What is treasury stock?
One way a corporation can reduce the number of shares it has outstanding is to buy them back on the stock market. The transaction involves a debit to treasury stock and a credit to cash for the market value of the shares. Shares held as treasury stock have no rights until they are reissued. They can be held by the corporation for an indefinite period of time, reissued or retired.
Treasury Stock Method
Assume a corporation bought back 1,000 of its own stock at a price of $25 per share. The journal entry to record the purchase would be as follows: (Treasury Stock Journal Entry)
Resale of Treasury Stock
As mentioned, shares held as treasury stock can be reissued at a later date. Assume 500 of the above shares were reissued for $27 per share, total proceeds of $13,500. Even though the shares were reissued for $2 ($27-$25) more per share than they were originally purchased, no gain will be recorded as a corporation cannot earn revenue by selling its’ own shares. Instead, the stockholders’ equity account, paid-in capital, treasury stock, is credited for the excess. The entry to record the reissuance would be as follows:
Now let’s assume the remaining treasury stock is reissued for $21 per share for total proceeds of $10,500. As with gains, the corporation is not allowed to record a loss on the sale of treasury stock; therefore, the difference will be first debited to clear out any balance in the paid-in capital, treasury stock account and then if needed, retained earnings is debited for any amount in excess of the balance in the paid-in capital, treasury stock account. The entry to record this sale would be as follows:
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