FUNDAMENTAL ACCOUNTING PRINCIPLES
FUNDAMENTAL ACCOUNTING PRINCIPLES
24th Edition
ISBN: 9781264044375
Author: Wild
Publisher: McGraw-Hil
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Chapter 13, Problem 4BTN

Requirement − 1b:

To determine

To calculate:

Why a company engage in stock buyback?

Requirement − 1b:

Expert Solution
Check Mark

Answer to Problem 4BTN

Solution:

A company normaly engage in stock buyback due to following reasons;

1. For reducing overall cost of capital.

2. For improving return on the shares.

3. For improving condition of undervalued stock.

4. For improving earnings per share.

5. For using excess cash balance in the hand.

6. For taking tax advantages.

Explanation of Solution

A company normally engage in stock buyback due to following reasons;

1. For reducing overall cost of capital; As we know that dividends paid to shareholders is the cost for a company so through buyback of shares a company can reduce number of outstanding shares hence as a result dividends to be paid will be lower. Thus it will result into lower of overall cost of capital.

2. For improving return on the shares;With the help of buyback of shares, number of outstanding shares can be reduced hence it will help in improving eraning per share.

3. For improving condition of undervalued stockCompany can improve value of shares with the help of buyback of shares because in case of undervalued shares company buyback its' own shares and in case higher it sells these shares.

4. For using excess cash balance in the hand;If a company have excess cash in the hand and there is no fair investment option then company can use this excess cash balance for buyback of shares.

6. For taking tax advantages;Dividends paid is subject to taxataion hence for reducing tax burden a company go goy buyback of shares because in case of buyback company can use its' surplus cash.

Conclusion

Thus, above mentioned are the reasons for engaging in stock buyback.

Requirement − 2:

To determine

To calculate:

Journal entries for stock buyback.

Requirement − 2:

Expert Solution
Check Mark

Answer to Problem 4BTN

Solution:

    S. No.Accounts Title & ExplanationDebitCredit
    (1).
    Treasury Stock
    $13400


    Cash

    $13400

    (To record purchase of common stock at cost)






    (a).
    Cash
    $13400


    Treasury Stock

    $13400

    (To record re-issue of treasury stock)






    (b).
    Cash
    $15000


    Treasury Stock

    $13400

    Additional paid in capital − Treasury Stock

    $1600

    (To record re-issue of treasury stock)






    (c).
    Cash
    $12000


    Additional paid in capital − Treasury Stock
    $1400


    Treasury Stock

    $13400

    (To record re-issue of treasury stock)






    (d).
    Cash
    $12000


    Additional paid in capital − Treasury Stock
    $1000


    Retained earnings
    $400


    Treasury Stock

    $13400

    (To record re-issue of treasury stock)






    (e).
    Cash
    $12000


    Retained earnings
    $1400


    Treasury Stock

    $13400

    (To record re-issue of treasury stock)


Explanation of Solution

    S. No.Accounts Title & ExplanationDebitCredit
    (1).
    Treasury Stock (100 * $134)
    $13400


    Cash

    $13400

    (To record purchase of common stock at cost)






    (a).
    Cash (100 * $134)
    $13400


    Treasury Stock

    $13400

    (To record re-issue of treasury stock)






    (b).
    Cash (100 * $150)
    $15000


    Treasury Stock (100 * $134)

    $13400

    Additional paid in capital − Treasury Stock ($15000 - $13400)

    $1600

    (To record re-issue of treasury stock)






    (c).
    Cash (100 * $120)
    $12000


    Additional paid in capital − Treasury Stock (100 * $14)
    $1400


    Treasury Stock (100 * $134)

    $13400

    (To record re-issue of treasury stock)






    (d).
    Cash (100 * $120)
    $12000


    Additional paid in capital − Treasury Stock
    $1000


    Retained earnings ($13400 - $12000 - $1000)
    $400


    Treasury Stock (100 * $134)

    $13400

    (To record re-issue of treasury stock)






    (e).
    Cash (100 * $120)
    $12000


    Retained earnings ($13400 - $12000)
    $1400


    Treasury Stock (100 * $134)

    $13400

    (To record re-issue of treasury stock)


Conclusion

Thus, above given are the journal entries in various cases.

Requirement − 3:

To determine

To discuss:

Differences & similarities in journal entries under various cases?

Requirement − 3:

Expert Solution
Check Mark

Answer to Problem 4BTN

Solution:

(1). Similarities and differences between (a) and (b);

So on the basis of above two entry it is clear that in case of (a) treasury stock is reissued at cost value whereas in case of (b) treasury stock is reissued more than cost value that is why additional paid in capital account is credited with the excess value $1600. So cash account debited in both case will differ due to receipt of different amount for reissue. Value of treasury stock credited will be same in both case that is cost of treasury stock.

(2). Similarities and differences between (b) and (c);

So on the basis of above two entry it is clear that in case of (b) treasury stock is reissued at more than cost value whereas in case of (c) treasury stock is reissued less than cost value that is why additional paid in capital account is credited with the excess value $1600 in case of (b) wheras additional capital account is debited in case of (c). So cash account debited in both case will differ due to receipt of different amount for reissue. Value of treasury stock credited will be same in both case that is cost of treasury stock.

