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Cornerstones of Financial Accounti...
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Cornerstones of Financial Accounti...
A company would repurchase its own stock for all of the following reasons except:
- it wishes to prevent unwanted takeover attempts.
- it wishes to increase the earnings per share.
- it believes the stock is overvalued.
- it needs the stock for employee bonuses.
Concept introduction:
Treasury stock:
Treasury stock is the shares bought back by the company itself. A company may purchase its own shares and the shares bought back are called treasury stock. The journal entries are made at the time of sale and purchase of treasury stock as follows:
- For Purchase of treasury stock:
Treasury stock account is debited and cash account is credited with the cost of treasury stock purchased.
- For Sale / Reissuance of treasury stock:
Cash account is debited for the amount received on sale of treasury stock and the Treasury stock account is credited with the cost of treasury stock. For the difference in cost and sale value, Additional Paid in Capital and Retained earnings accounts are adjusted.
To choose:
The correct option that is not a reason for repurchase of own stock.
Explanation for correct answer:
A company would not repurchase its own stock by the reason of stock being overvalued. Hence the correct option is c.
Explanation for incorrect answers:
a. Prevention of unwanted takeover attempts is one of the reasons for repurchasing its own stock...
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