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Chapter 15: Question: CA15-7 (page 824)

(Treasury Stock—Ethics) Lois Kenseth, president of Sycamore Corporation, is concerned about several large stockholders who have been very vocal lately in their criticisms of her leadership. She thinks they might mount a campaign to have her removed as the corporation’s CEO. She decides that buying them out by purchasing their shares could eliminate them as opponents, and she is confident they would accept a “good” offer. Kenseth knows the corporation’s cash position is decent, so it has the cash to complete the transaction. She also knows the purchase of these shares will increase earnings per share, which should make other investors quite happy. (Earnings per share is calculated by dividing net income available for the common shareholders by the weighted-average number of shares outstanding. Therefore, if the number of shares outstanding is decreased by purchasing treasury shares, earnings per share increases.)

Instructions

Answer the following questions.

  1. Who are the stakeholders in this situation?
  2. What are the ethical issues involved?
  3. Should Kenseth authorize the transaction?

Short Answer

Expert verified

Lois Kenseth must use ethical issues when control of a corporation is at stake.

Step by step solution

01

Meaning of Treasury stock

Shares that are repurchasedby a company sometime after the issue for some specific reason are known as treasury stock. It is measured aspart of the equity section of the balance sheet.

02

The stakeholders are

The stakeholders are disgruntled shareholders, other shareholders,potential speculators, creditors, and Kenneth.

03

Explaining the ethical issues in the transaction

Ethical issues are credibility, work security, and personal obligations to others. That is, by using her insider knowledge and her expertise to make the buy-in, she can leverage herself at the potential cost of other partners.

04

Explaining the authorization of the transaction.

It is important for Kenseth to consider that what is good for the organization is not suitable for her(in back framing, an organization issue). Kenseth should consider answering the questions: (1) Are there better jobs for the money? (2) Can she win over the dissidents in any other way? (3) Will this business be best for all parties in the long run?

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Most popular questions from this chapter

What are the principal considerations of a board of directors in making decisions involving dividend declarations? Discuss briefly.

(Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders’ equity.

  1. Recorded accrued interest earned on a note receivable.
  2. Declared a cash dividend.
  3. Declared and distributed a stock split.
  4. Approved a retained earnings restriction.
  5. Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance.
  6. Paid the cash dividend declared in item 2 above.
  7. Recorded accrued interest expense on a note payable.
  8. Declared a stock dividend.
  9. Distributed the stock dividend declared in item 8.

Instructions

In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code: I = Increase, D = Decrease, NE = No effect.

Item

Asset

Liabilities

Stockholders’ Equity

Paid-in Capital

Retained

Earnings

Net Income

Seles Corporation’s charter authorized issuance of 100,000 shares of \(10 par value common stock and 50,000 shares of \)50 preferred stock. The following transactions involving the issuance of shares of stock were completed. Each transaction is independent of the others.

  1. Issued a \(10,000, 9% bond payable at par and gave as a bonus one share of preferred stock, which at that time was selling for \)106 a share.
  2. Issued 500 shares of common stock for equipment. The equipment had been appraised at \(7,100; the seller’s book value was \)6,200. The most recent market price of the common stock is \(16 a share.
  3. Issued 375 shares of common and 100 shares of preferred for a lump sum amounting to \)10,800. The common had been selling at \(14 and the preferred at \)65.
  4. Issued 200 shares of common and 50 shares of preferred for equipment. The common had a fair value of \(16 per share; the equipment has a fair value of \)6,500.

Instructions

Record the transactions listed above in journal entry form.

Where in the financial statements is preferred stock normally reported?

Indicate how each of the following accounts should be classified in the stockholders’ equity section.

  1. Common Stock.
  2. Retained Earnings.
  3. Paid-in Capital in Excess of Par—Common Stock.
  4. Treasury Stock.
  5. Paid-in Capital from Treasury Stock.
  6. Paid-in Capital in Excess of Stated Value—Common Stock.
  7. Preferred Stock.
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