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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

In the absence of restrictive provisions, what are the basic rights of stockholders of a corporation?

(Cash Dividend and Liquidating Dividend) Lotoya Davis Corporation has 10 million shares of common stock issued and outstanding. On June 1, the board of directors voted an 80 cents per share cash dividend to stockholders of record as of June 14, payable June 3

Instructions

  1. Prepare the journal entry for each of the dates above, assuming the dividend represents a distribution of earnings.
  2. How would the entry differ if the dividend were a liquidating dividend?

Before Gordon Corporation engages in the treasury stock transactions listed on the next page, its general ledger reflects, among others, the following account balances (par value of its stock is \(30 per share).

Paid-in Capital in Excess of Par Common Stock Retained Earnings

Common Stock

\)99,000 \(270,000 \)80,000

Instructions

Record the treasury stock transactions (given below) under the cost method of handling treasury stock; use the FIFO method for purchase-sale purposes.

(a) Bought 380 shares of treasury stock at \(40 per share.

(b) Bought 300 shares of treasury stock at \)45 per share.

(c) Sold 350 shares of treasury stock at \(42 per share.

(d) Sold 110 shares of treasury stock at \)38 per share.

(Stock Split and Stock Dividend) The common stock of Alexander Hamilton Inc. is currently selling at \(120 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is \)10; book value is $70 per share. Nine million shares are issued and outstanding.

Instructions

Prepare the necessary journal entries assuming the following

  1. The board votes a 2-for-1 stock split.
  2. The board votes a 100% stock dividend.
  3. Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

(Dividends and Stockholders’ Equity Section) Anne Cleves Company reported the following amounts in the stockholders’ equity section of its December 31, 2016, balance sheet.

Preferred stock, 10%, \(100 par (10,000 shares authorized, 2,000 shares issued)

\)200,000

Common stock, \(5 par (100,000 shares authorized, 20,000 shares issued)

100,000

Additional paid-in capital

125,000

Retained earnings

450,000

Total

\)875,000

During 2017, Cleves took part in the following transactions concerning stockholders’ equity.

  1. Paid the annual 2016 \(10 per share dividend on preferred stock and a \)2 per share dividend on common stock. These dividends had been declared on December 31, 2016.
  2. Purchased 1,700 shares of its own outstanding common stock for \(40 per share. Cleves uses the cost method.
  3. Reissued 700 treasury shares for land valued at \)30,000.
  4. Issued 500 shares of preferred stock at \(105 per share.
  5. Declared a 10% stock dividend on the outstanding common stock when the stock is selling for \)45 per share.
  6. Issued the stock dividend.
  7. Declared the annual 2017 \(10 per share dividend on preferred stock and the \)2 per share dividend on common stock. These dividends are payable in 2018.

Instructions

  1. Prepare journal entries to record the transactions described above.
  2. Prepare the December 31, 2017, stockholders’ equity section. Assume 2017 net income was $330,000.
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