It is the stock that is issued by the company and may later be reacquired by the company from its shareholders. The company may retire or cancel it these stocks. The reacquired stock which is not retired by the company is called as “treasury stock”. Treasury stock is not an asset for the company. A company creates its assets by holding it in itself. There are various reasons a corporation may reacquire the stocks such as; use treasury stocks to reissue the shares to officers and employees as bonus and stock compensation plan (a.k.a. Employees Stock Option Plan), and to reduce the numbers of shares and thereby increasing earnings per shares (EPS).
Accounting for Treasury Stocks
The purchase of treasury stocks is accounted in the books of account by the cost method. Under the cost method; company records the treasury stocks in the books of account by the increase (debit) the treasury stock by the price paid to reacquire the shares. Treasury stock Account decreases by the same amount when the company later sell the shares. At the time of repurchase simply record the entire amount of purchase in the treasury books of account.
At the time, when treasury stocks are sold, offset the sale price against the treasury stocks account, and credit any sales exceeding the repurchase the additional paid -in the capital account. If the sale price is lesser than the repurchase cost, charge the differential amount to any additional paid-in capital remaining from prior treasury stock transactions, and any residual amount of retained earnings if there is no remaining balance in additional paid- in the capital account.
For an example:-
(a) Raymond Company purchase stock 3000 shares of its $50 par value common stock $1, 80,000 cash on July 1. It accepts to hold the shares until the resold.
(b) Later on, company decides to resell the shares at $70 per share
Journalise entry is as follows:-
To Cash A/c
(recording the purchases of shares at $60 per share per share)
- B) Sell repurchased shares at $ 70 per share
To Additional paid-in Capital
To Treasury stock
(Being Treasury stock sold at $70 per shares.)