Treasury stock is stock that a corporation has issued and then reacquired. A corporation may reacquire (purchase) its own stock for a variety of reasons, including the following:
- To provide shares for resale to employees
- To reissue as bonuses to employees, or
- To support the market price of the stock
The cost method is normally used for recording the purchase and resale of treasury stock. Using the cost method, Treasury Stock is debited for the cost (purchase price) of the stock. When the stock is resold, Treasury Stock is credited for its cost. Any difference between the cost and the selling price is debited or credited to Paid-In Capital from Sale of Treasury Stock.
To illustrate, assume that a corporation has the following paid-in capital on January 1:
On February 13, the corporation purchases 1,000 shares of its common stock at $45 per share. The entry to record the purchase of the treasury stock is as follows:
On April 29, the corporation sells 600 shares of the treasury stock for $60. The entry to record the sale is as follows:
A sale of treasury stock may result in a decrease in paid-in capital. To the extent that Paid-In Capital from Sale of Treasury Stock has a credit balance, it is debited for any such decrease. Any remaining decrease is then debited to the retained earnings account.
To illustrate, assume that on October 4, the corporation sells the remaining 400 shares of treasury stock for $40 per share. The entry to record the sale is as follows:
The October 4 entry shown above decreases paid-in capital by $2,000. Since Paid-In Capital from Sale of Treasury Stock has a credit balance of $9,000, the entire $2,000 was debited to Paid-In Capital from Sale of Treasury Stock.
No dividends (cash or stock) are paid on the shares of treasury stock. To do so would result in the corporation earning dividend revenue from itself.
Source: Warren Carl S., Reeve James M., Duchac Jonathan (2013), Corporate Financial Accounting, South-Western College Pub; 12th edition.