Zpanys financial condition that positively impacts

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__ zpany's financial condition that positively impacts its share price and, thus, allows it to resell shares for a "gain." Any such gain on resale is never reflected in the income statement. d, any excess of the resale price over the repurchase price is added to additional paid-in . GAAP prohibits companies from reporting gains and losses from stock transactions with own shareholders. Another reason companies repurchase shares is to offset the dilutive effects of an employee -option program. When an employee exercises stock options, the number of shares outstand- _ increases. These additional shares reduce earnings per share and are, therefore, viewed as . e. In response, many companies repurchase an equivalent number of shares in a desire to outstanding shares constant. A stock repurchase reduces the size of the company (cash declines and, thus, total assets - e). A repurchase has the opposite financial statement effects from a stock issuance. That cash is reduced by the price of the shares repurchased (number of shares repurchased multi- by the purchase price per share), and stockholders' equity is reduced by the same amount. reduction in equity is achieved by increasing a contra equity (negative equity) account treasury stock, which reduces stockholders' equity. Thus, when the treasury stock con- equity account increases, total equity decreases. When the company subsequently reissues treasury stock there is no accounting gain or loss. d, the difference between the proceeds received and the original purchase price of the trea- _.stock is reflected as an increase or decrease to additional paid-in capital. To illustrate, assume that 3,000 common shares of Aon previously issued for $43 are repur- d for $40. This repurchase has the following financial statement effects: Balance Sheet Income Statement = etlon ;:::, + N:::: C::- + c;,::.:," + ~:~:.:: ~•.. " _~eR~ne_u:~-s~ __ E_:_~_~_n_- __ ~_In_~_:_' ~_e_' --' rchase ,I) ~ com- -120,000 -120,000 '!J S:;~~:h Cash T~t~~kry \ share 1 ----_._._--------------------------------------------------------------------.-----------------------------------,~.;,---------------------------------------------------------- TS 120.000 Cash 120.000 TS 120,000 I Cash I 120,000 ts (cash) and equity both decrease. Treasury stock (a contra equity account) increases by _0,000, which reduces stockholders' equity by that amount. Assume that these 3,000 shares are subsequently resold for $42 cash per share. This resale of zeasury stock has the following financial statement effects:
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8-9 Module 8 I Equity Recognition and Owner Financing "\: Cash 126,000 TS 120,000 APIC 6.000 Cash 126.0001 TS 1,20.000 APIC 1 6.000 IFRS Alert Accounting for stock repurchases under IFRS is similar to GAAP except that IFRS provides little guidance on how to allocate the treasury stock to equity accounts. Thus, repurchases can be recorded as an increase to treasury stock, or as a decrease to common stock and APIC (share capital and premium), retained earnings (reserves), or some combination. Balance Sheet Income Statement I <, Expen- _ Net ses - Income j( Cash Noncash Liabil- Contrib. Earned + = + + Transaction Asset Assets ities Capital Capital Reissue +120,000 r 3,000 trea- Treasury sury (com- +126,000 Stock man) shares Cash = +6,000 Additional ~ for $42 cash Paid-In per share Capital J Rev- enues = Cash assets increase by $126,000 (3,000 shares X $42 per share), the treasury stock account is reduced by the $120,000 cost of the treasury shares issued (thus increasing contributed capital), aOC
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