Definition
The financial accounting term treasury shares accounted for at cost refers to a process that treats the acquisition of treasury stock as the first step in a two-step transaction. The second step in the transaction involves the reissuance of the treasury stock back into the marketplace.
Explanation
Companies will issue capital stock to raise funds that are used to expand business operations and create additional shareholder value. Companies can choose to subsequently buy back shares from the market and will reacquire stock for a number of reasons including: increasing earnings per share, meeting stock option obligations, establishing a floor price for the stock, contracting the business, as well as preventing a hostile takeover.
When a company reacquires shares of common stock, it can use one of two methods to account for this transaction: the cost and the par method.
Under the cost method, the reacquisition of stock is viewed as a temporary reduction in the capitalization of the company and the first of a two-step transaction. The second step involves reissuing the treasury stock to the market, thereby completing the transaction from an accounting standpoint.
Generally, the treasury shares accounted for at cost method would touch three accounts:
Cash: a debit to Cash occurs when the stock is reissued, while a credit to Cash occurs when stock is reacquired.
Treasury Stock: a debit to Treasury Stock occurs when stock is reacquired, while a credit to Treasury Stock occurs when reissued.
Paid-in Capital from Treasury Stock: a debit to Paid-in Capital occurs when the stock is reissued at a price lower than the reacquisition price, while a credit occurs when the stock is reissued at a price higher than the reacquisition price.
Note: If Paid-in Capital from Treasury Stock has a zero balance, and the stock is reissued at a price lower than the reacquisition price, a debit is made to Retained Earnings.
Example
Ten years ago, Company A issued 1,000,000 shares of common stock with a par value of $0.01. During the initial public offering, Company A was able to raise $20,000,000. The journal entries to record the issuance of this common stock would be as follows:
| Debit | Credit | |
| Cash | $20,000,000 | |
| Common Stock: 1,000,000 shares, par value $0.01 | $10,000 | |
| Paid-in Capital in Excess of Par | $19,990,000 |
Two years ago, Company A reacquired 100,000 shares at a price of $24.00. The journal entry to record this transaction using the cost method would be as follows:
| Debit | Credit | |
| Treasury Stock: 100,000 shares x $24.00 per share | $2,400,000 | |
| Cash | $2,400,000 |
Early last year, Company A reissued 25,000 shares of Treasury Stock at $24.00. The journal entry to record this transaction using the cost method would be as follows:
| Debit | Credit | |
| Cash | $600,000 | |
| Treasury Stock: 25,000 shares x $24.00 per share | $600,000 |
In July of last year, Company A reissued 50,000 shares of Treasury Stock at $26.00. The journal entry to record this transaction using the cost method would be as follows:
| Debit | Credit | |
| Cash | $1,300,000 | |
| Treasury Stock: 50,000 shares x $24.00 per share | $1,200,000 | |
| Paid-in Capital, Treasury Stock | $100,000 |
Finally, late last year, Company A reissued the remaining 25,000 shares of Treasury Stock at $23.00 per share.
| Debit | Credit | |
| Cash | $575,000 | |
| Paid-in Capital, Treasury Stock | $25,000 | |
| Treasury Stock: 50,000 shares x $24.00 per share | $600,000 |
