Treasury stock is the corporation’s own capital stock that it has issued and then reacquired; this stock has not been canceled and is legally available for reissuance. Because it has been issued, we cannot classify treasury stock as unissued stock. Instead, treasury stock reduces shares outstanding but does not change shares issued.
A corporation may reacquire its own capital stock as treasury stock to: (1) cancel and retire the stock; (2) reissue the stock later at a higher price; (3) reduce the shares outstanding and thereby increase earnings per share; or (4) issue the stock to employees. If the intent of reacquisition is cancellation and retirement, the treasury shares exist only until they are retired and canceled by a formal reduction of corporate capital.
For dividend or voting purposes, most state laws consider treasury stock as issued but not outstanding, since the shares are no longer in the possession of stockholders. Also, accountants do not consider treasury shares outstanding in calculating earnings per share.
When firms reacquire treasury stock, they record the stock at cost as a debit in a stockholders’ equity account called Treasury Stock. They credit reissuances to the Treasury Stock account at the original cost of paid to reaquire the stock (not the par or stated value). Thus, the Treasury Stock account is debited at cost when shares are acquired and credited at cost when these shares are sold. Any excess of the reissue price over cost represents additional paid-in capital and is credited to Paid-In Capital—Common (Preferred) Treasury Stock.
To further illustrate, assume that on February 18, the Hillside Corporation reacquired 100 shares of its outstanding common stock for $55 each. On April 18, the company reissued 30 shares of its treasury stock for $58 each. The entries to record these events are:
|Feb 18||Treasury stock – Common (100 shares x $55)||5,500|
|Acquired 100 shares of treasury stock at $55.|
|Apr. 18||Cash (30 shares x $58)||1,740|
|Treasury stock – Common (30 shares x $55)||1,650|
|Paid-In Capital – treasury stock (1,740 price received – 1,650 our cost)||90|
|Reissued 30 shares of treasury stock at $58; cost is $55 per share.|
When the reissue price of subsequent shares is less than the acquisition price, firms debit the difference between cost and reissue price to Paid-In Capital — Treasury Stock. This account, however, never develops a debit balance. By definition, no paid-in capital account can have a debit balance. If Hillside reissued an additional 20 shares at $52 per share on June 12, the entry would be:
|Jun 12||Cash (20 shares x $52)||1,040|
|Paid-In Capital – Treasury stock (1,100 our cost – 1,040 received)||60|
|Treasury stock – Common (20 shares x $55)||1,100|
|Reissued 20 shares of treasury stock at $52; cost is $55 per share.|
At this point, the credit balance in the Paid-In Capital—Common Treasury Stock Transactions account would be $30 ($90 credit from Apr 18 – $60 debit from Jun 12) . If the remaining 50 shares are reissued on July 16, for $53 per share, the entry would be:
|Jul 16||Cash (50 shares x $53 price received)||2,650|
|Paid-In Capital – Treasury Stock ($30 balance remaining)||30|
|Retained earnings (to balance entry $2,750 cost – $2,650 cash – $30 paid in capital balance)||70|
|Treasury stock – Common (50 shares x $55 cost)||2,750|
|Reissued 50 shares of treasury stock at $53; cost is $55 per share.|
Notice that Hillside has exhausted the Paid-In Capital—Common Treasury Stock Transactions account credit balance. If more than $30 is debited to that account, it would develop a debit balance. Thus, the remaining $70 of the excess of cost over reissue price is a special distribution to the stockholders involved and is debited to the Retained Earnings account.
When treasury stock is shown on a balance sheet date, it customarily appears at cost, as a deduction from the sum of total paid-in capital and retained earnings.