Financial Accounting: An Integrated Statements Approach, 2nd Edition

treasury stock. The 2004 edition of Accounting Trends & Techniquesindicated that over

67% of the companies surveyed reported treasury stock.

A commonly used method of accounting for the purchase and resale of treasury

stock is the cost method.^5 When the stock is purchased by the corporation, the account

Treasury Stockis debited for its cost (the price paid for it). The par value and the price

at which the stock was originally issued are ignored. When the stock is resold. Treasury

Stock is credited for its cost, and any difference between the cost and the selling price

is normally debited or credited to Paid-In Capital from Sale of Treasury Stock.

To illustrate, assume that the paid-in capital of a corporation is as follows:

Common stock, $25 par (20,000 shares authorized and issued) $500,000

Excess of issue price over par 150,000 $650,000

The purchase of 1,000 shares of treasury stock at a price of $45 per share is recorded

as follows:

If 200 shares of treasury stock were resold at $60 per share, it is recorded as follows:

If at a later date another 200 shares of treasury stock are sold for $40 per share, it would

be recorded as follows:

As shown above, a sale of treasury stock may result in a decrease in paid-in capi-

tal. To the extent that Paid-In Capital from Sale of Treasury Stock has a credit balance,

it should be debited for any decrease. Any remaining decrease should then be debited

to the retained earnings account.

At the end of the period, the balance in the treasury stock account is reported as a

deduction from the total of the paid-in capital and retained earnings. The balance of

Paid-In Capital from Sale of Treasury Stock is reported as part of the paid-in capital,

as shown in Exhibit 4.

502 Chapter 11 Stockholders’ Equity: Capital Stock and Dividends

5 Another method that is infrequently used, called the par value method, is discussed in advanced account-

ing texts.

Treasury Stock 45,000

Cash 45,000

Cash 12,000

Treasury Stock 9,000

Paid-In Capital from Sale of Treasury Stock 3,000

Cash 8,000

Paid-In Capital from Sale of Treasury Stock 1,000

Treasury Stock 9,000

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