Question

On January 27, 2015, ALFA purchased 900,000 of its own shares of stock in the open market for 34 SR per share. Then on February 18, 2015 sold 400,000 shares for 23 SR per share.

Answer 1

Solution:

Buyback:

The own shares that are bought by the company are called Treasury Stock. Buyback of shares is a procedure followed by the company, when the company intends to reduce the number of shareholders outside the company, so that no one will gain control of the business. Articles of Association of the company should permit the company to buyback companies own shares. However, shares that are purchased by the company should be fully paid up. The company may intend to cancel the shares bought or it can hold for reissuance at a later date. The stock that are repurchased does not qualify for voting rights or dividend. There are two methods for accounting the buyback of the shares. Cost Method and Constructive Retirement Method.

Cost Method:

Cost Method it the widely used simplest method for accounting the repurchase of the stock.

When purchase is made the Treasury stock account is debited and cash is credited. If the shares are reissued at the lesser price. Need to Charge the differential to the retained earning if there is no additional paid up capital remaining from the prior treasury stock transaction.

Constructive Retirement Method:

An alternative method for accounting the treasury stock. In this method treasury stock will be accounted under the assumption that it will not be reissued. Here, we will reverse the stock at the original price it was sold. The remaining amount if any will be debited to the retained earnings account.