In Its 2010 Annual Report, Gamma Company Indicated That the Number

question 123

Essay

In its 2010 annual report, Gamma Company indicated that the number of common shares held in the treasury decreased from 45,546,171 in 2009 to 3,397,381 in 2010. The following also was reported:
By Board authorization, effective December 31, 2010 the Company cancelled 50 million shares of common stock held in treasury. As a result of the cancellation, common stock decreased by $125 million, capital in excess of par value of stock decreased by $228 million, and retained earnings decreased by $3,119 million.
The shares cancelled or retired represent almost 25 percent of the shares of common stock issued by Gamma. Explain the accounting for the treasury shares by Gamma. Did the company buy any treasury shares during the year? Prepare the entry in journal form that was made to record the cancellation or retirement of the treasury shares. At what average price were the treasury shares purchased, and at what average price were they originally issued? What do you think was management's reason for purchasing the treasury shares? (Omit explanations.)

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Definitions:

Output Levels

The quantity of goods or services produced by a firm, industry, or economy in a given period.

Competitive Market

An economic system where multiple firms sell similar products or services, encouraging fairness and efficiency, driven by supply and demand mechanisms.

Marginal Products

Additional outputs that result from the increment of one unit of input while holding other inputs constant, emphasizing the concept of variable productivity.

Fast Food Restaurant

A quick service eating establishment that serves affordable food items prepared and served quickly.