At December 31, year 1, Rama Corp. had 20,000 shares of
$1 par value treasury stock that had been acquired in year 1 at
$12 per share. In May year 2, Rama issued 15,000 of these treasury
shares at $10 per share. The cost method is used to record
treasury stock transactions. Rama is located in a state where laws
relating to acquisition of treasury stock restrict the availability of
retained earnings for declaration of dividends. At December 31,
year 2, what amount should Rama show in notes to financial
statements as a restriction of retained earnings as a result of its
treasury stock transactions?

(c) The entry that Rama made on acquisition of treasury
stock was as follows using the cost method:
Treasury stock
(20,000 × $12) 240,000
Cash 240,000
When some of the shares are later reissued, the entry is
Cash (15,000 × $10) 150,000
Retained earnings 30,000
Treasury stock
(15,000 × $12) 180,000
It is assumed there was no balance in APIC—Treasury stock
prior to this entry. If the problem had stated there was a credit
balance, APIC—Treasury stock would be debited before retained
earnings to the extent a credit balance existed in APIC—
Treasury stock. When retained earnings are legally restricted the
restriction must be disclosed. In this case, the net treasury stock
account balance is $60,000 ($240,000 – $180,000), and this is
the amount of retained earnings that must be disclosed as legally
restricted.