Treasury stock is when a corporation's issued stock has been bought back from the stockholders. Since a corporation cannot be its own shareholder, when the corporation purchases shares, those shares are NOT considered assets of the corporation. If we assume the corporation plans to re-issue the share, then those shares are held in the treasury and reported as a deduction in stockholders' equity. This is reflected in the balance sheet.
Those with shares of treasury stock not only give up the right to vote, but they also give up the right to receive dividends, or receive a liquidation value. Companies will often purchase treasury stock if the shares are needed for things like employee compensation plans or to acquire another company. It can also be used to reduce the number of outstanding shares if the stock is considered equivalent or worth it. Purchasing treasury stock can often be stimulate trading, and without changing net income, could increase earnings per share.
Purchase of the treasury stock:
Whenever treasury stock is purchased, the treasury stock is then debited while the cash is credited $12,000.00. When a company holds treasury stock, a debit balance always exists in its general ledger account. Treasury stock is stockholders’ equity account while cash is an asset. It has no effect on net income, it decreases total assets by $12,000, has no effect on total paid-in capital, and decreases $12,000 total stockholders’ equity.
Resale of the treasury stock:
Additional Paid-in Capital - Treasury Stock
When treasury stock is resold for more than the original cost, cash is then debited for the amount of the proceeds. In this case, it is the $15,000. Treasury stock should be credited at cost which is the $12,000, and the excess of $3,000 is credited to Paid-in Capital from treasury stock. Cash is always...
References: Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business decision making (7th ed.). Hoboken, NJ: John Wiley & Sons.
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