Journal Entry for Repurchase of Common Stock and Retirement
Introduction
In business, the company may have surplus cash on hand and decide to repurchase the common stock so that it can retire them in order to increase the stock value if it decides to not reissue them to the market. In this case, the company needs to make the journal entry for repurchase of common stock in order to account for the cost it pays for and make the journal entry for the retirement of common stock if it decides to do so.
As the balance of the equity increases when the company issues the common stock, repurchasing it back will logically decrease the equity on the balance sheet. However, the way of decreasing equity is not by reducing the common stock in the equity section, but by adding a contra account which is treasury stock as a result of the repurchase of common stock.
This is due to the common stock the company has in its equity section on the balance sheet represents the common stock that it has issued so far. And repurchase of common stock means that the company has a portion of its own issued shares of common stock, not directly reducing the issued shares of common stock.
Of course, when the company decides to retire the repurchased shares of common stock later, the number of shares on the market, as well as the balance of the common stock and its related item on the balance sheet, will decrease accordingly. In this case, the treasury stock that represents the repurchased stock will also need to be removed as a result of stock retirement.
Journal entry for repurchase of common stock
The company can make the journal entry for repurchase of common stock by debiting the treasury stock account and crediting the cash account.
| Account | Debit | Credit |
|---|---|---|
| Treasury stock | $$$ | |
| Cash | $$$ |
Treasury stock is a contra account to the capital account (e.g. common stock) in the equity section of the balance sheet. Likewise, its normal balance is on the debit side and this journal entry will decrease both total assets and total equity on the balance sheet.
In accounting, the treasury stock is recorded at cost, so the debit amount of treasury stock in the above journal entry is the total cost of the share price plus any commission (e.g. brokerage fee). Additionally, as the treasury stock is recorded at the cost of purchase, there is no par value involved like the transaction of issuing of common stock either.
As mentioned, the number of shares of the common stock that the company has issued will stay the same even after it repurchases some of the shares back from the capital market. In other words, the repurchase of common stock does not reduce the number of its shares on the capital market; only retirement does it reduce the number of shares.
Journal entry for retirement of common stock
Retirement of common stock means that the company reduces the number of issued shares of common stock that it has. This usually happens when the company wants to increase its share value.
After all, when the number of shares is reduced, the EPS (earnings per share) will automatically increase making the company’s shares of common stock on the capital market becoming more attractive to investors. Additionally, the supplies of the company’s shares on the market are also reduced as a result of the retirement.
Likewise, the company can make the journal entry for retirement of common stock by debiting the common stock account and the additional paid-in capital account and crediting the treasury stock account to remove them from the balance sheet.
| Account | Debit | Credit |
|---|---|---|
| Common stock | $$$ | |
| Additional paid-in capital | $$$ | |
| Treasury stock | $$$ |
In this journal entry, it is assumed that the company pays the same amount as the amount that it had received from issuing the stock in the first place. However, this is rarely the case as the company usually pays more to repurchase the stock back from the market. Of course, there are also uncommon cases where the company pays less to repurchase the stock.
Likewise, if the company pays more than the amount it had received from issuing the stock, it needs to record the difference as a debit to the retained earnings account when it makes the journal entry for the retirement of common stock.
Retirement of common stock – paying more to repurchase:
| Account | Debit | Credit |
|---|---|---|
| Common stock | $$$ | |
| Additional paid-in capital | $$$ | |
| Retained earnings | $$$ | |
| Treasury stock | $$$ |
Alternatively, if the company pays less than the amount it had received from issuing the stock, it can record the difference as a credit to the additional paid-in capital from stock retirement as in the journal entry below:
Retirement of common stock – paying less to repurchase:
| Account | Debit | Credit |
|---|---|---|
| Common stock | $$$ | |
| Additional paid-in capital | $$$ | |
| Paid-in capital – stock retirement | $$$ | |
| Treasury stock | $$$ |
Retirement of common stock without recording the treasury stock
Sometimes, the company may decide to retire the common stock immediately after buying them back. In this case, the company may decide to remove the common stock from the balance sheet immediately without bothering to record the treasury stock. This usually happens when the company repurchases the common stock with the intention to retire them immediately.
In this case, the company can make the journal entry for repurchase and retirement of common stock by debiting the common stock and its additional paid-in capital and crediting the cash account by the amount that it pays for the repurchase of the common stock.
| Account | Debit | Credit |
|---|---|---|
| Common stock | $$$ | |
| Additional paid-in capital | $$$ | |
| Cash | $$$ |
In this journal entry, there is no treasury stock account. The company simply combines the repurchase and retirement of common stock together.
