Scenario 1
Since Johnson Corporation repurchased the shares for purposes of resale and not for constructive retirement, they are treated as treasury shares. Gain on sale of treasury stock is treated as a capital surplus. The Controller of Johnson Co. should credit the amount in the capital surplus account. On the date of repurchase of these shares, an entry is made to reduce capital by the cost incurred by the firm to repurchase the shares.
The Controller should make the following entry:
DR Treasury Stock 700
CR: Capital Surplus/ 700
Specific reference and associated literature
ASC 505-30 states the guideline for the treatment of gains on sale of repurchased shares. The standard provides that gain on sale of treasury stock should be credited to capital surplus account.
ASC 505-30. It states as follows:
25-9: The difference between the repurchase and resale prices of a corporation's own common stock shall be reflected as part of the capital of a corporation and allocated to the different components within stockholder equity as required by paragraphs 505-30-30-5 through 30-10.
Scenario 2
DR: Bonds Payable 1,000,000
Cr: Cash 940,000
Cr: Gain on redemption 60,000
Robinson Corporation has paid the holder of the bond, and it is, therefore, relieved of the debt. In addition, the payment involves delivery of cash. The company should, therefore, recognise the difference between the carrying amount of the bond and its redemption price/cost incurred by the company, as a gain in the current year. The carrying amount of the bond is $1,000,000, but the company spent only $940,000 to redeem it. Therefore, the company gained $60,000 from the redemption of these shares.
Reference and associated literature
ASC 470-50 – Debt Modifications and Extinguishments or ASC-405-20 Extinguishment of Debt, outline the guideline for the treatment of this transaction. The transaction meets the requirements for de-recognition of debt under ASC 470-50-40-1 and 2. If a transaction qualifies as an extinguishment of debt, then ASC 470-50 provides as follows:
40-1 As indicated in paragraph 470-50-15-4, the general guidance for the extinguishment of liabilities is contained in Subtopic 405-20 and defines transactions that the debtor shall recognize as an extinguishment of a liability.
40-2 A difference between the reacquisition price of debt and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as losses or gains and identified as a separate item. Gains and losses shall not be amortized to future periods. If upon extinguishment of debt the parties also exchange unstated (or stated) rights or privileges, the portion of the consideration exchanged allocable to such unstated (or stated) rights or privileges shall be given appropriate accounting recognition. Moreover, extinguishment transactions between related entities may be in essence capital transactions.
ASC-405-20 states as follows:
40-1: A debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if either of the following conditions is met:
- a. The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following:
- 1. Delivery of cash
- 2. Delivery of other financial assets
- 3. Delivery of goods or services
- 4. Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds.
- b. The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a third party in conjunction with the sale of an asset that serves as sole collateral for that debt.
Scenario 3
The Controller is not right in recognizing the contingent gain in the financial statements of Allen Co. In this case, the gain from the second lawsuit is only reasonably probable hence it does not meet recognition requirements for inclusion in the financial statements. Since this benefit is reasonably possible; the Controller should only disclose it in the notes to the financial statements. When the actual event occurs, then the controller will recognise the benefit in the financial statements of that period.
Specific reference and associated literature:
ASC 450 provides guidelines for treatment of contingent liabilities in the financial assets. ASC 450-30 prohibits the recognition of any contingent gain/asset in the financial statements. It encourages a conservative approach in which entities account for contingent losses when they are reasonably probable, and recognize contingent assets only when their occurrence is reasonably certain. ASC 450-30-25-1 states that:
A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization.
ASC 450-30-50-1 requires disclosure of contingent gains. It states as follows:
Adequate disclosure shall be made of a contingency that might result in a gain, but care shall be exercised to avoid misleading implications as to the likelihood of realization.
Scenario 4
In the year 2010, segments A, B, C and D were reportable since each of them met the 10% requirement. Therefore, the Controller of Jason Corporation should report segments A, B, C and D separately in the notes for the year 2010 financial statements. It should also include the comparative information for the year 2009 for segments A, B, C and D. Segments A, B and C fulfilled the 10% test in both 2009 and 2010. Segment D was not reportable in the year 2009. However, its comparative figures for 2009 are included by since it is reportable in the year 2009.
Specific reference associated literature
ASC 280 provides that a segment is considered as reportable if it meets any one of the 10% tests. The argument to include the 2009 comparative figures for Segment D is supported by the following literature from ASC 280-50-17:
If an operating segment is identified as a reportable segment in the current period due to the quantitative thresholds, prior-period segment data presented for comparative purposes shall be restated to reflect the newly reportable segment as a separate segment even if that segment did not satisfy the criteria for reportability in paragraph 280-10-50-12 in the prior period unless it is impracticable to do so. For purposes of this Subtopic, information is impracticable to present if the necessary information is not available and the cost to develop it would be excessive.
