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Journal Entries for Treasury Stock – Simple Guide

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In this article, let’s break down the journal entries for treasury stock with easy-to-follow examples.

Basics of Treasury Stock 

Imagine a company as a pie. This pie is cut into several slices, each representing a share of the company. These slices may belong to different owners. Sometimes, a company may buy back some of these slices. This “repurchase of slices” is referred to as treasury stock. It represents outstanding shares bought back by the company from other shareholders.

Reasons a company might buy back its shares include:

  • Believing its shares are undervalued and wanting to boost its stock price. It’s like sending out a signal that the company’s management is confident about their future performance, as more shares owned implies a potential for greater profit in the future.
  • Wanting to reward its shareholders by reducing the number of available slices, making each remaining slice more valuable. Think of it like a collectible coin. The less available it is on the market, the more valuable the one you own.
  • Setting aside a stash of slices for future use, like for employee bonus plans. Public companies often reward their employees with stocks/shares to encourage better performance.

So, how does this affect a company’s financial statements, specifically the balance sheet? When a company buys back its shares, those slices (now called treasury stock) aren’t counted as assets or liabilities. Instead, the value of these slices reduces the company’s total equity. Think of it as setting aside some slices of the pie. They’re still there, but just not served on the table right now. See the section below for a detailed explanation.

Journal Entries for Purchase of Treasury Stock

There are two methods to record the purchase of treasury stock: the Cost Method and the Par Value Method.

Cost Method

The Cost Method records the repurchase of a company’s shares (treasury stock) at the specific price paid to acquire them, irrespective of their par value. In other words, if a company spends $500 to buy back the shares, it records $500. Simple as that.

Here is a simple example: Pie Company buys back 100 shares at $5 each. The journal entry would look like this:

Journal Entry for Purchase of Treasury Stock - Cost Method

Here, Pie Company has debited the Treasury Stock account for the exact amount it paid for the shares (100 shares * $5 per share = $500) and credited Cash since it spent that money.

Par Value Method

The Par Value method records the repurchase of a company’s shares (treasury stock) at their par value, irrespective of the actual purchase price. When shares are repurchased at a price different from their par value, the difference between the actual purchase price and the par value is allocated to the Additional Paid-in Capital account and Retained Earnings (if applicable).

In other words, if a company spends $500 to buy back the shares and the par value of those stocks is $100, then it records $100 to the treasury stock account and $400 to the Additional Paid-in Capital account and Retained Earnings account (if applicable).

Here is a simple example: Pie Company buys back 100 shares at $5 each (the par value is $1).

Scenario 1: when the purchase price of treasury stock is less than the original stock issuance price, the difference is entirely debited to the Additional Paid-in Capital account.

For example, if the treasury stock was bought back at $5, but the original issuance price of the stock was at $6.

Journal Entry for Purchase of Treasury Stock - Par Value Method below issuance

In this entry, Pie Company debits Treasury Stock for the par value of the shares (100 shares * $1 per share par value = $100). The difference between the purchase price and the par value (100 shares x ($5 – $1)) is $400, which is debited to the “Additional Paid-in Capital” account. Cash is credited since it’s the money spent.

Scenario 2: when the purchase price of treasury stock is greater than the original stock issuance price, the difference is debited to the Additional Paid-in Capital account up to the original issuance price. The remaining amount is debited to Retained Earnings.

Here is a simple illustration:

Suppose the original stock issuance price is $4, and the treasury stock is purchased at $5. In that case, the Additional Paid-in Capital account can only be debited up to $3 ($4 original issuance price – $1 par value). The remaining $1 should be debited to retained earnings. The entry would look like this.

Journal Entry for Purchase of Treasury Stock - Par Value Method above issuance

In other words, when the stock was originally issued at $4 with a $1 par value, only $3 was allocated to the Additional Paid-in Capital account. If you want to debit more than $3, the excess should be debited to retained earnings since it can’t exceed the amount originally allocated.

Difference between the Cost Method and the Par Value Method

In essence, the core difference is all about how a company records the treasury stock price: the Cost Method records the exact amount paid, and the Par Value method takes the par value of the stock and leaves the rest to the Additional Paid-in Capital Account/Retained earnings.

Most public companies report their purchase of treasury stock using the Cost Method, leaving Additional Paid-in Capital or Retained Earnings intact from the transaction. Below is a snippet from Amazon’s 10-K.

Treasury Stock Cost Method - Amazon 10-K

Journal Entry for Reissuance of Treasury Stock

Sometimes, a company would also reissue the treasury stock purchased back from other shareholders earlier. The solution is to simply debit Cash and credit treasury stock. The price difference between treasury stock reissuance and purchase is simply “plugged” into Additional Paid-in Capital.

Scenario 1: Pie Company reissues 100 shares of treasury stock purchased at $5 per share for $6. (Above cost)

Journal Entry for Reissuance of Treasury Stock Above Cost

Since the reissuance price of $6 is above the purchase price of $5, the $1 “gain” is plugged on the credit side into the Additional Paid-in Capital account. Note the transaction includes 100 shares, so in the journal entry, the amount is 100 shares times $5 ($500 for treasury stock) and 100 shares times $1 ($100 for Additional Paid-in Capital)

Scenario 2: Pie Company reissues 100 shares of treasury stock purchased at $5 per share for $4. (below cost)

Journal Entry for Reissuance of Treasury Stock Below Cost

Since the reissuance price of $4 is below the purchase price of $5, the $1 “loss” is plugged on the debit side into the Additional Paid-in Capital account. Note the transaction includes 100 shares, so in the journal entry, the amount is 100 shares times $4 ($400 for treasury stock) and 100 shares times $1 ($100 for Additional Paid-in Capital)

Summary (Infographic)

Here is a summary of Journal Entries for Treasury Stock under both the Cost Method and the Par Value Method, along with reissuance of treasury stock.

Journal Entries for Treasury Stock - a simple example (Infographic)

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