Overview
This lecture explains how corporations account for treasury stock, including reasons for repurchase, journal entries for buying and reselling shares, and effects on stockholders' equity.
Treasury Stock Basics
- Treasury stock is a corporation's own previously issued stock that has been reacquired and held in its treasury.
- Companies repurchase stock to resell later at a higher price, avoid hostile takeovers, support stock price, or provide employee compensation.
- Treasury stock is a contra equity account with a normal debit balance.
- It is recorded using the cost method (at purchase price, not par value).
- On the balance sheet, treasury stock is listed below retained earnings and reduces total stockholders' equity.
Issued vs. Outstanding Shares
- Issued stock refers to total shares that the company has ever issued.
- Outstanding shares are issued shares currently held by stockholders (Issued shares minus treasury shares).
Accounting for Treasury Stock Transactions
- Purchase of treasury stock: Debit treasury stock and credit cash for the total cost.
- Reselling at cost: Debit cash and credit treasury stock for the original cost.
- Reselling above cost: Debit cash for the total sale, credit treasury stock at original cost, and credit the difference to Paid-in Capital from Treasury Stock Transactions.
- Reselling below cost: Debit cash for proceeds, credit treasury stock at original cost, and debit the difference from Paid-in Capital from Treasury Stock Transactions (up to its balance); any remainder is debited from retained earnings.
Example Transactions
- Buying 1,000 shares at $5 each: Debit treasury stock $5,000, credit cash $5,000.
- Selling 100 shares at $5 (cost): Debit cash $500, credit treasury stock $500.
- Selling 200 shares at $6: Debit cash $1,200, credit treasury stock $1,000, credit Paid-in Capital $200.
- Selling 200 shares at $4.30: Debit cash $860, debit Paid-in Capital $140, credit treasury stock $1,000.
- If Paid-in Capital is depleted, further losses reduce retained earnings.
Retirement of Stock
- Companies may also retire stock, cancelling it so it cannot be reissued (often used for preferred stock).
- Retirement entries: Debit the stock account (par value), debit Paid-in Capital in excess of par, and credit cash.
Key Terms & Definitions
- Treasury Stock — A company’s own stock that has been reacquired and is held in the treasury.
- Contra Equity Account — An equity account with a normal debit balance that reduces total equity.
- Cost Method — Recording treasury stock at purchase cost, not at par value.
- Paid-in Capital from Treasury Stock Transactions — Equity account credited when treasury stock is resold above cost.
- Issued Shares — Total shares a company has issued to date.
- Outstanding Shares — Issued shares currently held by investors; issued shares minus treasury shares.
- Retirement of Stock — The process of buying back and canceling stock so it cannot be reissued.
Action Items / Next Steps
- Review the balance sheet to identify and understand the effects of treasury stock transactions.
- Practice journal entries for treasury stock purchase, resale (above/below cost), and retirement.
- Study the difference between issued, outstanding, and treasury shares for exams.