Treasury Stock - Online Tutor, Practice Problems & Exam Prep

Treasury stock refers to shares that a company has repurchased from the public at the current market price, which do not receive dividends. The equation for treasury stock is $T=I-O$, where T is treasury stock, I is issued shares, and O is outstanding shares. Treasury stock is a contra equity account with a debit balance, reducing total equity. When reselling, any difference between the repurchase and resale price affects additional paid-in capital (APIC) rather than income statements.

Treasury Stock

Alright, let's go into more details about Treasury stock. So, Treasury stock is stock that has been previously issued. It has been issued previously, and then the company is repurchasing its own stock. You want to note that the company is going to repurchase the stock at the current market price. Okay? So, if ABC company wants to go and repurchase its stock, well, it was stock that it previously issued to stockholders, and then it looks okay. What's my stock trading for on Google? $50 a share? Okay. That's what I'm gonna repurchase it for. $50 a share. Okay? So, it's at that current market price that it gets repurchased by the company.

And a couple of other notes about treasury stock. First, is that they do not receive dividends, right? It doesn't make sense for a company to pay dividends and be paying themselves dividends, right? So the treasury stock, stock that they've repurchased, well, there's no dividends paid. The dividends are only paid on which ones do you think? Remember, there was authorized, issued, and outstanding. It's going to be on the outstanding shares, right? The outstanding shares receive dividends. Remember, we issue a certain amount of shares, and if we repurchase any, well then the treasury stock is going to be what's the difference between those issued and outstanding. Outstanding shares are still in the hands of the public, and the difference there I'll write it here. Treasury stock, I'm going to put T stock is equal to issued minus outstanding. Okay?

So, the issued shares, the ones that we have sold to the public minus the ones still in the hands of the public, well, that's what's equal to what we have repurchased ourselves, alright? So the treasury stock is the issued shares minus the outstanding shares.

And now, this is another trick. A lot of students have trouble with this. They think treasury stock is an asset, right? We repurchase the stock. We have stock in the company, but it's our own company, right? We're repurchasing the equity of our company. So this is actually a contra equity account. Okay? Because you're going to see that treasury stock has a debit balance. Okay? Treasury stock has a debit balance and if you remember, equity accounts, right? Equity accounts have credit balances, right? So this treasury stock being contra equity, well, it's going to have a debit balance. It's going to lower the value of equity. So, it's lowering the value of outstanding equity, right? Because our company has repurchased some of our own stock.

So, once we get into the next video, we'll start making the journal entries. I want to note that we're focusing on the cost method for Treasury stock. There's another method called the par value method, but you learn that in later accounting classes. We're going to focus on the cost method right now. Alright? Let's go ahead and pause, and then we're going to start doing the journal entries.

Repurchasing Stock into Treasury

So we're going to focus on 2 transactions for treasury stock. First, when we repurchase it from the public and then at a later date, we might resell it at a different price, right? So we're going to repurchase some of our shares from the open market and then later sell it back out to the open market. Let's start here with the repurchase entry. The Apartment Depot repurchased 10,000 shares of $0.50 par value common stock at the current market price of $25. So when we use the cost method for dealing with treasury stock, the par value doesn't matter here. All we care about is how much we spent to repurchase this stock. So we bought 10,000 shares at a price of $25. Well, that's going to come out to $250,000, right? That's the amount we spent buying these shares and that's the value of the treasury stock account. So like I said before, treasury stock is going to have a debit balance, right? It's contra equity. So we're going to have the debit in this transaction be treasury stock. So our debit is the treasury stock for $250,000 and what's going to be our credit here? It's going to be cash, right? We bought these shares with cash, so we've got to get the cash off of our books with the credit and that's going to be for the $250,000 that we spent. Pretty easy, right? This almost looks like when we buy any sort of asset, but this is a little different because we're talking about lowering equity, right? So what did we see happen here? We saw that our cash lowered our assets by $250,000, but the other side, it's not that we bought an asset like as if we bought machinery or bought some sort of investment. This is buying our own stock back. So we're going to lower our equity. So the treasury stock, I'm going to put t stock, is going to lower equity by $250,000 and that's how our equation stays balanced here. Alright? $250,000 less in equity, $250,000 less in assets. Cool? That journal entry is pretty easy. Let's go ahead and move on to the next one.

Selling Treasury Stock from the Treasury

Alright, so we have previously repurchased shares into our Treasury Stock and now we're going to sell them back to the public at a different price. So let's see what happens here. Previously, the Apartment Depot repurchased 10,000 shares of $0.50 par value common stock at the current market price of $25. Now, the Apartment Depot will resell 5,000 shares of its Treasury Stock at a price of $30. Okay? So notice, it's a different price here, right? We bought it at 25 and now we're selling it at 30. Okay? So clearly, there's been an increase in the price.

First, let's see what was the total amount in our treasury stock. 10,000 shares, just like we saw before, times $25 was $250,000, right? In the previous entry, we had debited our Treasury Stock account $250,000, but notice what happened now. We didn't sell all the shares that we repurchased, right? We had repurchased 10,000 shares, but we're only selling 5,000. How many of the shares are we selling? Well, if it had been some weird number, we would have had to do a calculation, but we know it's half, right? 5,000 out of the 10,000 shares. We sold half, 0.5 of our treasury stock, right?

