Buying Treasury Stock

Treasury stock is stock that's been repurchased by a company.

There's two situations we need to familiarize ourselves with treasury stock:

  • Buying treasury stock
  • Selling back treasury stock

Buying treasury stock

Scenario: You decide that you'd like to purchase back some shares of your lemonade stand. You decide to purchase 10 common stock shares back at a price of $20 per share.

In this situation, we're purchasing back 10 shares at $20 per share...

Scenario: You decide that you'd like to purchase back some shares of your lemonade stand. You decide to purchase 10 common stock shares back at a price of $20 per share.

...resulting in 10 shares x $20 per share = $200 of treasury stock being created!

Since we're creating treasury stock, we'll debit the Treasury Stock (which is a contra-equity account having a normal debit balance) by $200!

TransactionDebitCredit
Treasury Stock$200
     ??????

Why is Treasury Stock a contra-equity account? Because by purchasing stock back from shareholders, the company is decreasing the total equity available in the company for shareholders!

What account are we going to credit here?

Well... how are we obtaining this treasury stock?

By paying cash to the shareholders who previous owned them!

Therefore, since we're decreasing our Cash balance, we'll credit it (since Cash is an asset with a normal debit balance).

TransactionDebitCredit
Treasury Stock$200
     Cash$200
TransactionDebitCredit
Treasury Stock$200
     Cash$200

Selling back treasury stock

Scenario: As your lemon increases in value, you decide to sell back some of your treasury stock shares. You sell back 5 shares of treasury stock at a price of $30 per share.

The biggest mistake students make is forgetting that these 5 shares of treasury stock...

Scenario: As your lemon increases in value, you decide to sell back some of your treasury stock shares. You sell back 5 shares of treasury stock at a price of $30 per share.

...still have a value of $20 per share from our initial purchase in the previous scenario...

Scenario: You decide that you'd like to purchase back some shares of your lemonade stand. You decide to purchase 10 common stock shares back at a price of $20 per share.

This means that we're selling off 5 shares x $20 per share = $100 in Treasury Stock value. (Wait... why not $30 per share? Because these shares were recorded in the previous journal entry as $20 per share!)

This can be recorded as a credit to Treasury Stock, since we're decreasing our Treasury Stock balance (and it's a contra-equity account with a normal debit balance).

TransactionDebitCredit
??????
     Treasury Stock$100
     ??????

To account for the $10 difference between the treasury stock share value ($20) and the selling price ($30), we're going to incorporate the Additional Paid-In Capital account, and add ($30 - $20) x 5 shares = $50 to its balance!

Additional Paid-In Capital is an equity account, therefore to add to its balance we must credit it (since equity accounts have a normal credit balance)!

TransactionDebitCredit
??????
     Treasury Stock$100
     Additional Paid-In Capital$50

By selling these 5 treasury stock shares at $30 per share...

Scenario: As your lemon increases in value, you decide to sell back some of your treasury stock shares. You sell back 5 shares of treasury stock at a price of $30 per share.

...we're obtaining 5 shares x $30 per share = $150 in cash. We'll record this as a debit to Cash!

TransactionDebitCredit
Cash$150
     Treasury Stock$100
     Additional Paid-In Capital$50
TransactionDebitCredit
Cash$150
     Treasury Stock$100
     Additional Paid-In Capital$50
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