Question

Company A secured financing of $40 million from an independent investor (Company B), in exchange for:
-$30 million (preferred stock), and
-$10 million for the sale of its shares of common stock
The purchase of preferred and common stock was done within the same transaction, meaning Company B paid the same per share for both stocks.

Company A had previously awarded common stock to its employees as share-based compensation. As required by the terms of the financing agreement, Company A conducted a tender offer to repurchase an aggregate of $10 million common stock from its current employees at a per-share price of $4.68. The reacquired common stock was then sold to Company B for $10 million. The purchase price of $4.68 was independently negotiated with Company B. Company A acted as a principal in both transactions with its employees and Company B. Company A did not act as an agent to purchase shares from employees on behalf of Company B.

On the basis of an independent third-party valuation, Company A concluded that the purchase price paid to the employees ($10 million) exceeded the fair value of common stock by $2.6 million.  

ASC 718-20-35-7 states, in part:
The amount of cash or other assets transferred (or liabilities incurred) to repurchase an equity award shall be charged to equity, to the extent that the amount paid does not exceed the fair value of the equity instruments repurchased at the repurchase date. Any excess of the repurchase price over the fair value of the instruments repurchased shall be recognized as additional compensation cost.

With respect to this codification, Company A recorded a debit to treasury stock and expense in the amounts of $7.4 million (representing the fair value of the common stock) and $2.6 million (representing the excess of the purchase price over fair value), respectively, and a credit to cash.

Question: Please illustrate cash inflow, outflow, and net balance of the appropriate cash flow activities

Answer 1