Treasury Stock
shares of a corporation’s own capital stock that have been
issued and later acquired by the issuing company
reduces assets (cash)
reduces Shareholders’ Equity by the same amount
reasons:
- need the stock to give to employees under a bonus plan
- desire to increase earnings per share
- to support the current market price
shares held in the treasury are not regarded as outstanding
shares, and therefore are not included in earnings per share
calculations, and aren’t eligible for dividends, votes, etc.
journal entry:
Treasury Stock $$$
Cash $$$
regarded as a reduction of shareholders’ equity, not as an
acquisition of an asset
- appears as a deduction in the S/E section
- refer to page 686
when Treasury Stock is reissued:
Situation 1:
Cash $$$
Treasury Stock $$$
Contributed Capital from Treasury
Stock Transactions $$$
- new account records any difference between the cost
(purchase) and the reissue price
Situation 2:
Cash $$$
Contributed Capital from Treasury
Stock Transactions $$$
Treasury Stock $$$
- if issued at a price below cost (purchase price)
note: if insufficient or no contributed capital from previous
treasury stock transactions to cover the excess, the balance or
the entire excess of the cost of the treasury shares over the
reissue price may be recorded as a debit to Retained Earnings
no income or loss is recognized on treasury stock
transactions (just changes in contributed capital)
corporate law:
- distributions of assets to shareholders cannot exceed
the balance in the Retained Earnings account
- this includes purchases of treasury stock
- Retained Earnings are usually restricted by an amount
equal to the cost of any shares held in the treasury
- refer to pg. 686