Treasury Stock

Question 1

Why do companies have treasury stock?

Answer 1

Deter hostile take over

Stock compensation, buy back stock so that you don’t have to issue new shares

Management thinks the shares are undervalued

Increases EPS

Takes a company private if they choose to

Question 2

What are the two methods to account for treasury stock?

Answer 2

Cost method: Debits treasury stock at cost

Par Method- Debits the treasury account at par

Reissuance, the treasury stock account is credited for cost or par

Question 3

What is the impact on the balance sheet when you purchase treasury stock?

Answer 3

When it is acquired, OE is decreased by the amount of cash paid.

Question 4

What is the journal entry under the cost method to repurchase treasury stock?

Answer 4

DB: Treasury Stock
CR: Cash Paid

Question 5

What is the journal entry if you sell treasury stock for MORE than you purchased it for?

Answer 5

DB: Cash
CR: Treasury Stock (same cost that you purchased)
CR: APIC- Treasury

Question 6

If you have multiple re-purchases at different repurchase prices, which price do you use under the cost method?

Answer 6

Use the FIFO method to determine the price per share to use when you sale.

Company may elect to use the average cost assumption to value the treasury stock when it is re-sold back into the market.

Question 7

Under the Par Method, what journal entry would you make when you repurchase shares of common stock?

Answer 7

DR: TREASURY STOCK (RECORD AT PAR)
DB: APIC- Common (Issue price-Par Value)
CR: APIC-Treasury Stock (Shares X (issue price-price paid to repurchase)
CR: Cash

Question 8

What is the journal entry under par method when you re-issue treasury stock back into the market?

Answer 8

DB: CASH
CR: TREASURY STOCK
CR: APIC- Common Stock

Question 9

If you use the par value to purchase additional shares of treasury, what is your journal entry?

Answer 9

DB:  Treasury Stock 
DR: APIC- Common
DR: APIC- Treasury (exhales first) 
DR: Retained Earnings (last resort) 
CR: Cash