Chapter 11: Treasury Stock

Recording Purchases and Sales of Treasury Stock Treasury Stock is stock that a corporation buys back after it has been issued. It is recorded as a contra-equity account, meaning it reduces the total equity in the stockholders' equity section of the balance sheet. Treasury stock does not carry voting rights, nor does it receive dividends. 1. Recording Treasury Stock Purchases When a corporation buys back its own stock: • • The cost method is commonly used, where treasury stock is recorded at the cost of repurchase. Buying treasury stock reduces both total assets and total equity without affecting the common stock or retained earnings accounts. Example Journal Entry for Purchase: • Suppose a corporation purchases 1,000 shares of its own stock at $11.50 per share. plaintext Debit Treasury Stock $11,500 Credit Cash $11,500 o This entry reduces the company’s cash and equity by $11,500. 2. Recording Treasury Stock Sales • Treasury stock can be reissued (sold) at the same cost it was bought, above cost, or below cost. Sales of treasury stock do not result in "gains" or "losses" on the income statement; instead, they adjust equity accounts. a. Selling Treasury Stock at Cost • • If treasury stock is reissued at the original purchase cost, the transaction reverses the initial purchase entry. Example: Reissuing 100 treasury shares at the original $11.50 per share cost. plaintext Debit Cash $1,150 Credit Treasury Stock $1,150 b. Selling Treasury Stock Above Cost • • When sold at a price above the original cost, the excess is credited to a separate equity account called Paid-In Capital, Treasury Stock. Example: Selling 400 shares of treasury stock at $12 per share (original cost was $11.50 per share). plaintext Debit Cash $4,800 Credit Treasury Stock $4,600 Credit Paid-In Capital, Treasury Stock $200 • Here, $200 (400 shares × $0.50) is credited to Paid-In Capital, Treasury Stock. c. Selling Treasury Stock Below Cost • • When sold below the original purchase cost, the shortfall is first debited to Paid-In Capital, Treasury Stock, if it has a credit balance. If no credit balance remains, any further shortfall is debited to Retained Earnings. Example: Selling the remaining 500 shares of treasury stock at $11.20 per share, when the original cost was $11.50 per share. plaintext Debit Cash $5,600 Debit Paid-In Capital, Treasury Stock $150 Credit Treasury Stock $5,750 • Here, $150 (500 shares × $0.30) is debited to Paid-In Capital, Treasury Stock to adjust for the excess cost over selling price. 3. Example Problem Solution Example Transactions for the Year: • A corporation with an initial common stock balance performs the following transactions: 1. Purchases 30 shares of treasury stock at $20 per share: plaintext Debit Treasury Stock $600 Credit Cash $600 2. Sells 20 shares of treasury stock at $26 per share: plaintext Debit Cash $520 Credit Treasury Stock $400 Credit Paid-In Capital, Treasury Stock $120 3. Sells the remaining 10 shares of treasury stock at $9 per share:  Since the selling price is below cost, Paid-In Capital, Treasury Stock is reduced by the shortfall, and if needed, Retained Earnings is used. plaintext Debit Cash $90 Debit Paid-In Capital, Treasury Stock $110 Credit Treasury Stock $200 Key Points • • • • Treasury Stock is a contra-equity account that reduces stockholders' equity. Sales Above Cost: Excess is credited to Paid-In Capital, Treasury Stock. Sales Below Cost: Shortfall reduces Paid-In Capital, Treasury Stock; if exhausted, it reduces Retained Earnings. Treasury stock does not affect the income statement directly; transactions only affect equity accounts.