What is Treasury Stock?
Treasury Stock is company’s own stock that has been issue and subsequently reacquired by purchase.
There are number of reasons for which firm require its own shares –
- To obtain shares that can be used in the future for acquisitions, bonus plans, exercise of warrants and conversion.
- To increase the earnings per share which ultimately leads to increase in the market price.
- Stop an outsider who is attempting to buy share for the takeover purpose.
- To increase the market price of each share of the stock.
Well, treasury stock is not an asset of an entity. To be more precise, a corporation cannot own part of itself. Therefore, it is not an economic resource and nor it has any voting, dividend or other shareholder’s rights. In balance sheet, it is reported as a deduction in shareholder’s equity. This leads to reduction in the number and book value of the share outstanding.
Treasury Stock Accounting
There are two methods for doing the accounting of Treasury stock. However, for a given situation, each method has same effect on total owner’s equity.
In cost method, when the stock is repurchased, the amount is debited to Treasury stock is its requisition cost, no matter what the par value is. It continue to shown in its requisition cost unless it is cancel or reissued. It these stocks are reissued, then any excess of selling price above cost is credited to a paid in capital account.
If treasury shares are reissued, any excess of selling price above cost is credited to a paid – in capital account. If treasury stock is sold at a price below its re acquisition cost, the loss may be deducted from the related paid – in capital account if such an account already exists from prior transactions. Otherwise the loss is debited to Retained Earnings.