Corporations buy shares of their own stock for a variety of reasons, including (1) using them to acquire another corporation, (2) purchasing shares to avoid a hostile takeover of the corporation, (3) reissuing them to employees as compensation, and (4) maintaining a strong market for their stock or demonstrating management confidence in the current price.
TREASURY STOCK
Treasury stock refers to a corporation's reacquired shares, which are comparable to unissued stock in various ways: (1) neither treasury stock nor unissued stock is an asset, (2) neither receives cash dividends nor stock dividends, and (3) Neither of them permits the exercise of voting rights. However, treasury stock differs from unissued stock in one significant way: the corporation can resell treasury stock for less than par without incurring obligation to the buyers, as long as it was initially issued at par or above. Treasury stock acquisitions necessitate ethical attention on the part of management since monies are distributed to individual stockholders rather than all stockholders. Managers must ensure that the acquisition is in the best interests of all stakeholders. Because of these issues, corporations are required to properly report treasury stock transactions.
Purchasing Treasury Stock
Assets | Stockholders’ Equity | ||
---|---|---|---|
30,000 | Cash | 100,000 | authorized, issued, and outstanding |
95,000 | Other assets | 25,000 | Retained earnings |
125,000 | Total assets | 125,000 | Total stockholders’ equity |
Credit | Debit | Description | Date |
---|---|---|---|
11,500 | Treasury Stock, Common | May 1 | |
11,500 | Cash | ||
Purchased 1,000 treasury shares at $11.50 per share. |
Assets | Stockholders’ Equity | ||
---|---|---|---|
18,500 | Cash | 100,000 | authorized and issued; 1,000 shares in treasury |
95,000 | Other assets | 25,000 (11,500) | treasury stock purchase Less cost of treasury stock |
113,500 | Total assets | 113,500 | Total stockholders’ equity |
The acquisition of treasury stock decreases Cyber's cash, total assets, and total equity by $11,500 but has no effect on the balances of the Common Stock or the Retained Earnings accounts. In the equity section, the equity reduction is calculated by subtracting the cost of treasury stock. There are also two disclosures. First, the stock description discloses that 1,000 issued shares have been placed in treasury, leaving just 9,000 shares outstanding. Second, the description for retained profits implies that it is restricted in part.
Reissuing Treasury Stock
Credit | Debit | Description | Date |
---|---|---|---|
1,150 | Cash | May 21 | |
1,150 | Treasury Stock, Common | ||
Received $11.50 per share for 100 treasury shares costing $11.50 per share |
Credit | Debit | Description | Date |
---|---|---|---|
4,800 | cash | June 3 | |
4,600 200 | Treasury Stock, Common Paid-In Capital, Treasury Stock | ||
Received $12 per share for 400 treasury shares costing $11.50 per share |
Credit | Debit | Description | Date |
---|---|---|---|
5,000 200 550 | Cash Paid-In Capital, Treasury Stock Retained Earnings | July 10 | |
5,750 | Treasury Stock, Common | ||
Received $10 per share for 500 treasury shares costing $11.50 per share. |
This entry removes the $200 credit amount from the paid-in capital account generated on June 3 and then decreases the Retained Earnings balance by the remaining $550 cost over selling price excess. A company's loss (or gain) from the selling of treasury stock is never reported.