Treasury Stock Transactions

By Maire Loughran from Intermediate Accounting For Dummies

Treasury stock is shares of corporate stock that a company previously sold to investors and has since bought back. It may seem strange for a company to do this. After all, isn’t the point in selling stock to raise capital?

A corporation may opt to remove shares from the open marketplace for many reasons. For example, a corporation may buy back shares of its own stock to prevent a hostile takeover. Fewer shares trading in the open market reduces the chance of another company purchasing a controlling interest in the corporation.

You record treasury stock on the balance sheet as a contra stockholders’ equity account. Contra accounts carry a balance opposite to the normal account balance. Equity accounts normally have a credit balance, so a contra equity account weighs in with a debit balance.

Your intermediate accounting textbook covers three different treasury stock transactions: purchasing, selling, and retiring. All three are pretty easy to journalize after you get the hang of it. Time to get going hanging this treasury stock wallpaper!

Purchase: The journal entry is to debit treasury stock and credit cash for the purchase price. For example, if a company buys back 10,000 shares at $5 per share, the amount debited and credited is $50,000 (10,000 x $5).
Sale at more than cost: If the company reissues all 10,000 shares of treasury stock at a price higher than what it paid to purchase it (say it sold the purchased stock at $6 per share), the journal entry is to debit cash for $60,000 (10,000 x $6) and credit treasury stock for $50,000 and paid-in capital from treasury stock for $10,000 ($60,000 – $50,000).
Sale at less than cost: If the company reissues all 10,000 shares of treasury stock for $4 per share, the journal entry is to debit cash for $40,000 (10,000 x $4), debit paid-in capital from treasury stock for $10,000, and credit treasury stock for $50,000.
Retiring: If the company retires treasury stock, the journal entry is to debit the paid-in capital account that relates to the retired treasury stock and credit treasury stock.