12/12/2023 0 Comments Treasury stock transaction definitionThe original cost paid for each treasury share, $25, is multiplied by the 100 shares to be resold, or $2,500. This has the effect of increasing an asset, Cash, with a debit, and decreasing the Treasury Stock account with a credit. If La Cantina reissues 100 of its treasury shares at cost ($25 per share) on July 3, a reversal of the original purchase for the 100 shares is recorded. The company can resell the treasury stock at cost, above cost, below cost, or retire it. Management typically does not hold treasury stock forever. 15 Figure 5.63 By: Rice University Source: Openstax CC BY-NC-SA 4.0 Long Descrption In 2017, it acquired additional shares at a cost of 3,547 million CHF, raising its total treasury stock to 4,537 million CHF at the end of 2017, primarily due to a share buy-back program. The company’s statement of stockholders’ equity shows that it began with 990 million Swiss francs (CHF) in treasury stock at the beginning of 2016. Nestlé Holdings Group sells a number of major brands of food and beverages including Gerber, Häagen-Dazs, Purina, and Lean Cuisine. Immediately after the purchase, the equity section of the balance sheet ( Figure 5.62) will show the total cost of the treasury shares as a deduction from total stockholders’ equity.ĬONCEPTS IN PRACTICE Reporting Treasury Stock for Nestlé Holdings Group An entity cannot own part of itself, so no asset is acquired. Figure 5.61 By: Rice University Source: Openstax CC BY-NC-SA 4.0Įven though the company is purchasing stock, there is no asset recognized for the purchase. The following journal entry is recorded for the purchase of the treasury stock under the cost method. Duratech will pay the market price of the stock at $25 per share times the 800 shares it purchased, for a total cost of $20,000. Each share of the company’s common stock is selling for $25 on the open market on May 1, the date that Duratech purchases the stock. During May, the company’s board of directors authorizes the repurchase of 800 shares of the company’s own common stock as treasury stock. The cost method is so named because the amount in the Treasury Stock account at any point in time represents the number of shares held in treasury times the original cost paid to acquire each treasury share.Īssume Duratech’s net income for the first year was $3,100,000, and that the company has 12,500 shares of common stock issued. There are two methods possible to account for treasury stock-the cost method, which is discussed here, and the par value method, which is a more advanced accounting topic. Dividends are not paid on treasury shares, they provide no voting rights, and they do not receive a share of assets upon liquidation of the company. Treasury shares do not carry the basic common shareholder rights because they are not outstanding. However, owning a portion of one’s self is not possible. In substance, treasury stock implies that a company owns shares of itself. The total cost of treasury stock reduces total equity. As a contra equity account, Treasury Stock has a debit balance, rather than the normal credit balances of other equity accounts. When a company purchases treasury stock, it is reflected on the balance sheet in a contra equity account. Sometimes companies buy back shares to be used for employee stock options or profit-sharing plans. A purchase can also create demand for the stock, which in turn raises the market price of the stock. It can be a strategic maneuver to prevent another company from acquiring a majority interest or preventing a hostile takeover. A company might purchase its own outstanding stock for a number of possible reasons. These shares are referred to as treasury stock. Sometimes a corporation decides to purchase its own stock in the market.
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