Page 532 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

Treasury stock

Treasury stock is the corporation's own capital stock that it has issued and then reacquired; this stock has not
been canceled and is legally available for reissuance. Because it has been issued, we cannot classify treasury stock as
unissued stock.
Recall that when a corporation has additional authorized shares of stock that are to be issued after the date of
original issue, in most states the preemptive right requires offering these additional shares first to existing
stockholders on a pro rata basis. However, firms may reissue treasury stock without violating the preemptive right

provisions of state laws; that is, treasury stock does not have to be offered to current stockholders on a pro rata
basis.
Larkin Corporation
Statement of stockholders' equity
For the Year ended 2010 December 31
$50 par, value, $20 par value Paid-In capital Retained Treasury
6% preferred Common stock In excess of Earnings Stock
stock par value
Balance, 2010 January 1 $250,000 $300,000 $200,000 $500,000 $(42,000)
Issuance of 10,000 shares of 200,000 100,000
common stock
5% stock dividend on common 25,000 27,500 (52,500)
stock, 1,250 shares
Purchase of 1,200 shares of
treasury stock
(48,000)
Net income 185,000
Cash dividends:
Preferred stock (15,000)
Common stock (25,000)
Balance, 2010 December 31 $250,000 $525,000 $327,500 $592,500 $(90,000)
Exhibit 102: Statement of stockholders' equity

A corporation may reacquire its own capital stock as treasury stock to: (1) cancel and retire the stock; (2) reissue
the stock later at a higher price; (3) reduce the shares outstanding and thereby increase earnings per share; or (4)
issue the stock to employees. If the intent of reacquisition is cancellation and retirement, the treasury shares exist
only until they are retired and canceled by a formal reduction of corporate capital.
For dividend or voting purposes, most state laws consider treasury stock as issued but not outstanding, since the
shares are no longer in the possession of stockholders. Also, accountants do not consider treasury shares
outstanding in calculating earnings per share. However, they generally consider treasury shares outstanding for
purposes of determining legal capital, which includes outstanding shares plus treasury shares.
In states that consider treasury stock as part of legal capital, the cost of treasury stock may not exceed the

retained earnings at the date the shares are reacquired. This regulation protects creditors by preventing the
corporation in financial difficulty from using funds to purchase its own stock instead of paying its debts. Thus, if a
corporation is subject to such a law (as is assumed in this text), the retained earnings available for dividends must
exceed the cost of the treasury shares on hand.
When firms reacquire treasury stock, they record the stock at cost as a debit in a stockholders' equity account
called Treasury Stock. They credit reissuances to the Treasury Stock account at the cost of acquisition. Thus, the
43
Treasury Stock account is debited at cost when shares are acquired and credited at cost when these shares are sold.

43 Another acceptable method of accounting for treasury stock transactions is the par value method. We leave

further discussion of the par value method to intermediate accounting texts.

Accounting Principles: A Business Perspective 533 A Global Text