Also, this is journal entry is assumed that the company pays the same amount as the amount received from issuing the stock. Likewise, similar to the above, if the company pays more, there will be a debit of retained earnings and if the company pays less, there will be a credit of paid-in capital from the stock retirement.
Paying more to repurchase and retire immediately
| Account | Debit | Credit |
|---|---|---|
| Common stock | $$$ | |
| Additional paid-in capital | $$$ | |
| Retained earnings | $$$ | |
| Cash | $$$ |
Paying less to repurchase and retire immediately
| Account | Debit | Credit |
|---|---|---|
| Common stock | $$$ | |
| Additional paid-in capital | $$$ | |
| Paid-in capital – stock retirement | $$$ | |
| Cash | $$$ |
It is useful to note that making the journal entry of repurchase and retirement of common stock this way will not leave an audit trail of the treasury stock. Hence, it may be difficult to track the treasury stock transaction if the company needs to do so.
Repurchase and retirement of common stock example
For example, on January 31, the company ABC repurchase 10,000 shares of its common stock from the market. The company ABC originally issued the common stock for $5 per share with the par value of $1 per share.
However, the company ABC pays $80,000 (including the brokerage fee) with its surplus cash for this repurchase of 10,000 shares of common stock. And later, on March 31, the company ABC decides to retire these 10,000 shares of common stock in order to increase its EPS ratio.
What is the journal entry for repurchase of common stock on January 31?
What is the journal entry for retirement of common stock on March 31?
Solution:
On January 31
The company ABC can make the journal entry for the repurchase of 10,000 shares of its common stock on January 31, by debiting the $80,000 that it pays for into the treasury stock account and crediting the cash account with the same amount.
Repurchase of common stock
| Account | Debit | Credit |
|---|---|---|
| Treasury stock | 80,000 | |
| Cash | 80,000 |
In this journal entry, both total assets and total equity on the balance sheet decrease by $80,000 as of January 31.
On March 31
On March 31, the company ABC can make the journal entry for the retirement of the 10,000 shares of common stock by debiting the $10,000 of common stock (10,000 shares x 1$ per share) and its related additional paid-in capital of $40,000 ($50,000 – $10,000) and crediting the $80,000 into treasury stock account.
Additionally, as there is a difference of $30,000 ($80,000 – $50,000) which is due to the company ABC paying more to repurchase the stock, there will be also a debit of retained earnings.
Likewise, the company needs to record the $30,000 into the retained earnings account in the journal entry for retirement of common stock as below:
Retirement of common stock
| Account | Debit | Credit |
|---|---|---|
| Common stock | 10,000 | |
| Additional paid-in capital | 40,000 | |
| Retained earnings | 30,000 | |
| Treasury stock | 80,000 |
In this journal entry, treasury stock of $80,000 will be removed together with the 10,000 shares of common stock. Likewise, the number of issued shares of common stock that the company ABC has issued so far will be reduced by 10,000 as of March 31.
Example 2:
For another scenario, assuming that the company ABC above pays $80,000 to repurchase the 10,000 shares of its common stock with the intention to retire them immediately on January 31 which is the date of repurchase itself. And the originally issued common stock was still $5 per share with the par value of $1 per share.
In this case, the company ABC can and may make the journal entry for repurchase and retirement of common stock on January 31 as below:
| Account | Debit | Credit |
|---|---|---|
| Common stock | 10,000 | |
| Additional paid-in capital | 40,000 | |
| Retained earnings | 30,000 | |
| Cash | 80,000 |
In this journal entry, there is no treasury stock as in the first example as the company ABC repurchases the common stock in order to retire them immediately.
Of course, the company ABC can also record the same way as in the first example by making two journal entries on January 31, in which one journal entry is for the repurchase of common stock and another is for the retirement of common stock.
Example 3:
For another example, assuming that the company ABC above pays only $40,000 for the repurchase of 10,000 shares of the common stock on January 31. The common stock was still originally issued for $5 per share with the par value of $1 per share. And the company ABC still only decide later to retire the 10,000 shares of common stock on March 31.
In this case, the company ABC can make journal entry for the repurchase of common stock on January 31 as below instead:
Repurchase of common stock
| Account | Debit | Credit |
|---|---|---|
| Treasury stock | 40,000 | |
| Cash | 40,000 |
Additionally, as the company ABC pays only $40,000 for the repurchase of 10,000 shares, in which it has received $50,000 for the issuance of the same number of shares originally, it can make the journal entry for the retirement of common stock on March 31, by crediting the difference of $10,000 into the paid-in capital from the retirement of stock as below:
Retirement of common stock
| Account | Debit | Credit |
|---|---|---|
| Common stock | 10,000 | |
| Additional paid-in capital | 40,000 | |
| Paid-in capital – stock retirement | 10,000 | |
| Treasury stock | 40,000 |
