Treasury Stock

A corporation may choose to reacquire some of its outstanding stock from its shareholders when it has
a large amount of idle cash and, in the opinion of its directors, the market price of its stock is too low. If
a corporation reacquires a significant amount of its own stock, the corporation's earnings per share
may increase because there are fewer shares outstanding.

If a corporation reacquires some of its stock and does not retire those shares, the shares are called
treasury stock. Treasury stock reflects the difference between the number of shares issued and the
number of shares outstanding. When a corporation holds treasury stock, a debit balance exists in the
general ledger account Treasury Stock (a contra stockholders' equity account). There are two methods
of recording treasury stock: (1) the cost method, and (2) the par value method. (The cost method will
be illustrated because it is the method deemed in accordance with legal requirement of the law).

Under the cost method, the cost of the shares acquired is debited to the account Treasury Stock. For
example, if a corporation acquires 100 shares of its stock at P20 each, the following entry is made:

Stockholders' equity will be reported as follows:

Stockholders’ Equity
Common stock, P1 par, 10,000 shares authorized
Issued 2,000 shares- outstanding, 1,900 shares P 2,000
Additional paid in capital in excess of par 48,000

Total paid in capital 50,000

Retained earnings
Appropriated for Treasury stock 2,000
Unappropriated 26,000
78,000
Treasury stock, at cost (100 shares at P20) (2,000)
P 76,000

If the corporation were to sell some of its treasury stock, the cash received is debited to Cash, the cost
of the shares sold is credited to the stockholders' equity account Treasury Stock, and the difference
goes to another stockholders' equity account. Note that the difference does not go to an income
statement account, as there can be no income statement recognition of gains or losses on treasury
stock transactions.

If the corporation sells 30 of the 100 shares of its treasury stock for P29 per share, the entry will be:
Cash (30 shares @ P 29 ) 870
 Treasury stocks (30 shares @ P 20 cost ) 600

APIC from treasury stock 270

Recall that the corporation's cost to purchase those shares at an earlier date was P20 per share. The
P20 per share times 30 shares equals the P600 that was credited above to Treasury Stock. This leaves a
debit balance in the account Treasury Stock of P1,400 (70 shares at P20 each).

The difference of P9 per share (P29 of proceeds minus the P20 cost) times 30 shares was credited to
another stockholders equity account, APCI from Treasury Stock. Although the corporation is better off
by P9 per share, the corporation cannot report this "gain" on its income statement. Instead the P270
goes directly to stockholders' equity in the paid-in capital section as shown below.

Stockholders’ Equity
Common stock, P1 par, 10,000 shares authorized
Issued 2,000 shares; outstanding, 1,930 shares P 2,000
Additional paid in capital
In excess of par – Common 48,000
From treasury stock transactions 270
Retained earnings
Appropriated for Treasury stock 1,400
Unappropriated 26,600
78,270
Treasury stock, at cost (70 shares at P20) (1,400)
P 76,870

If the corporation sells any of its treasury stock for less than its cost, the cash received is debited to
Cash, the cost of the shares sold is credited to Treasury Stock, and the difference ("loss") is debited to
APIC from Treasury Stock (so long as the balance in that account will not become a debit balance). If the
"loss" is larger than the credit balance, part of the "loss" is recorded in APIC from Treasury Stock (up to
the amount of the credit balance) and the remainder is debited to Retained Earnings. To illustrate this
rule, let's look at several transactions where treasury stock is sold for less than cost.

We will continue with our example from above. Recall that the cost of the corporation's treasury stock
is P20 per share. The corporation now sells 25 shares of treasury stock for P16 per share and receives
cash of P400. As mentioned previously, the P4 "loss" per share (P16 proceeds minus the P20 cost)
cannot appear on the income statement. Instead the "loss" goes directly to the account APIC from
Treasury Stock (if the account's credit balance is greater than the "loss" amount). Since the P270 credit
balance in APIC from Treasury Stock is greater than the P100 debit, the entire P100 is debited to that
account:
Cash (25 shares @ P16 ) 400

APIC from Treasury stock 100

 Treasury stocks (25 shares @ P 20 cost ) 500

After making this entry, the stockholders' equity section of the balance sheet appears as follows:
Stockholders’ Equity
Common stock, P1 par, 10,000 shares authorized
Issued 2,000 shares; outstanding, 1,955 shares P 2,000
Additional paid in capital
In excess of par – Common 48,000
From treasury stock transactions 170
Retained earnings
Appropriated for Treasury stock 900
Unappropriated 27,100
78,170
Treasury stock, at cost (45 shares at P20) (900)
P 77,270

After the 25 shares of treasury stock are sold, the balance in Treasury Stock becomes a debit of P900
(45 shares at their cost of P20 per share). The APIC from Treasury Stock now shows a credit balance of
P170.

Now let's illustrate what happens when the next sale of treasury stock results in a "loss" and it exceeds
the credit balance in Paid-in Capital from Treasury Stock. Let's assume that the remaining 45 shares of
treasury stock are sold by the corporation for P12 per share and the proceeds total P540. Since the cost
of those treasury shares was P900 (45 shares at a cost of P20 each) there will be a "loss" of P360. This
P360 is too large to be absorbed by the P170 credit balance in APIC from Treasury Stock. As a result, the
first P170 of the "loss" goes to APIC from Treasury Stock and the remaining P190 (P360 minus P170) is
debited to Retained Earnings as shown in the following journal entry.
Cash (45 shares @ P12 ) 540

APIC from Treasury stock 170

Retained earnings 190

Treasury stocks (45 shares @ P 20 cost ) 900

Again, no income statement account was involved with the sale of treasury stock, even though the
shares were sold for less than their cost. The difference between the cost of the shares sold and their
proceeds was debited to stockholders' equity accounts. The debit was applied to APIC from Treasury
Stock for as much as that account's credit balance. Any "loss" greater than the credit balance was
debited to Retained Earnings. The stockholders' equity section of the balance sheet now appears as
follows.

Stockholders’ Equity
Common stock, P1 par, 10,000 shares authorized
Issued and outstanding 2,000 shares P 2,000
Additional paid in capital
In excess of par – Common 48,000
Retained earnings
Unappropriated 27,810
P 77,810