Hospital Corporation of America bought back 12 million shares at a cost of $54 million meaning a share at $47 but after the crash of the stock market the shares dropped to a market price of $311/8. It seems Hospital Corporation of America made a loss of $190. 5 millions but according to accounting principles no loss can be attributed to the buy back. This to common sense it seems the hospital corporation of America is showing the shareholder that they have good investment while they have made a big loss from the investment.
Accounting for treasury stock transaction is done differently from how common sense reasoning is. According to Mazoo learning Blog website (http:/www. learning. net/archives), Treasury Stock accounting is done through two methods: Par Value method or the Cost method. In either of the methods gain or loss from stock transactions is not reflected in the income statement.
As cited in Mazoo learning Blog website (http:/www. learning.net/archives), for par value method, the par value figure is used in the treasury stock account, Gains are credited to the additional paid in capital, treasury stock account and losses are debited to Additional paid in Capital, Treasury account and then to Retained earnings account. This way the transaction do no increase the retained earnings account. For the cost method, the company does not make any loss or gain from the transaction.
Gains are credited to Additional paid in Capital Treasury stock account and losses are debited to Additional paid in capital-treasury stock account and then retained earnings account and thus the transaction do not increase the retained earnings. Thus according to accounting practices Hospital Corporation of America did not make any loss and its income statement would not reflect any effect out of the stock transactions. 14-62 Why 49% Ownership is Enough 1. Owning 50% stock of a company makes the company a subsidiary of the holder company.
This means that the holder will control the operations of the subsidiary company and the accounts of the subsidiary will be included in consolidated accounts of the holding company. 2. Owning less than 50% of a company’s stock does not make it a subsidiary but an associate company. This means the holding company’s investment in the associate company will be reflected as an asset in books of the holding company balance sheet. The liabilities of the associate company will not be reflected on the holding company’s balance sheet hence reflecting a favorable position.
This important for the Coca-Cola Company as the favorable position reflected in its balance sheet will: help it attract investors, access loan financiers and increase its reputation among its customers. The Coca-Cola Company will prefer to own less than 50% of its distribution network so as to avoid consolidation of their accounts hence will not reflect the liabilities of the distribution network companies in its balance sheet. 3. Consolidation means the debt that was transferred to the Coca-Cola enterprise will be shown the consolidated balance sheet of the Coca-Cola Company thus reflecting unfavorable financial position.
This unfavorable financial position may bar it from accessing loan financing and tarnish its reputation amongst its customers and partners.
References Investor words. com. Retrieved January 8, 2008 from (http://www. investorwords. com/2108/full_disclosure. html) Mazoo learning Blog Treasury Stock Retrieved January 8, 2008 from (http:/www. learning. net/archives) Siegel Joel G. Slim Jae K. Qureshi Anique Gaap handbook of policies and procedures,1999 Prentice Hall Direct (1998).