Ch 15.2 (Reacquisition of Shares)

Question 1

Why do corporations purchase their outstanding stock?

Answer 1

1. To provide tax-efficient distributions of excess cash to shareholders.
2. To increase earnings per share and return on equity.
3. To provide stock for employee stock compensation contracts or to meet potential merger needs.
4. To thwart takeover attempts or to reduce the number of stockholders.
5. To make a market in the stock.

Question 2

Leveraged Buyout

Answer 2

The company borrows money to finance the stock repurchases.

Some publicly held corporations have chosen to “go private,” that is, to eliminate public (outside) ownership entirely by purchasing all of their outstanding stock.

Question 3

Treasury Stock (treasury shares)

Answer 3

After reacquiring shares, a company may either retire them or hold them in the treasury for reissue.

Treasury stock is a corporation’s own stock, reacquired after having been issued and fully paid.

Treasury stock is not an asset.

When a corporation buys back some of its own outstanding stock, it reduces net assets.

Treasury stock simply reduces common stock outstanding.

Treasury stock is essentially the same as unissued capital stock.

Question 4

Cost Method (Treasury Stock)

Answer 4

Debiting the Treasury Stock account for the reacquisition cost and in reporting this account as a deduction from the total paid-in capital and retained earnings on the balance sheet. (Debit Treasury Stock, Credit Cash)

Question 5

Par (stated) Value Method (Treasury Stock)

Answer 5

Records all transactions in treasury shares at their par value and reports the treasury stock as a deduction from capital stock only.

Question 6

Outstanding Stock

Answer 6

The number of shares of issued stock that stockholders own.

Question 7

Sale of treasury stock not equal to cost

Answer 7

Accounting for treasury stock sold above cost differs from the accounting for treasury stock sold below cost.

However, the sale of treasury stock either above or below cost increases both total assets and stockholders’ equity.

Question 8

Sale of Treasury Stock Above Cost

Answer 8

When the selling price of shares of treasury stock exceeds its cost, a company credits the difference to Paid-in Capital from Treasury Stock.

(1) Gains on sales occur when selling assets; treasury stock is not an asset. (2) A gain or loss should not be recognized from stock transactions with its own stockholders.

Question 9

Sale of Treasury Stock Below Cost

Answer 9

When a corporation sells treasury stock below its cost, it usually debits the excess of the cost over selling price to Paid-in Capital from Treasury Stock.

Question 10

Paid-in Capital from Treasury Stock

Answer 10

After eliminating the credit balance in Paid-in Capital from Treasury Stock, the corporation debits any additional excess of cost over selling price to Retained Earnings

Question 11

Retiring Treasury Stock

Answer 11

Needs board of director’s approval.

The accounting effects are similar to the sale of treasury stock except that corporations debit the paid-in capital accounts applicable to the retired shares instead of cash.

Debits Common Stock and Debits Paid-in Capital in Excess of Par - Common Stock.