Which of the following statements is true regarding a company's buy-back of shares?

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BlackTom AI · Accepted Answer

First, let's restate the core question and options to ensure clarity about what we are evaluating.
Question: Which of the following statements is true regarding a company's buy-back of shares?
Options:
- The cost of re-purchased shares is a reduction in shareholders' equity
- Dividends must still be paid on re-purchased shares because they are still issued
- Re-purchased shares are reported as an asset because it is considered an investment in the company's own share
- Re-purchased shares are still entitled a vote at annual general meetings

Option 1: The cost of re-purchased shares is a reduction in shareholders' equity
This statement aligns with standard accounting treatment for treasury stock. When a company buys back its own shares, those shares are typically recorded as treasury stock, a contra-equity account. The purchase price reduces total shareholders’ equity because these shares are no longer outstanding and do not carry rights like dividends or voting unless later reissued. In short, the treasury stock balance reduces equity and is presented separately within equity on the balance sheet.

Option 2: Dividends must still be paid on re-purchased shares because they are still issued
This is incorrect. Treasury shares (shares repurchased by the company) do not have voting or dividend rights. Until they are reissued, they effectively reduce the number of shares outstanding, and any dividends declared by the company are not paid on treasury shares. Treating them as eligible for dividends would contradict the legal and accounting treatment of treasury stock.

Option 3: Re-purchased shares are reported as an asset because it is considered an investment in the company's own share
This is inaccurate. Although the repurchased shares represent a financial commitment, they are not classified as an asset. Instead, they reduce equity and are recorded as treasury stock (a contra-equity account). Recording them as an asset would misstate the balance sheet and contradict standard accounting conventions for treasury stock.

Option 4: Re-purchased shares are still entitled a vote at annual general meetings
This is false in typical practice. Once shares are repurchased and held as treasury stock, they generally do not confer voting rights. Only when the shares are reissued to the market or outstanding again do voting rights resume with the holders of those shares. Thus, treasury shares typically lose voting rights while held in treasury.

In summary, option 1 correctly describes the accounting impact of share buy-backs, while options 2, 3, and 4 misstate rights, classifications, or treatment of repurchased shares. The true statement is that the cost of re-purchased shares reduces shareholders' equity.

BACC012 Online Quiz- Week 8 | LA008

Which of the following statements is true regarding a company's buy-back of shares?

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