Treasury stock transactions: cost method
| | | |
| :------------------------------------ | :-: | :-: |
| Repurchased stock (recorded at cost) | | |
| Treasury stock | XXX | |
| Cash | | XXX |
| Reissued at a price greater than cost | | |
| Cash | XXX | |
| Treasury stock | | XXX |
| APIC-treasury stock | | XXX |
| | | |
| :------------------ | :-: | :-: |
| Reissued at a price less than cost |
| Cash | XXX | |
| APIC-treasury stock | XXX | |
| Retained earnings* | XXX | |
| Treasury stock | | XXX |
No gain or loss recognized with any treasury stock transaction.
| | | |
| :-------------------- | :-: | :-: |
| Retired the stock | | |
| Common stock | XXX | |
| APIC-common stock | XXX | |
| Treasury stock | | XXX |
| APIC-treasury stock** | | XXX |
*Only if insufficient APIC-treasury stock.
**Only if original issue price is more than the cost of the treasury stock.
Answer (2)
Treasury stock is repurchased at cost: Debit Treasury Stock, Credit Cash.
Reissuance above cost: Debit Cash, Credit Treasury Stock, Credit APIC-Treasury Stock.
Reissuance below cost: Debit Cash, Debit APIC-Treasury Stock (and Retained Earnings if APIC is insufficient), Credit Treasury Stock.
Retirement of stock: Debit Common Stock, Debit APIC-Common Stock, Credit Treasury Stock, Credit APIC-Treasury Stock (if applicable).
Explanation
Understanding the Transactions We are given a set of treasury stock transactions recorded using the cost method. The transactions include repurchasing stock, reissuing stock at prices greater than and less than cost, and retiring the stock. Our goal is to describe the accounting treatment for each type of transaction.
Repurchasing Stock When a company repurchases its own shares, it is called treasury stock. Under the cost method, the treasury stock is recorded at the price the company paid to reacquire the shares. The journal entry is:
Debit: Treasury Stock (XXX) Credit: Cash (XXX)
Reissuing Stock Above Cost When treasury stock is reissued at a price greater than its cost, the excess of the selling price over the cost is credited to Additional Paid-In Capital - Treasury Stock (APIC-Treasury Stock). The journal entry is:
Debit: Cash (XXX) Credit: Treasury Stock (XXX) Credit: APIC-Treasury Stock (XXX)
Reissuing Stock Below Cost When treasury stock is reissued at a price less than its cost, the difference between the cost and the selling price is debited to APIC-Treasury Stock. If the balance in APIC-Treasury Stock is insufficient to cover the entire difference, the remainder is debited to Retained Earnings. The journal entry is:
Debit: Cash (XXX) Debit: APIC-Treasury Stock (XXX) Debit: Retained Earnings (XXX) *if APIC-Treasury Stock is insufficient Credit: Treasury Stock (XXX)
Retiring Stock When treasury stock is retired (i.e., the shares are canceled and no longer outstanding), the following accounts are affected: Common Stock, APIC-Common Stock, Treasury Stock, and APIC-Treasury Stock. The journal entry is:
Debit: Common Stock (XXX) Debit: APIC-Common Stock (XXX) Credit: Treasury Stock (XXX) Credit: APIC-Treasury Stock (XXX) **only if original issue price is more than the cost of the treasury stock
Conclusion In summary, the accounting treatment for treasury stock transactions under the cost method involves recording the repurchase at cost, crediting APIC-Treasury Stock for reissuances above cost, debiting APIC-Treasury Stock (and Retained Earnings if necessary) for reissuances below cost, and adjusting Common Stock, APIC-Common Stock, Treasury Stock, and APIC-Treasury Stock when the stock is retired. No gains or losses are recognized on treasury stock transactions.
Examples
Understanding treasury stock transactions is crucial for analyzing a company's financial health. For example, if a company repurchases its shares, it reduces the number of outstanding shares, potentially increasing earnings per share (EPS). If the company later reissues these shares at a higher price, it generates additional capital. Analyzing these transactions helps investors understand management's view on the company's stock value and its capital management strategies. These insights are valuable for making informed investment decisions.
Treasury stock transactions under the cost method involve recording repurchased shares at cost, reissuing shares above or below cost, and retiring shares. Important journal entries reflect these transactions while avoiding the recognition of gains or losses. This method is crucial for accurate financial reporting and effective capital management analysis.
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