' Equity

Common stock—$10 par value,

85, 000 shares authorized

Issued                                $720,000

less Treasury Stock           -$63,000

Outstanding                                      $657,000

Paid—in capital in excess of par

value, common stock        216,000

less Treasury Stock            176,400    39,600

Retained earnings                             864,000

Total stockholders' equity           $1,560,600

Explanation:

a) Data and Calculations:

Stockholders' Equity

Common stock—$10 par value,

85, 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

b) Sherman Systems can choose from two methods on how to record its Treasury Stock transactions.  One method is the costing method that records every transaction in the Treasury Stock and the par value method which records the differences in the par value for Treasury Stock in the Paid-in In Excess of Par account.

b is the correct answer