(3). Similarities and differences between (c) and (d);

So on the basis of above two entry it is clear that in case of (c) treasury stock is reissued at less than cost value whereas in case of (d) treasury stock is also reissued less than cost value that is why additional paid in capital account is debited. In case of (b) there is adequate balance in additional paid in capital account to cover loss on reissue but in case of (d) there is no adequate balance available in additional paid in capital account that is why retained earnings account is also debited with $400. So cash account debited in both case will differ due to receipt of different amount for reissue. Value of treasury stock credited will be same in both case that is cost of treasury stock.

(4). Similarities and differences between (d) and (e);

So on the basis of above two entry it is clear that in case of (d) treasury stock is reissued at less than cost value whereas in case of (e) treasury stock is also reissued less than cost value. In case of (d) there is not adequate balance in additional paid in capital account to cover loss on reissue that is why additional paid in capital account and retained earnings accounts both are debited. In case of (e) there is no balance available in additional paid in capital account that is why retained earnings account is debited with $1400. So cash account debited in both case will differ due to receipt of different amount for reissue. Value of treasury stock credited will be same in both case that is cost of treasury stock.

Explanation of Solution

Let's see differences and similarities in all cases from (a) to (e) with the help of pair of two entries;

(1). Similarities and differences between (a) and (b);

    (a).
    Cash (100 * $134)
    $13400


    Treasury Stock

    $13400

    (To record re-issue of treasury stock)






    (b).
    Cash (100 * $150)
    $15000


    Treasury Stock (100 * $134)

    $13400

    Additional paid in capital − Treasury Stock ($15000 - $13400)

    $1600

    (To record re-issue of treasury stock)






So on the basis of above two entry it is clear that in case of (a) treasury stock is reissued at cost value whereas in case of (b) treasury stock is reissued more than cost value that is why additional paid in capital account is credited with the excess value $1600. So cash account debited in both case will differ due to receipt of different amount for reissue. Value of treasury stock credited will be same in both case that is cost of treasury stock.

(2). Similarities and differences between (b) and (c);

    (b).
    Cash (100 * $150)
    $15000


    Treasury Stock (100 * $134)

    $13400

    Additional paid in capital − Treasury Stock ($15000 - $13400)

    $1600

    (To record re-issue of treasury stock)






    (c).
    Cash (100 * $120)
    $12000


    Additional paid in capital − Treasury Stock (100 * $14)
    $1400


    Treasury Stock (100 * $134)

    $13400

    (To record re-issue of treasury stock)






So on the basis of above two entry it is clear that in case of (b) treasury stock is reissued at more than cost value whereas in case of (c) treasury stock is reissued less than cost value that is why additional paid in capital account is credited with the excess value $1600 in case of (b) wheras additional capital account is debited in case of (c). So cash account debited in both case will differ due to receipt of different amount for reissue. Value of treasury stock credited will be same in both case that is cost of treasury stock.

(3). Similarities and differences between (c) and (d);

    (c).
    Cash (100 * $120)
    $12000


    Additional paid in capital − Treasury Stock (100 * $14)
    $1400


    Treasury Stock (100 * $134)

    $13400

    (To record re-issue of treasury stock)






    (d).
    Cash (100 * $120)
    $12000


    Additional paid in capital − Treasury Stock
    $1000


    Retained earnings ($13400 - $12000 - $1000)
    $400


    Treasury Stock (100 * $134)

    $13400

    (To record re-issue of treasury stock)


So on the basis of above two entry it is clear that in case of (c) treasury stock is reissued at less than cost value whereas in case of (d) treasury stock is also reissued less than cost value that is why additional paid in capital account is debited. In case of (b) there is adequate balance in additional paid in capital account to cover loss on reissue but in case of (d) there is no adequate balance available in additional paid in capital account that is why retained earnings account is also debited with $400. So cash account debited in both case will differ due to receipt of different amount for reissue. Value of treasury stock credited will be same in both case that is cost of treasury stock.

(4). Similarities and differences between (d) and (e);

    (d).
    Cash (100 * $120)
    $12000


    Additional paid in capital − Treasury Stock
    $1000


    Retained earnings ($13400 - $12000 - $1000)
    $400


    Treasury Stock (100 * $134)

    $13400

    (To record re-issue of treasury stock)






    (e).
    Cash (100 * $120)
    $12000


    Retained earnings ($13400 - $12000)
    $1400


    Treasury Stock (100 * $134)

    $13400

    (To record re-issue of treasury stock)


So on the basis of above two entry it is clear that in case of (d) treasury stock is reissued at less than cost value whereas in case of (e) treasury stock is also reissued less than cost value. In case of (d) there is not adequate balance in additional paid in capital account to cover loss on reissue that is why additional paid in capital account and retained earnings accounts both are debited. In case of (e) there is no balance available in additional paid in capital account that is why retained earnings account is debited with $1400. So cash account debited in both case will differ due to receipt of different amount for reissue. Value of treasury stock credited will be same in both case that is cost of treasury stock.

Conclusion

Thus, above mentioned are the similarities and differences between various cases.

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Chapter 13 Solutions

FUNDAMENTAL ACCOUNTING PRINCIPLES

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What Are Stock Buybacks and Why Are They Controversial?; Author: TD Ameritrade;https://www.youtube.com/watch?v=2O4bmcliaog;License: Standard youtube license