6.5: Treasury Stock

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Treasury stock is stock that is repurchased by the same corporation that issued it. The corporation is buying back its own stock from the stockholders. Since treasury stock shares are no longer owned by stockholders, but by the corporation itself, total stockholders’ equity decreases.

Shares outstanding equals the number of shares issued (sold for the first time) minus the number of shares of treasury stock a corporation has reacquired. When treasury stock is purchased, the number of shares issued remains unchanged, but the number of shares outstanding decreases.

When treasury stock is purchased, the Treasury Stock account is debited for the number of shares purchased times the purchase price per share. Treasury Stock is a contra stockholders’ equity account and increases by debiting. It is not an asset account.

Treasury stock may be resold to stockholders at the same, a higher, or a lower price than it was purchased for. When sold, the Treasury Stock account can only be credited in multiples of its original purchase price per share. Use the Paid-in Capital from Sale of Treasury Stock account for differences between purchase and selling prices. Paid-in Capital from Sale of Treasury Stock is credited for any amount above the original purchase price (similar to a gain) and is debited for any amount below the original purchase price (similar to a loss).

The sale of treasury stock increases the number of shares outstanding and increases total stockholders’ equity.

The par value of the stock is not a factor in the purchase or sale of treasury stock.

Example

Assume there were 10,000 shares of common stock issued before any treasury stock transaction. That would mean there were also 10,000 shares outstanding.

Purchased 1,000 shares of treasury stock at $45 per share.

	Account	Debit	Credit
▲	Treasury Stock	45,000		(1,000 x $45) - Purchase price time number of shares
▼	Cash		45,000	(1,000 x $45) - Purchase price time number of shares

Buying treasury stock reduces the number of shares outstanding (the number of shares stockholders own). Prior to purchasing the 1,000 shares of treasury stock there were 10,000 shares of common stock outstanding. After purchasing the treasury stock, there are 9,000 shares outstanding.

▲ Treasury Stock is a contra stockholders’ equity account that is increasing.

▼ Cash is an asset account that is decreasing.

Note

Another way this same transaction could be stated is as follows:

Purchased 1,000 shares of treasury stock for $45,000.

To determine the purchase price per share, divide $45,000 by 1,000 shares to get $45 per share.

Treasury stock may be resold to stockholders for more than its purchase price per share.