Does Treasury Stock Belong in the Stockholders' Equity of Balance Sheet?
- A corporation might buy back its own stock for a number of reasons. For example, if employees own stock options in the company or stockholders are entitled to a stock dividend, the company might have to buy back shares of its own stock to fulfill these obligations. The Board of directors of a company might believe the stock is undervalued in the marketplace and may buy back stock to prevent it being sold at too low a price. It might be a step in the process of converting a company from a publicly traded company to a privately held company or in preparation for a merger. Treasury stock can be reissued at any time.
- As a part of a corporation's organizing documents, the articles of incorporation state the number of shares of stock the corporation is authorized to issue. In the equity section of the balance sheet, a business usually discloses its stock's par value, the authorized shares, the number of shares issued to stockholders and the number of shares still outstanding at the balance sheet date. If the corporation has repurchased treasury stock, the number of shares issued will differ from the number of shares outstanding because treasury shares are no longer outstanding.
For example, Treasure Island Corporation is authorized to issue 100,000 shares of stock. It has issued, or sold, 65,000 shares of stock. During the current year, Treasure Island Corporation bought back 5,000 shares of stock as treasury stock. The disclosure statement would read, "Common stock, $1.00 par, 100,000 shares authorized, 65,000 shares issued, 60,000 shares outstanding." - Most equity accounts are credit balances. Treasury stock is presented in the equity section of the balance sheet as a debit after retained earnings and before the calculation of total stockholders equity. For example, if common stock has a par value of $10,000, the paid-in capital account is $100,000, retained earnings is $30,000 and the company has repurchased $5,000 of treasury stock, the entry would be Common stock -- $10,000 + Paid-in Capital -- $100,000 + Retained Earnings -- $30,000 - Treasury Stock -- $5,000 = Stockholders Equity -- $135,000.
- If a company sells treasury shares on the open market, the transaction is still reported on the balance sheet. There is no gain or loss to report on the income statement because a corporation cannot produce income or generate a loss through the purchase or sale of its own stock. Any amount treasury stocks sell for over the par value becomes an addition to paid-in capital. For example, if Treasure Island Corporation sells 1,000 shares of its treasury stock for $5,000 and the stock has a par value of $1 per share ($1,000 for 1,000 shares), the company would record the following transaction: a debit to cash for $5,000; a credit to common stock shares outstanding for $1,000; and a credit to paid-in capital for $4,000.
