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Treasury Stock. The Cost Method.
This is a memorandum note for accounting of treasury stock transactions under the cost method.
Assume that ABC Corp. uses the Cost Method to account for treasury stock transactions. ABC Corp. issued 1000 shares of 10$ par common stock at 15$ per share.
Dr Cash.............15 * 1000 = 15 000$
Cr Common stock.....................................10*1000 = 10 000$
Cr APIC-CS......................................15 000 - 10 000 = 5 000$
Where APIC-CS is Additional paid-in capital - common stock
The cost method:
1) ABC Corp. acquires 200 shares for 20$ each:
Dr Treasury stock........20*200 = 4000$
Cr Cash................................................20*200 = 4000$
There is no gain and no loss when the company acquired the shares under the Cost Method.
2) ABC Corp. reissues 100 shares for 23$ each (this is a gain, because selling price 23$ is more than the purchase price 20$):
Dr Cash.................23*100 = 2 300$
Cr Treasury stock.........................................20*100 = 2 000$
Cr APIC-TS (APIC-Treasury stock).............2 300 - 2000 = 300$
Gains are recorded in Additional paid-in capital - treasury stock account.
3) ABC Corp. reissues remaining 100 shares for 12$ each (this is a loss, because selling price 12$ is less than the purchase price 20$)
Dr Cash...............................12*100 = 1 200$
Dr APIC-TS............................................300$
Dr Retaining Earnings......2000-1200-300=500$
Cr Treasury stock........................................20*100 = 2 000$
Losses are debited to APIC-TS account, reducing its balance to zero and remaining losses are debited to Retaining Earnings Account.
Let's resume:
1. In all stock transactions, no gains or losses are shown on the income statement.
2. There is no gain and no loss when the company acquired the shares under the Cost Method.
3. Gains are credited APIC-TS account.
4. Losses are debited APIC-TS account (if there is a balance in it) and then Retained Earnings account.
That is why Retained Earnings account cannot increase by share transactions.
Posted by mazoo at June 10, 2005 6:01 PM
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