10. Treasury Stock Clockman Corporation has recently become the target of a take
ID: 2458696 • Letter: 1
Question
10. Treasury Stock Clockman Corporation has recently become the target of a takeover attempt by William Face, one of its larger shareholders. Face currently owns 1,000 shares of Clockman, giving him a 40% stake in the company. The current value of Face’s shares totals $100,000. After negotiations, Clockman and Face have entered into an arrangement whereby Clockman will buy half of Face’s stake in the company for $75,000, and Face will agree not to buy any more shares of Clockman on the open market. You are an accountant at Clockman. In discussing this transaction with you, the CEO of Clockman says, ‘‘Even though we’ve paid $25,000 above market value for Face’s shares, we can still allocate the full purchase price to our Treasury Stock account.’’ Is the CEO correct? Research the appropriate Codication and describe proper treatment of this situation.
Explanation / Answer
The CEO is not correct. FASB Codification 505-30-30-2 states that if a company purchases treasury stock at price that is significantly in excess of the current market price of the shares purchased, a portion of the repurchase price must be allocated to other elements of the repurchase transaction.
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