ASC 505 Equity: Treasury Stock Transaction Explained with Journal Entries

Posted In | ASC Education | Gridlex Academy

Treasury stock represents a company's own shares that have been repurchased from the market. These repurchases can be done for various reasons, such as providing shares for employee stock option plans, supporting stock price, or preventing hostile takeovers. ASC 505, Equity, provides guidelines on accounting for treasury stock transactions. In this article, we will discuss the treatment of treasury stock under ASC 505 and provide journal entries to help illustrate the accounting process.

 

ASC 505: Equity - Overview

ASC 505 establishes the accounting and reporting requirements for transactions involving a company's equity, including the issuance, repurchase, and retirement of shares. Under ASC 505, treasury stock is recorded at cost and reported as a contra-equity account, reducing the total shareholders' equity.

 

Treasury Stock Transactions

A company can repurchase its shares either in the open market or through privately negotiated transactions. The cost method is commonly used to account for treasury stock transactions, whereby the treasury stock is recorded at the cost paid to repurchase the shares, without considering any par value.
 

Journal Entries for Treasury Stock Transactions.

To illustrate the accounting treatment of treasury stock transactions, let's consider the following example:

ABC Company repurchases 1,000 shares of its common stock at $20 per share. The total cost of repurchasing the shares is $20,000.
 

Journal entry for the repurchase of shares would be:

1. Repurchase of Shares:

       Dr. Treasury Stock: $20,000

       Cr. Cash: $20,000
 

The company records the treasury stock at the cost of repurchase and reduces its cash balance accordingly.

If ABC Company later decides to resell 500 of the repurchased shares at $22 per share, the total proceeds from the sale would be $11,000.
 

Journal entry for the resale of treasury stock would be:

2. Resale of Treasury Stock:

       Dr. Cash: $11,000

       Cr. Treasury Stock: $10,000

       Cr. Additional Paid-in Capital - Treasury Stock: $1,000

 

The company records the cash proceeds from the sale, reduces the treasury stock account by the cost of the shares sold ($10,000), and credits the difference between the selling price and the cost to the additional paid-in capital - treasury stock account. It is important to note that any gain or loss on the sale of treasury stock is not recognized in the income statement. Instead, the difference between the sale price and the cost is recorded in the equity section of the balance sheet.

 

Understanding the treatment of treasury stock transactions under ASC 505 is crucial for companies that engage in share repurchases. By following the guidelines provided by ASC 505, companies can ensure accurate reporting of their equity structure and maintain transparency in their financial statements. Proper accounting for treasury stock transactions helps companies to effectively manage their capital structure, benefiting shareholders and other stakeholders.