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Chapter 15: Question 14Q (page 810)

For what reasons might a corporation purchase its own stock?

Short Answer

Expert verified

A corporation may repurchase its company’s shares to increase EPS and other financial ratios to help increase the company’s assets.

Step by step solution

01

Meaning of Stock.

A stock is a type of security issued by a company that represents a percentage of ownership in the corporation. It is considered a way for corporations to make money from the general public.

02

The Reason for the Corporation Purchasing Its Own Stock

For a variety of reasons for which a firm purchases its own stock are as follows:

  1. Tax-efficient distributionof cash to shareholders
  2. In the case of employee stock compensation plans or prospective mergers, supplying stock is necessary.
  3. avoiding takeovers or keeping the number of shareholders low
  4. Initiating a stock market.

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Most popular questions from this chapter

This comment appeared in the annual report of MacCloud Inc.: “The Company could pay cash or property dividends on the Class A common stock without paying cash or property dividends on the Class B common stock. But if the Company pays any cash or property dividends on the Class B common stock, it would be required to pay at least the same dividend on the Class A common stock.” How is a property dividend accounted for in the financial records?

Cole Inc. owns shares of Marlin Corporation stock. At December 31, 2017, the securities were carried in Cole’s accounting records at their cost of \(875,000, which equals their fair value. On September 21, 2018, when the fair value of the securities was \)1,200,000, Cole declared a property dividend whereby the Marlin securities are to be distributed on October 23, 2018, to stockholders of record on October 8, 2018. Prepare all journal entries necessary on those three dates.

Why is the distinction between paid-in capital and retained earnings important?

Where in the financial statements is preferred stock normally reported?

Lindsey Hunter Corporation is authorized to issue 50,000 shares of \(5 par value common stock. During 2017, Lindsey Hunter took part in the following selected transactions.

  1. Issued 5,000 shares of stock at \)45 per share, less costs related to the issuance of the stock totaling \(7,000.
  2. Issued 1,000 shares of stock for land appraised at \)50,000. The stock was actively traded on a national stock exchange at approximately \(46 per share on the date of issuance.
  3. Purchased 500 shares of treasury stock at \)43 per share. The treasury shares purchased were issued in 2013 at $40 per share.

Instructions

  1. Prepare the journal entry to record item 1.
  2. Prepare the journal entry to record item 2.
  3. Prepare the journal entry to record item 3 using the cost method.
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