JournaldrillTreasury stock
Under the cost method, buying back the company's own shares debits Treasury Stock (a contra-equity account) and credits Cash for the cost. Reissuing treasury shares above cost credits Paid-in Capital from Treasury Stock for the excess; reissuing below cost debits that account first and then Retained Earnings. No gain or loss is ever recorded.
Syntax
Buy: Dr Treasury Stock / Cr Cash; Reissue above cost: Dr Cash / Cr Treasury Stock (cost), Cr Paid-in Capital from Treasury Stock; below cost: Dr Cash, Dr Paid-in Capital from Treasury Stock (then Retained Earnings) / Cr Treasury Stock| Part | What it is |
|---|---|
Treasury Stock | Contra-equity with a debit balance, deducted at the bottom of stockholders' equity. |
Paid-in Capital from Treasury Stock | Equity account for the difference between reissue price and cost. |
Retained Earnings | Debited for a reissue below cost once the treasury paid-in capital account is used up. |
Examples
Dr Treasury Stock 20,000 / Cr Cash 20,000Result: Equity down 20,000, assets down 20,000
1,000 shares bought back at 20 each.
Dr Cash 12,500 / Cr Treasury Stock 10,000, Cr Paid-in Capital from Treasury Stock 2,500Result: Equity up 12,500; no gain recorded
500 treasury shares reissued at 25 (cost 20).
Dr Cash 9,000, Dr Paid-in Capital from Treasury Stock 1,000 / Cr Treasury Stock 10,000Result: Shortfall absorbed by the earlier 2,500 of treasury paid-in capital
Remaining 500 shares reissued at 18 (cost 20).
Dr Cash 9,000, Dr Paid-in Capital from Treasury Stock 300, Dr Retained Earnings 700 / Cr Treasury Stock 10,000Result: Retained earnings takes what the paid-in capital account cannot
Same reissue when only 300 remains in Paid-in Capital from Treasury Stock.
Common mistakes
- Recording a gain or loss on treasury stock: transactions in a company's own shares never go through the income statement.
- Crediting Common Stock when buying back shares: the shares are still issued, so Common Stock is unchanged; Treasury Stock holds the cost.
- Reporting treasury stock as an asset: it is a deduction from equity, not an investment.
Practice Treasury stock
These drills check your answer on live data, free, no account needed.
- Buying treasury stockStonebridge Analytics Inc. buys back 3,000 shares of its own $1 par value common stock at $22 per share and holds them as treasury stock. It uses the cost method.
Questions
Is treasury stock an asset?
No. It is a contra-equity account subtracted from total stockholders' equity, because a company cannot own part of itself as an asset.
Why do companies buy back their own stock?
To return cash to shareholders, support the share price, have shares available for employee plans, or reduce the number of shares outstanding.
What is the effect of treasury stock on shares outstanding?
Shares outstanding equal shares issued minus treasury shares. Treasury shares have no vote and receive no dividends.
Related
- Issuing stockHow to record a stock issue: Dr Cash, Cr Common Stock at par and Cr Paid-in Capital in Excess of Par. No-par shares, preferred stock and stock for assets.
- Retained earningsWhat retained earnings are, how net income and dividends change them, the closing entries that post to the account, the formula and what a deficit means.
- Cash dividendHow to record a cash dividend: Dr Dividends, Cr Dividends Payable on declaration; Dr Dividends Payable, Cr Cash on payment; nothing on the record date.
- Stock dividendHow to record a stock dividend: small (under 20 to 25%) at market value, large at par, using Common Stock Dividend Distributable. Compared with a split.