Buying your own stock;

              ATLANTA PORTLAND
BALTIMORE
BOSTON
BUFFALO HASKINS & SELLS PROVIDENCE
SAINT LOUIS
SAN DIEGO
CCHHAATRTLAONTOTOEG A SAN FRANCISCO
CHICAGO CERTIFIED PUBLIC ACCOUNTANTS SEATTLE
TULSA
CINCINNATI
CLEVELAND —
DALLAS BULLETIN BERLIN
DENVER LONDON
DETROIT MANILA
JACKSONVILLE PARIS
KANSAS CITY SHANGHAI
LOS ANGELES MINNEAPOLIS NNEEWW AORRKLE ANS EXECUTIVE OFFICE CCUABNAAD A
NEW YORK 15 BROAD STREET, NEW YORK
MEXICO
PHILADELPHIA
SOUTH AMERICA
PITTSBURGH SOUTH AFRICA
VOL. X I V (QUARTERLY) NEW YORK, OCTOBER, 1931 No. 4
THE question of how to treat purchases
by a corporation of its own capital
stock, of late has assumed more than aca­demic
importance because of the economic
situation which has existed during the past
year and a half. A depressed stock market
has offered rare opportunities to corpora­tions
for the purchase of their own shares.
Many corporations have found themselves
in a position where decreased volume of
business has made desirable a smaller
amount of capital to which dividend re­sponsibilities
attach. Smaller earnings, in
some cases, have interfered with the con­tinuance
of established rates of dividends.
A smaller number of shares outstanding
might permit an untarnished dividend
record, or at least a dividend distribution
acceptable to shareholders. Many corpora­tions
have taken advantage of the oppor-tunities
afforded by the market, and have
purchased their own shares. Not a few
corporation officials have been perplexed
by the accounting problem of how to treat
the stock so acquired, and, where the law
requires that such shares may be purchased
only out of surplus, how to treat the sur­plus
so used.
The power of a corporation to acquire its
own capital stock by purchase, is a matter
to be governed by the statutes applicable
to the jurisdiction involved, or by the de­cided
cases pertinent to the question. The
accounting treatment to be accorded to
such shares when purchased has been the
subject of considerable controversy be­cause
of two sharply opposed theories con­cerning
the significance of such transac­tions.
The two theories may be referred to,
respectively, as the commodity theory,
and as the capital stock adjustment theory.
The commodity theory of capital stock
is based on the principle that exchanges
make a ready market for capital stocks,
that the stocks are bought and sold, like
merchandise, and, that once a corporation
has sold and issued its stock, such stock
takes on the character of merchandise, re­gardless
of the hands into which it may
fall. This, coupled with the fact that cer­tain
statutes governing corporations for­bid
the reduction of capital stock without
formal action, furnishes ground for the
argument that stock once issued and re­acquired
for value, otherwise known as
treasury stock, properly may be recognized
as an asset. Thus is afforded a theoretical
reason for ignoring any accounting rela­tionship
between treasury stock and the
capital stock account and a basis on which
to predicate a theory of gain or loss in sub­sequent
treasury stock transactions.
The capital stock adjustment theory is
based on the principle that capital stock is
Buying Your Own Stock