Why a company engage in stock buyback?

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 13, Problem 4BTN

Requirement − 1b:

To determine

To calculate:

Why a company engage in stock buyback?

Requirement − 1b:

Expert Solution

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

Answer to Problem 4BTN

Solution:

S. No.	Accounts Title & Explanation	Debit	Credit
(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 & Explanation	Debit	Credit
(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

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

Wanting to finalize a sale before year-end, on December 29, WR Outfitters sold to Bob a warehouse and the land for $140,000. Note: Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. a. What is Bob's basis in the warehouse and in the land if the appraised value of the warehouse was $100,750 and the appraised value of the land was $115,000? Bob's Basis Warehouse Land

On 17-Feb of year 1, Javier purchased a building, including the land it was on, to assemble his new equipment. The total cost of the purchase was $1,302,500; $295,000 was allocated to the basis of the land and the remaining $1,007,500 was allocated to the basis of the building. (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) Note: Do not round intermediate calculations. Round your answers to the nearest whole dollar amount. e. What would be the depreciation for 2024, 2025, and 2026 if the property were nonresidential property purchased and placed in service 17-Feb, 2007 (assume the same original basis)? Depreciation Year Expense 2024 2025 2026

What percentage of RBC’s total assets is held in investments (at October 31, 2020 and 2019)? refer to the 2020 financial statements and accompanying notes of Royal Bank of Canada (RBC). Note that RBC also holds a significant loan portfolio. What is the business reason for holding loans versus securities? Comment on how the investments are classified and presented on the balance sheet. What percentage of total interest income comes from securities (2020 and 2019)? Are there any other lines on the income statement or in OCI) relating to the securities? What percentage of net income (include any relevant OCI items) relates to securities (2020 versus 2019)? Calculate an approximate return on the investments in securities.

Answer 2

Question

Chapter 13, Problem 4BTN

Requirement − 1b:

To determine

To calculate:

Why a company engage in stock buyback?

Requirement − 1b:

Expert Solution

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

Answer to Problem 4BTN

Solution:

S. No.	Accounts Title & Explanation	Debit	Credit
(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 & Explanation	Debit	Credit
(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

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 13, Problem 4BTN

Requirement − 1b:

To determine

To calculate:

Why a company engage in stock buyback?

Requirement − 1b:

Expert Solution

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

Answer to Problem 4BTN

Solution:

S. No.	Accounts Title & Explanation	Debit	Credit
(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 & Explanation	Debit	Credit
(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

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 13, Problem 4BTN

Requirement − 1b:

To determine

To calculate:

Why a company engage in stock buyback?

Requirement − 1b:

Expert Solution

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

Answer to Problem 4BTN

Solution:

S. No.	Accounts Title & Explanation	Debit	Credit
(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 & Explanation	Debit	Credit
(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

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 13, Problem 4BTN

Requirement − 1b:

To determine

To calculate:

Why a company engage in stock buyback?

Requirement − 1b:

Expert Solution

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

Answer to Problem 4BTN

Solution:

S. No.	Accounts Title & Explanation	Debit	Credit
(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 & Explanation	Debit	Credit
(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

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.

Answer 6

Chapter 13, Problem 4BTN

Requirement − 1b:

To determine

To calculate:

Why a company engage in stock buyback?

Requirement − 1b:

Expert Solution

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.

Answer 7

Chapter 13, Problem 4BTN

Requirement − 1b:

To determine

To calculate:

Why a company engage in stock buyback?

Answer 8

Requirement − 1b:

Expert Solution

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.

Answer 9

Requirement − 1b:

Expert Solution

Answer 10

Requirement − 1b:

Expert Solution

Answer 11

Expert Solution

Answer 12

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.

Answer 13

Conclusion

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

Answer 14

Requirement − 2:

To determine

To calculate:

Journal entries for stock buyback.

Requirement − 2:

Expert Solution

Answer to Problem 4BTN

Solution:

S. No.	Accounts Title & Explanation	Debit	Credit
(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 & Explanation	Debit	Credit
(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.

Answer 15

Requirement − 2:

To determine

To calculate:

Journal entries for stock buyback.

Answer 16

Requirement − 2:

Expert Solution

Answer to Problem 4BTN

Solution:

S. No.	Accounts Title & Explanation	Debit	Credit
(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)

Answer 17

Requirement − 2:

Expert Solution

Answer 18

Requirement − 2:

Expert Solution

Answer 19

Expert Solution

Answer 20

Explanation of Solution

S. No.	Accounts Title & Explanation	Debit	Credit
(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)

Answer 21

Conclusion

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

Answer 22

Requirement − 3:

To determine

To discuss:

Differences & similarities in journal entries under various cases?

Requirement − 3:

Expert Solution

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.

Answer 23

Requirement − 3:

To determine

To discuss:

Differences & similarities in journal entries under various cases?

Answer 24

Requirement − 3:

Expert Solution

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.

Answer 25

Requirement − 3:

Expert Solution

Answer 26

Requirement − 3:

Expert Solution

Answer 27

Expert Solution

Answer 28

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.