Treasury stock refers to a company repurchasing shares of previously issued stock. Treasury shares are not allowed to vote on corporate issues or receive dividends, as explained by the Cliffs Notes website. A company has the ability to reissue shares of treasury stock as a way of raising capital for the company’s business activities. Treasury stock appears on a company’s balance sheet and has a normal debit balance and is deducted from a corporation’s retained earnings to determine total shareholders’ equity.
1. Confirm the treasury stock price per share. Let’s assume a company purchased 500 shares of treasury stock at $10 per share. This means the company paid $5,000 to purchase the treasury shares.
2. Verify the reissue price per share and number of shares the company will reissue. Let’s say a company reissues 250 of the 500 treasury shares at $15 per share. In this scenario, the company receives $3,750 for the treasury shares. Debit the cash account for $3,750. Credit treasury shares for $2,500 because 250 shares times $10 is equal to $2,500. Crediting treasury shares decreases the amount in the company’s treasury shares account.
3. Subtract the amount the company paid for the treasury shares by the amount of the reissue. If a company paid $2,500 for 250 shares of treasury stock and reissued 250 shares of treasury stock for $3,750, the company made $1,250 on the transaction. In this scenario, the company must credit paid-in capital for $1,250 to recognize the gain made on the treasury stock reissuance.