1. Corporations: Organization, Stock Transactions, and Dividends
LO 5 – Journalizing Treasury Stock Transactions

2. Treasury Stock Transactions
LO 5
Treasury Stock Transactions
Treasury stock is stock that a corporation has issued and then reacquired. A corporation may purchase its own stock for a variety of reasons, including the following:
To provide shares for resale to employees
To reissue as bonuses to employees, or
To support the market price of the stock
When a corporation buys back its own stock from its shareholders, it is called treasury stock. Corporations buy treasury stock for a number of reasons including: (1) providing shares for resale to employees, (2) reissuing as a bonus to employees, or (3) supporting the market price of the stock. Treasury stock shares are not voted and do not receive dividends.

3. Treasury Stock Transactions
LO 5
Treasury Stock Transactions
On February 13, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. The cost method for accounting for treasury stock is used. The entry to record the purchase of the treasury stock is as follows:
On February 13, a firm purchased 1,000 shares of treasury stock (common stock, $25 par) at $45 per share. Since the cost method is used, the purchase of treasury stock will be recorded at $45 per share, the purchase price of each share.
The shareholders’ equity account, Treasury Stock, is debited for the cost of the shares purchased, $45,000, which is 1,000 treasury shares purchased at a cost of $25 per share. Cash is credited for $45,000.

4. Treasury Stock Transactions
LO 5
Treasury Stock Transactions
On April 29, the corporation sells 600 shares of the treasury stock for $60. The entry to record the sale is as follows: *
The amount (per share) debited to Treasury Stock when purchased is the amount per share that must be credited to that account when sold (600 * $45).
Later, 200 shares of treasury stock were sold for $60 per share. Under the cost method of accounting for treasury stock, when a corporation reissues or sells the treasury stock, it reduces the Treasury Stock account for the purchase cost of the shares and treats any difference between the cash proceeds received and the purchase cost of the treasury shares as an adjustment to additional paid-in-capital.
Cash is debited for $36,000, which is 600 shares of treasury stock sold at $60 per share, the amount received when the shares are resold. Treasury stock is credited $27,000 (600 × $45) at the cost per share when it was repurchased. The difference of $9,000, between the amount the shares are reissued at and the amount they were purchased at, is credited to Paid-In Capital from Sale of Treasury Stock.

5. Treasury Stock Transactions
LO 5
Treasury Stock Transactions
Notice that Paid-in Capital from Sale of Treasury Stock was credited, rather than a “gain” account. There are no gains or losses resulting from a company buying and selling its own stock.
Gains or losses are not recorded when a company buys and sells its own stock; therefore, it does not credit a gain account for the excess.

6. Treasury Stock Transactions
LO 5
Treasury Stock Transactions
On October 4, the corporation sells the remaining 400 shares of treasury stock for $40 per share. The entry to record the sale is as follows:
For the sale of the remaining 400 shares, since the treasury shares are now being sold for less than the purchase cost of the treasury shares, a debit to Paid-In Capital from Sale of Treasury Stock is required. Cash is debited for $16,000, which is the 400 shares at a price of $40 per share. Treasury Stock is credited for $18,000, or 400 shares of treasury stock at the purchase cost of $45 per share. The difference between the $16,000 received and the $18,000 cost of the treasury stock is debited to Paid-In Capital from Sale of Treasury Stock.

7. Treasury Stock Transactions
LO 5
Treasury Stock Transactions
Notice that Paid-in Capital from Sale of Treasury Stock was debited, rather than a “loss” account. If the balance in this paid-in capital account had not been large enough to cover the “loss,” the difference is debited to Retained Earnings.
The difference is not debited to a loss account because businesses do not record gains and losses on the issuance of their own stock. If the balance in this paid-in capital account had not been large enough to cover the “loss,” the difference is debited to Retained Earnings.