Treasury Stock Journal Entry
Sometimes, the company may need to purchase back the stock that it has issued. In this case, the company needs to account for the reacquired stock as the treasury stock with proper journal entry if it does not have the intention to retire the stock.
In accounting, the company needs to account for the treasury stock under the cost method. In other words, the company needs to record the treasury stock at the amount it paid to acquire it back.
Later, when the company decides to sell the treasury stock, it needs to record the difference between the cost and sale price of the treasury stock as the paid-in capital from treasury stock.
Treasury stock journal entry
Purchase of treasury stock
The company can make the journal entry for the purchase of treasury stock by debiting the treasury stock account and crediting the cash account.
Treasury stock account is a contra account to the equity on the balance sheet. Likewise, when the company makes the purchase of the treasury stock, the total balance of equity will reduce by the amount of repurchased stock.
Sale of treasury stock
When the company sells the treasury stock, it can make the journal entry by debiting the cash account and crediting the treasury stock account and paid-in capital from the treasury stock.
|Paid-in capital from treasury stock||$$$|
Paid-in capital from treasury stock is the difference between the cost of treasury stock and the price the company sells the treasury stock for. The balance of the paid-in capital from treasury stock will be presented in the section of the additional paid-in capital on the balance sheet.
For example, on June 1, 2020, the company ABC paid $60,000 to reacquire 5,000 shared of its common stock back. Its common stock has a par value of $10 per share. The company ABC has no intention to retire the repurchased stock.
On October 1, 2020, the company ABC sell the 5,000 shares of treasury stock above at the price of $15 per share.
What is the journal entry for treasury stock?
- on June 1, 2020, when the company repurchases 5,000 shares of its common stock back
- on October 1, 2020, when the company sells 5,000 shares of the treasury stock
On June 1, 2020
As the company ABC does not retire the repurchased stock, it can record it as the purchase of the treasury stock and make the journal entry as below:
In this journal entry, the $10 par value of the common stock is not used to determine the value of the treasury stock. This is due to the value of the treasury stock is determined by the cost that the company paid to reacquire the stock, which, in this case, is $60,000 or $12 per share.
On October 1, 2020
When the company ABC sells the treasury stock for $75,000 (5,000 x 15), it can recognize the difference between the cost and sale price of $15,000 ($75,000 – $60,000) as paid-in capital from treasury stock and make the journal entry as below:
|Paid-in capital from treasury stock||15,000|
In this journal entry of the sale of treasury stock, both total assets and total equity in the balance sheet increase by $75,000.