Many States Limit the Amount That May Be Paid to Acquire

question 32

Essay

Many states limit the amount that may be paid to acquire treasury stock to the balance in Retained Earnings.States also restrict the amount of retained earnings available for dividends by the cost of the treasury stock.
Required:
Explain why these restrictions are necessary and how they can be removed.

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Definitions:

Market Rate

The current price or interest rate at which an asset or service can be bought or sold in a particular market.

Secured Bond

Specific assets are pledged as a guarantee of repayment at maturity.

Guarantee Repayment

The obligation of the guarantor to pay back the debt in case the debtor fails to make payments.

Specific Assets

Assets that are designated for a specific use or held to meet particular obligations, not readily used for other purposes.