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“To accounting and focus in this video. We are going to look at treasury stock. Stock. Now remember that treasury stock is stock that the company repurchases.
So why would company need to repurchase their own stock well. Sometimes they just want to get shares off the market. Sometimes they have specific uses for those stock like they might use them for 401k matching or an employee stock purchase plan so in order for the company to be able to sell shares to their employees. They have to have some on hand so these transactions are going to deal with the company purchasing and selling treasury.
Stock so let s see the company has 10000. Shares. Of 12 par. Value common stock.
Issued and outstanding on. January. 1st. Now why is it important to know that they have 10000.
Shares issued and outstanding well remember issued shares are shares that are out in the marketplace and outstanding shares are shares that are owned by the. Public not owned by the company so if there are 10000. Shares issued an outstanding that tells us that on january 1st. There is no treasury stock okay so on january 1st.
No treasury okay so now we know that we re starting with no treasury stock on hand. So when we look at the following transactions. We re starting from a clean slate. So the following transactions related.
Treasury stock were recorded during the year. The company purchased a thousand shares of common stock for fifteen dollars per share. So if the company is purchasing their own common stock. That means that we are building up treasury stock.
Now so the company by purchasing a thousand shares at fifteen dollars per share..
The company is spending. Fifteen thousand dollars of cash okay. So we know that cash is one of our accounts and we know that treasury stock is involved. But now how do we determine how much of the fifteen dollars per share is actually going to go into the treasury stock account well when you buy treasury stock.
The amount that the company purchases. The stock for becomes. The stated value of that treasury stock. If you remember back to the common the common stock video that we went through the stated value is what is put into the stock account.
So we re going to treat the entire fifteen dollars as if that were the stated value of the stock. So now we can do the journal entry so on one fifteen. We ve got two accounts we ve got treasury stock and we ve got cash okay so we ve already said the companies. Gunners the company is going to pay for 1000.
Shares of 15 per share so i ve got a credit to cash of 15000. My treasury stock remember we said we re going to treat this as if this were the stated. Value so my treasury stock is also 15000. Okay.
So that handles 115 so now on 320. The company s selling 200 shares that they acquired on january 15th for 15 per share. So if the company is selling the shares. The company is going to receive cash.
So we know that that is one of our accounts. They re giving up treasury stock. So if we look at this. I ve got cash coming.
In let s figure out the cash first 200 shares times 15 per. Share the company s going to receive 3000. In cash and then the value of the treasury stock remember if we put it in at 15 per share. We ve got to pull it back out at 15 a share.
So i think the easiest way to remember that is if you kind of comply..
If you kind of use the inventory theory remember with inventory. If we put it in at 15 per share. When we took it out for cost of goods sold we took it out at 15. So we re going to do the same thing here.
If i put it into treasury stock of 15. I m going to pull it back out of treasury stock at 15 so 200 shares times 15 per share is 3000. Okay so that is 320. So now let s look at july 2nd.
So on 7 2. The company sold an additional 400 shares for 17 per share. Okay. So we know the cash is involved.
And we also know that treasury stock is involved okay. So the company is going to sell the shares 400 shares for 17 dollars. Each. So let s figure out the cash amount first.
So that would be 400 times 17 dollars. Which would give me six thousand eight hundred dollars in cash that was received and now the treasury stock remember. We said and we re dealing with treasury stock. Whatever i put it into the account at i m going to pull it back out at the same price.
So i m going to take 400 shares times 15 per share. Because that s what written illipe aid for them. And that would be six thousand dollars. Now this does not balance my journal entry.
So i m i need a credit of eight hundred dollars to balance this out okay so remember when we sold stock higher than the stated value when we were dealing with common stock and preferred stock. Where did we put the additional amount that was paid over the stated value we put it into additional paid in capital. We re going to do the same thing here. Additional paid in capital is used when you sell stock for more than the stated value or the par value so in this case.
Our stated value is 15 per share..
We sold the shares for 17. So that s 2 per share more times 400 shares. Which is our 800 so we re going to call this additional paid in capital treasury okay so additional paid in capital treasury 800 okay so now we ve got one more left to do so i m just going to scroll the screen down just a bit. So we have enough space.
Okay so on the last entry is on september 28th. So i ve got nine twenty eight. The company sold the remaining four hundred shares for twelve dollars per share. So we re now selling the shares for less than we originally paid for them okay.
So let s take a look at this one so i ve got we know we ve got cash coming in and we know we re going to have treasury stock. So i ll write those two down okay. So let s see where this brings us helps if i finish writing the whole account okay so let s start with cash. So i ve got 400 shares that are selling for 12 per share.
So 400 times 12 is 48. Hundred dollars that s cash coming in so we re going to debit cash. My treasury stock remember i have to put in the stated value so 400 shares times 15 per share is 6000. So now i m off on the debit side so now say okay now what do i do all right so the first thing that you re going to do is you re going to see.
If you have any additional paid in capital that you can tap okay so. If you notice in the previous entry on 7 2. We had 800 dollars of additional paid in capital that we created on that sale so i can use that 800 towards my deficit notice. This is a credit.
I can use 800 as a debit to help me balance my journal entry that would bring the additional paid in capital for the treasury down to zero. So i m going to put additional paid in capital for treasury. I m just going to abbreviate additional paid in capital for treasury 800. Okay so now i still don t balance.
Though i m still 400 off so i need another account for 400. So i ve used up my additional paid in capital for treasury. So now. I think okay where can i go next.
The next step would be to use retained earnings that s the only other item that i ve got in my arsenal. That i can use okay. So i can t use additional paid in capital for another type of stock. Okay.
Because that additional painting capital is only related to common stock or to try it out into preferred stock and in this case. My common stock is really not being affected right. I m putting those common shares back onto the market. My shareholder value should not be affected in the common stock area.
So really the only thing that i ve got left. I m not paying out a dividend. So really what i the only option that i have is to use retained earnings. So i m going to debit retained earnings by 400.
Now if we had done this let s say that the 72 entry and the 928 entry were reversed okay so on 7 2. I had sold the shares for 12 per share. If that s the case. Then i wouldn t have had this additional paid in capital and so if there s no additional paid in capital for treasury stock.
Then i would put everything into retained earnings. So it s really important that when you re doing a problem like this with treasury stock that you track if you have any additional paid in capital for treasury. One of the ways you could do that is with a t account or you could just have something off to the side that says okay. I ve got 800 in the account that i can use up that s another good way to do it.
But i like t accounts. Because then i kind of visually. See the debits and the credits. Okay.
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