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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Researching GAAP

Situation

Russell International, a publicly traded company, reacquired 500,000 shares of its common stock during July 2019 at a cost of $25 per share. The current market price of the stock was $20 per share when the 500,000 shares were reacquired.

The shares that were reacquired had been owned by a group of minority shareholders who had been dissatisfied with Russell’s earnings trend, stock price, and dividends paid. In fact, these minority shareholders had been so disgruntled that they had filed a suit against Russell’s directors during 2018. The minority shareholders’ suit claimed damages of $3 million because of the board’s failure to fulfill its fiduciary responsibility to maximize shareholders’ value.

In August 2019, the minority shareholders’ suit was dropped, with neither Russell nor its directors having to offer or pay a set-dement. Russell accounts for its treasury stock transactions using the cost method.

Directions

  1. 1. Research the related generally accepted accounting principles and explain how Russell should account for the treasury stock transaction. Cite your reference and applicable paragraph numbers. (Contributed by Daryl G. Krause)

To determine

Identify the generally accepted accounting principles related to treasury stock and explain the manner R international should account for the treasury stock transaction. Cite the references and applicable paragraph numbers.

Explanation

Generally Accepted Accounting Principle (GAAP): Generally Accepted Accounting Principle (GAAP) is a common set of accounting principles, standards, and procedures that the companies must follow at the time of preparation of the financial statements.

Treasury Stock: It refers to the shares that are reacquired by the corporation that are already issued to the stockholders, but reacquisition does not signify retirement.

As per FASB, ASC 505-30-50-3-Equity is the paragraph that is related to the treasury stock transactions.

“A  repurchase  of  shares  at  a  price  significantly  in  excess  of  the  current  market  price creates a presumption that the repurchase price includes amounts attributable to items other than the shares repurchased.”

In case, the purchase of treasury stock includes the receipt of stated or unstated rights, privileges, or agreements in addition to the capital stock, then only the amount indicating the fair value of the treasury stock on the date the key terms of agreement to purchase the shares is reached should be accounted for as the cost of the shares acquired.

The amount paid in excess of the amount accounted for as the cost of the treasury stock should be attributed to the other components of the transaction and accounted for rendering to their substance...

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