Question

Case study 5:

Scenario 1:

ABC S.A.O.G was incorporated with an authorized capital of 300 million shares, ordinary shares of 500 baiza each. The company has in issue 100 million shares. On 15-january-2017 the company has repurchased 8 million shares at the rate of 3.250 each after the completion of all the requirements posed by capital market Authority-CMA. The company re issued such shares in the march 2018 @ rate of 4.000 R.O per share. The general rules set by CMA is that the company cannot repurchase more than 10% of its share capital at one time and there should be a minimum gap of 2 years between any repurchase. On 13-february-2020, the company again has repurchased 10 million shares at the rate of R.O 4.550 each.

Analyse the above situation and answer the following questions:

1. Explain in your own words impact of each repurchase on company’s share capital? Justify it with proper calculations? (1.5 marks-Min 75 words)
2. Has the company carried out the procedure of repurchase within the guidelines of CMA or not? Justify your answer with necessary data? (1.5 marks-Min 75 words)
3. What is the impact on corporation’s financial statements if all of such repurchased stock is reissued in the year 2020 @ R.O 4.000 each (2 marks-Min 100 words)

Answer 1

Assumption : As entity has intent to sell the repurchased stock. Cost method is used instead of par value method which can be used if entity has intention to hold share indefinitely.

Concept :

Cost value method :

Treasury stock is valued at repurchased cost and gain on sale is transferred to additional paid up capital - treasury stock similar to additional paid up capital- common stock account can be used to record excess of par value on sale of common stock and part of shareholders equity.

Stocks repurchased by the entity but not retired that means stock issued but NOT outstanding.

* It reduces number of outstanding stock.

** No dividen paid and no voting rights.

***Do participate in stock dividends and stock splits.

Treasury stock is contra Account to shareholders equity which implies reduces total shareholders equity.

Answer :

1.

A. Repurchased on 15 January 2017.

Due to repurchased of stock shareholders equity section of Balance sheet will be reduced by 8 milion shares × 3.250 = 26 milion Omani rial and reduce cash with 26 milion Omani rial.

Journal entry :

Debit : Treasury Stock 26 million Omani rial.

Credit : cash 26 milion Omani rial.

B. Re- issue of repurchased stock on March 2018.

Re-issue of stock will decrease treasury stock to nil as re- issue price is higher than repurchase price thus increase stock holers equiry and excess of re- issue and re- purchase price is transferred to additional paid up capital- treasury stock ( refer concept ) that 8 milion × ( 4 - 3.250 = 6 million Omani rial which again increase shareholders equity.Cash is increased by 32 milion Omani rial.

Journal entry :

Debit : Cash 32 milion Omani rial ( 8 milion shares × 4 R.O.)

Credit : Treasury Stock 26 million Omani rial ( 8 milion shares × 3.250 R.O)

Credit : Additional paid up capital- T/S 6 million Omani rial ( 8 milion shares × 4-3.250 R.O.)

C. Re- purchase of stock on 13- February 2020.

Same treatment by increasing treasury stock by 45.5 million Omani rial ( 10 million shares × 4.550 Per R.O ). This will reduce stockholders equity by 45.5 million Omani rial and cash with 45.5 million Omani rial.

Journal entry :

Debit : Treasury Stock 45.5 million Omani rial.

Credit: Cash 45.5 million Omani rial.

2.

Company has maintained the guidelines of Capital market authority.

Guidelines :

A. Company cannot re-purchase more than 10% of its share capital at time.

Share capital as on January 2017 100 million issued shares. Repurchased stock 8 million shares which is less than 10% of 100 million shares i.e. 10 million shares.

Share capital as on February 2020 100 million issued shares due to re-issue of repurchased stock on January 2017 Repurchase stock 10 million shares which is equal to 10% of 100 million shares

Guideline A is satisfied.

B. There should be gap of minimum two years between two Re- purchase of stocks.

Date of first re-purchase 15 January 2017

Date of second Re- purchase 13 February 2020.

There is clear gap of more than three years between two Re-purchase of stocks.

Guideline B is satisfied.

3.

Impact of Re-issue of shares purchase on 13 February 2020 at 4 R.O. per share at loss of 0.550 R.O. per share ( 4.550-4 R.O. per share ).

Effect on shareholders equity :

Increase by Treasury stock amount 45.5 million Omani rial ( 10 million shares × 4.55 Re-purchase price )

Decrease by Additional paid up capital- treasury stock 5.5 million Omani rial ( 10 million shares × 0.55 loss * ).

* 4.55 Re-purchase price - 4 Re-issue price.

Net increase in shareholders equity by 40 million Omani rial.

Effect on cash :

Cash will increase by 40 million Omani rial ( 10 millions shares × 4 R.O per share)

Journal entry:

Debit: Cash 40 million Omani Rial.

Debit: Additional paid up capital -T/S - 5.5 million Omani Rial

Credit : Treasury Stock 45.5 million Omani Rial.