ACCT2006 Chapter Notes - Chapter 13b: Treasury Stock, Financial Statement, Retained Earnings

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11 Oct 2018

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A share buyback scheme involves a company buying back some of its own shares from current holders of those shares. Some of the reasons a company may consider buying back its own shares are: To increase the worth per share of the remaining shares; To manage the capital structure by reducing equity; To provide price support for issued shares; and. To most effectively manage surplus funds held by the company. There is no specific accounting treatment for share buy backs, however, the company must deduct any shares form equity and cannot show a gain on loss on the purchase of the shares. When the shares are written off, they can be taken against any or all of the equity accounts (share capital, asset revaluation surplus or retained earnings). Treasury shares is the term used for shares that an entity reacquires in itself. All shares that are reacquired must be cancelled and cannot be issued again at a later date.

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The Directors of Brisbane Ltd (a listed company) have come toyour accounting firm to seek advice on how to account for theinvestments they have in the five (5) entities-- Canberra Ltd,Sydney Ltd, Melbourne Ltd, Adelaide Ltd and Perth Ltd. All sharesissued by each of the entities are ordinary shares with normalvoting rights. All key facts as known to the company are providedbelow:

Canberra Ltd

Brisbane Ltd owns 45% of the issued capital.

The remaining shares are owned by a diverse group of investorswho each hold a small parcel of shares, many of whom are unlikelyto attend meetings.

The current board of directors of Canberra Ltd has sevenmembers.

Six directors on the board of Canberra Ltd are appointed byBrisbane Ltd.

Sydney Ltd

Brisbane Ltd owns 90% of the issued capital.

The remaining shares are owned equally between twoshareholders.

Melbourne Ltd

Brisbane Ltd owns 40% of the issued capital.

Three institutional investors equally hold 50% of the issuedcapital. These shareholders regularly attend meetings and vote.

The remaining 10% of the issued capital are owned by ageographically diverse group of investors who each hold a smallparcel of shares, many of whom are unlikely to attend meetings.

Adelaide Ltd

Brisbane Ltd owns 35% of the issued capital.

Sydney Ltd owns 25% of the issued capital.

The remaining shares are owned by a small group of investors whoeach own 10% of the issued shares.

Brisbane Ltd and Sydney Ltd each have two appointees on theboard of directors which has five members.

Perth Ltd

Brisbane Ltd owns 25% of the issued capital.

The remaining shares are owned by three institutional investorswho each own 25% of the issued capital.

All investors have rights to the net assets of Perth Ltd. Theytake a keen interest in the running of the company and attend allmeetings.

The shareholders of Perth Ltd have a contractual agreementwhereby each investor cannot make any operating, investing orfinancing decisions without the expressed consent of the otherparties.

Given the information above, the directors of Brisbane Ltd wouldparticularly like to know:

the type of investment for each entity (i.e. you need to clearlyidentify the investor-investee relationship) including asummary of the identifying criteria and anapplication of this criterion;

the accounting method to be adopted for thistype of investment[1]; and

which entities, if any, would form part of the BrisbaneLtd Group.

[1] Note: You are not required to explain how to apply theaccounting method in detail, but rather simply identify (state) theaccounting method. You must cite the specific provisions includingparagraph from the relevant AASB using one of the following twoexamples for in-text referencing in your presentation slides: AASB102:11 or AASB 102 para. 11.

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1. The effect of a stock dividend is to

Question 17 options:

change the composition of stockholders' equity.

increase the book value per share of common stock.

decrease total assets and stockholders' equity.

decrease total assets and total liabilities

2. Regular dividends are declared out of:

	Common Stock.
	Treasury Stock.
	Retained Earnings.
	Paid-in Capital in Excess of Par.

3. Solaris, Inc. has 2,000 shares of 5%, $10 par value,cumulative preferred stock and 50,000 shares of $1 par value commonstock outstanding at December 31, 2014. What is the annual dividendon the preferred stock?

Question 20 options:

$5 per share

$10,000 in total

$1,000 in total

$.05 per share

4. Corporations generally issue stock dividends in order to

Question 21 options:

decrease the amount of capital in the corporation.

increase the market price per share.

exceed stockholders' dividend expectations.

increase the marketability of the stock.

5. A stockholder who receives a stock dividend would

Question 22 options:

expect the par value of the stock to change.

own more shares of stock.

expect retained earnings to increase.

expect the market price per share to increase.

6. When stock dividends are distributed,

Question 23 options:

	Retained Earnings is decreased.
	Common Stock Dividends Distributable is decreased.
	no entry is necessary if it is a large stock dividend.
	Paid-in Capital in Excess of Par is debited if it is a smallstock dividend.

Identify the effect the declaration and distribution of a stockdividend has on the par value per share.

Question 24 options:

No effect

Increase or decrease

Increase

Decrease

A stock split

Question 25 options:

will have no effect on the par value per share of stock.

will increase the total par value of the stock.

will increase total paid-in capital.

may occur in the absence of retained earnings.

On January 1, Sly Corporation had 120,000 shares of $10 parvalue common stock outstanding. On March 17, the company declared a15% stock dividend to stockholders of record on March 20. Marketvalue of the stock was $13 on March 17. The entry to record thetransaction of March 17 would include a

Question 26 options:

debit to Common Stock Dividends Distributable for $180,000.

credit to Cash for $234,000.

credit to Stock Dividends for $54,000.

credit to Common Stock Dividends Distributable for $180,000.

Bento, Inc. had 500,000 shares of common stock outstandingbefore a stock split occurred, and 1,500,000 shares outstandingafter the stock split. The stock split was

Question 27 options:

1-for-5.

2-for-5.

5-for-1.

3-for-1.

In the stockholders' equity section of the balance sheet,

Question 28 options:

Dividends in arrears will appear as a restriction of RetainedEarnings.

Common Stock Dividends Distributable will appear in its ownsubsection of the stock- holders' equity.

Common Stock Dividends Distributable will be classified as partof additional paid-in capital.

Additional Paid-in Capital appears under the subsection Paid-inCapital.

During 2014 Miami Inc. had sales revenue $1,328,000, grossprofit $728,000, operating expenses $398,000, cash dividends$90,000, other expenses and losses $40,000. Its corporate tax rateis 30%. What was Miami's income tax expense for the year?

Question 29 options:

$87,000

$398,400

$180,000

$60,000

Paiva Corporation splits its common stock 2 for 1, when themarket value is $80 per share. Prior to the split, Paiva had100,000 shares of $10 par value common stock issued andoutstanding. After the split, the par value of the stock

Question 30 options:

	remains the same.
	is reduced to $5 per share.
	is reduced to $2 per share.
	is reduced to $20 per share.

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ACCT2006 Chapter Notes - Chapter 13b: Treasury Stock, Financial Statement, Retained Earnings

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