So, if we had $250,000 in Treasury Stock representing 10,000 shares. Well, we got rid of half of it, right? So, 250,000 times 0.5, what we actually sold, we got rid of $125,000 worth of the treasury stock, right? $125,000 should be the reduction to the Treasury Stock account, but we sold it at a different price, right? The cash we brought in is going to be a different number. Let's look at what the cash is that we brought in. The cash is going to be equal to the $30 selling price times the 5,000 shares we sold, right? We sold 5,000 shares at $30. Well, that comes out to $150,000.

So notice what has happened here. The cash we brought in is different from the lowering of the Treasury Stock account, right? This is what is going to come out of Treasury Stock because it was sitting at $250,000, we got rid of half of it, but we brought in more cash. So let's start making our journal entry here. We're going to debit cash because we brought in cash of $150,000, and we're going to credit Treasury Stock for $125,000, because we got rid of half of the Treasury Stock, $125,000.

So how do we make this balance with another $25,000 credit? We're not going to take a gain. This isn't a gain that goes to the income statement as if we had sold a piece of machinery or sold an investment. No. When we're dealing with Treasury Stock, what we do is we increase our equity through Additional Paid-In Capital (APIC). So we're going to have Additional Paid-In Capital as the credit in this transaction. We don't want to take gains or losses onto our income statement from Treasury Stock transactions. We're dealing with our own stock in our own company. So this is going to go directly to equity here.

So instead of doing a gain or a loss on the sale, we go straight to APIC for the difference. If this had been sold for less, well, it would have been a reduction of APIC to balance this out, right? If the cash had been less than the Treasury Stock investment, we would have had to debit APIC, okay, to balance it out. So, what we saw in this transaction here, let me get out of the way to fill it out. We've had cash increase by $150,000. We had our equity increase for 2 of these. The Treasury Stock, we got rid of Treasury Stock, right? So that's going to increase our equity since that was a contra equity account, and then APIC increases our equity by another $25,000, so we stay balanced here. Our assets went up by $150,000, and our equity went up by $150,000. Cool? Alright. So treasury stock is not so complicated. You just have to the toughest thing here is usually that you're going to sell back a different number of shares than you purchased, so you have to see what is the proportion of our original purchase that we actually sold. Right? In this case, we sold half of that original investment. You might sell 60 percent of the investment, 70%, right? Whatever it is, you want to make sure that you get rid of the correct amount in the Treasury Stock account, right? Because at this point in time, there's still a balance in Treasury Stock. It's not the full $250,000 that we originally purchased. We got rid of half of it, so half that balance is still sitting as a debit balance in treasury stock. Cool? Alright, let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is treasury stock and how does it affect a company's equity?

Treasury stock refers to shares that a company has repurchased from the public at the current market price. These shares do not receive dividends and are not considered outstanding shares. Treasury stock is recorded as a contra equity account, meaning it has a debit balance and reduces the total equity of the company. The equation for treasury stock is:

$T=I-O$

where $T$ is treasury stock, $I$ is issued shares, and $O$ is outstanding shares. By repurchasing its own shares, a company lowers its equity, as the treasury stock account increases with a debit balance.

How is treasury stock recorded in journal entries?

When a company repurchases its own shares, the journal entry involves debiting the treasury stock account and crediting cash. For example, if a company repurchases 10,000 shares at $25 each, the entry would be:

Debit: Treasury Stock $250,000

Credit: Cash $250,000

This entry reduces both the company's cash (an asset) and its equity, as treasury stock is a contra equity account. When the company later resells the shares, the entry involves debiting cash and crediting treasury stock for the proportionate amount, with any difference affecting Additional Paid-In Capital (APIC).

What happens when a company resells its treasury stock at a different price?

When a company resells its treasury stock at a different price, the difference between the repurchase price and the resale price affects Additional Paid-In Capital (APIC). For example, if a company repurchased shares at $25 each and later resells them at $30 each, the journal entry would be:

Debit: Cash $150,000 (for 5,000 shares at $30 each)

Credit: Treasury Stock $125,000 (proportionate amount for 5,000 shares)

Credit: APIC $25,000 (difference between cash received and treasury stock reduction)

This entry increases both cash and equity, with the APIC account reflecting the gain from the resale.

Why is treasury stock considered a contra equity account?

Treasury stock is considered a contra equity account because it reduces the total equity of the company. Unlike regular equity accounts, which have credit balances, treasury stock has a debit balance. When a company repurchases its own shares, it records the transaction by debiting the treasury stock account, thereby lowering the overall equity. This is because the repurchased shares are no longer outstanding and do not contribute to the company's market value or dividend payments. The contra equity nature of treasury stock ensures that the financial statements accurately reflect the reduction in equity due to the repurchase.

Do treasury stock transactions affect the income statement?

No, treasury stock transactions do not affect the income statement. When a company repurchases or resells its own shares, the transactions are recorded in the equity section of the balance sheet. Any difference between the repurchase price and the resale price is adjusted through Additional Paid-In Capital (APIC) rather than being reported as a gain or loss on the income statement. This treatment ensures that the company's net income is not impacted by transactions involving its own equity, maintaining a clear distinction between operational performance and equity management.