- Account for buying and selling shares of treasury stock
When a business buys back its own shares, these shares become treasury stock and are decommissioned. In and of itself, treasury stock doesn’t have much value. These stocks do not have voting rights and do not pay any distributions. However, in certain situations, the organization may benefit from limiting outside ownership. Reacquiring stock also helps raise the share price, providing investors with an immediate reward.
Treasury stock is stock that is repurchased by the same corporation that issued it. The corporation is buying back its own stock from the stockholders. Since treasury stock shares are no longer owned by stockholders but by the corporation itself, total stockholders’ equity decreases.
As we noted before, shares outstanding equals the number of shares issued (sold for the first time) minus the number of shares of treasury stock a corporation has reacquired. When treasury stock is purchased, the number of shares issued remains unchanged, but the number of shares outstanding decreases.
When treasury stock is purchased, the Treasury Stock account is debited for the number of shares purchased times the purchase price per share. Treasury Stock is a contra stockholders’ equity account and increases by debiting. It is not an asset account.
Treasury stock may be resold to stockholders at the same, a higher, or a lower price than it was purchased for. When sold, the Treasury Stock account can only be credited in multiples of its original purchase price per share. Use the Paid-in Capital from Sale of Treasury Stock account for differences between purchase and selling prices. Paid-in Capital from Sale of Treasury Stock is credited for any amount above the original purchase price (similar to a gain) and is debited for any amount below the original purchase price (similar to a loss).
The sale of treasury stock increases the number of shares outstanding and increases total stockholders’ equity.
The par value of the stock is not a factor in the purchase or sale of treasury stock.
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| 20– | ||||
| Oct. 1 | Treasury Stock | 45,000.00 | ||
| Oct. 1 | Checking | 45,000.00 | ||
| Oct. 1 | To record repurchase of 1,000 shares of stock at $45 per share. | |||
A company can decide to hold onto treasury stocks indefinitely, reissue them to the public, or even cancel them.
If the company cancels the stock, then stock issued is reduced.
Reselling treasury stock (reissuing) is not very common, but if treasury stock is resold to stockholders for more than its purchase price per share, the entry would be:
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| 20– | ||||
| Oct. 1 | Checking | 12,000.00 | ||
| Oct. 1 | Paid-in Capital – Treasury Stock | 3,000.00 | ||
| Oct. 1 | Treasury stock | 9,000.00 | ||
| Oct. 1 | To record reissuance of 200 shares of stock at $60 per share (cost of $45). | |||
If treasury stock is resold to stockholders for less than its purchase price per share, the entry would be:
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| 20– | ||||
| Oct. 1 | Checking | 8,000.00 | ||
| Oct. 1 | Retained Earnings | 1,000.00 | ||
| Oct. 1 | Treasury Stock | 9,000.00 | ||
| Oct. 1 | To record reissuance of 200 shares of stock at $40 per share (cost of $45). | |||