LO10–4 Account for treasury stock.

What is treasury stock?

A company’s own previously issued shares that it buys back; recorded as a contra‑equity account that reduces total stockholders’ equity.

Other names for treasury stock transactions

Buybacks, repurchases, acquisitions of treasury stock.

Do most companies have treasury stock?

Yes — over two‑thirds of publicly traded companies report treasury stock on their balance sheets.

How do stock buybacks compare to dividends for large U.S. companies?

Stock buybacks are larger and more volatile

Dividends are smaller and more stable over time.

Why are buybacks more volatile than dividends?

Dividends are long‑term commitments

Buybacks can be increased or reduced anytime based on cash flow and strategy.

Reason 1 companies buy back stock: Boost underpriced stock

Reducing the supply of shares can raise the stock price; buyback announcements often signal confidence and increase market demand.

If the supply goes down, price will go up

Reason 2 companies buy back stock: Distribute cash without dividends

Buybacks return cash to shareholders without creating taxable dividend income.

A company wants to give cash back to shareholders, but doesn’t want to pay dividends because dividends create immediate taxable income for investors.

So instead, the company buys back its own shares.

Companies buy back stock to return cash to shareholders without forcing them to pay dividend taxes, making buybacks a more flexible and tax‑efficient alternative to dividends.

Reason 3 companies buy back stock: Increase EPS (earnings per share)

Buybacks reduce shares outstanding, which increases earnings per share (EPS) even if net income stays the same.

Reason 4 companies buy back stock: Employee stock plans

Companies reissue treasury shares for employee compensation, stock options, and stock ownership plans.

How do investors usually react to buyback announcements?

Positively — buybacks signal management confidence and often increase stock price.

Do buybacks return cash to investors?

Yes — both dividends and buybacks return cash, but buybacks do so more flexibly and tax‑efficiently.

What is treasury stock?

A company’s own previously issued shares that it buys back; recorded as a contra‑equity account that reduces total stockholders’ equity.

Why is treasury stock a contra‑equity account?

Because buying back shares reduces the amount of equity available to shareholders; treasury stock appears as a negative amount in equity.

Does treasury stock affect the income statement?

No — buying or selling treasury stock never affects net income. No gains or losses are recorded.

Does par value matter when recording treasury stock?

No — treasury stock is always recorded at cost, not par value.

Journal entry to record purchase of treasury stock

Example: Buy back 100 shares at $30

Debit Treasury Stock $3000

Credit Cash $3000

Recorded at cost & reduces equity

Effect of buying treasury stock on total equity

Total stockholders’ equity decreases by the cost of the treasury stock purchased.

What happens when treasury stock is resold above cost?

Example: Resell treasury stock for $35 (cost was $30)

The excess over cost is recorded as an increase in Additional Paid‑In Capital (APIC).

Debit Cash 3,500  

Credit Treasury Stock 3,000  

Credit APIC 500

Why is the $500 difference not a gain when it’s sold above cost?

Companies cannot report gains or losses from transactions involving their own stock; differences go to APIC, not the income statement.

What happens when treasury stock is resold below cost?

Example: Resell treasury stock for $25 (cost was $30)

The shortfall is recorded as a decrease in APIC (and if APIC is insufficient, reduce retained earnings).

Debit Cash 2,500

Debit APIC 500  

Treasury Credit Stock 3,000

Effect of reselling treasury stock on equity

• Removing treasury stock increases equity

• Selling above cost increases APIC

• Selling below cost decreases APIC

Where does treasury stock appear on the balance sheet?

In the stockholders’ equity section, as a negative line item.

How does treasury stock affect outstanding shares?

Treasury shares are not outstanding, so they do not receive dividends or voting rights.

What increases total equity when treasury stock is resold?

The cash received from the resale increases total equity.

What decreases total equity when treasury stock is purchased?

The cost of the treasury stock purchased.