Situation Russell International, a publicly traded company, reacquired 500,000 shares of its common stock during July 2008 at a cost of $25 per share. The current market price of the stock was $20 per share when the 500,000 shares were reacquired.
The shares that were reacquired had been owned by a group of minority shareholders who had been dissatisfied with Russell International’s earnings trend, stock price, and dividends paid. In fact, these minority shareholders had been so disgruntled that they had filed a suit against Russell’s directors during 2007. The minority shareholders’ suit claimed damages of $3 million because of the board’s failure to fulfill its fiduciary responsibility to maximize shareholders’ value.
In August 2008 the minority shareholders’ suit was dropped, with neither Russell International nor its directors having to offer or pay a settlement. Russell International accounts for its treasury stock transactions using the cost method.
Research the related generally accepted accounting principles and explain how Russell International should account for the treasury stock transaction. Cite your reference and applicable paragraph numbers.