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Why are no cash dividends paid on treasury shares?
ATreasury shares are recorded at par, not at market value
BThe corporation would essentially be paying a dividend to itself
CTreasury shares are an asset rather than equity
DDividends payable cannot exceed the treasury share balance
Answer & Solution
Correct answer: B. The corporation would essentially be paying a dividend to itself
1. Treasury shares are the corporation's own shares held by the corporation itself.
2. Dividends are distributions to outside shareholders out of retained earnings.
3. Paying a dividend on treasury shares would mean the company pays itself, which is meaningless.
4. Hence dividends are declared only on outstanding shares.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §6.5 "Cash Dividends", p.253_
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