Writing Assignment (Strategic accounting: par value or cost method?)
J.D. Michael Company has been very successful in recent years. Cash flow from operations is more than sufficient to cover the cost of all capital expenditures as well as regular cash dividends. J. D. Michael has decided to use some of its extra cash to begin a program of repurchasing its own shares in the open market. The shares will not be retired but will be held for potential reissue. Because J. D. Michael has never repurchased its own shares before, it has not had to make a choice between the par value and cost methods of accounting for treasury stock. As the resident expert on accounting in the company, you have been asked to Dr. aft a 1 page memo to the board of directors recommending either the cost method or the par value method of accounting for treasury stock. Your memo should adDr.ess issues like the prevailing practice, the likely effect on the financial statements (particularly the equity section), and the potential impact of the treasury stock accounting treatment on the ability to maintain steady cash dividend payments in the future.