Reports like Trial Balance and Balance sheet work out Opening Balances, Retained Earnings, Net income for the year on the fly by summing appropriate journal records. The company usually records the purchase of the treasury stocks first before deciding whether to resell them or retire them later. When equity shares are bought solely accounts receivable and accounts payable as a way to store cash in a possibly lucrative spot, the investor has no interest in influencing or controlling the decisions of the other company. That is not the reason for the purchase; the ownership interest is much too small. The company can raise the capital by issuing equity or debt security to the capital market.

Recording Stock Transactions

Briefly indicate the accounting entries necessary to recognize the split in the company’s accounting records and the effect the split will have on the company’s balance sheet. The date of record determines which shareholders will receive the dividends. There is no journal entry recorded; the company creates a list of the stockholders that will receive dividends.

Issuing Common Stock with a Par Value in Exchange for Cash

There is no auditor’s report required when reserves are created under these provisions. Also, these distributable reserves provide flexibility to the remaining shareholders to draw dividend as well. Generally, the buyback out of distributable profits is a much simpler and easier route than a buyback out of capital due to the onerous nature of the requirements. But when a company does not have sufficient distributable profits out of which to finance the buyback, a purchase out of capital may appear to be the only option.

Accounting treatment

As a contra equity account, Treasury Stock has a debit balance, rather than the normal credit balances of other equity accounts. In substance, treasury stock implies that a company owns shares of itself. Treasury shares do not carry the basic common shareholder rights because they are not outstanding. 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.

• Another investor could provide legal fees in exchange for stock.
• Sometimes, we may make the investment in shares of another company in order to earn extra revenues from the dividend or from the capital gain when the share price increases.
• The Cash accountincreases with a debit for $45 times 1,000 shares, or $45,000.
• Each share of the company’s common stock is sellingfor $25 on the open market on May 1, the date that Duratechpurchases the stock.

Record the purchase of treasury stock

As a contra equityaccount, Treasury Stock has a debit balance, rather than the normalcredit balances of other equity accounts. In substance, treasury stockimplies that a company owns shares of itself. Treasury shares do not carrythe basic common shareholder rights because they are notoutstanding. Dividends are not paid on treasury shares, theyprovide no voting rights, and they do not receive a share of assetsupon liquidation of the company.

The Cash Account is increased by the selling price, $28 per share times the number of shares resold, 100, for a total debit to Cash of $2,800. The Treasury Stock account decreases by the cost of the 100 shares sold, 100 × $25 per share, for a total credit of $2,500, just as it did in the sale at cost. The difference is recorded as a credit of $300 to Additional Paid-in Capital from Treasury Stock. When a company purchases treasury stock, it is reflected on thebalance sheet in a contra equity account.

Regardless of the type of dividend, the declaration always causes a decrease in the retained earnings account. Just after the issuance of both investments, the stockholders’equity account, Common Stock, reflects the total par value of theissued stock; in this case, $3,000 + $12,000, or a total of$15,000. The amounts received in excess of the par value areaccumulated in the Additional Paid-in Capital from Common Stockaccount in the amount of $5,000 + $160,000, or $165,000.

Notice on the partial balance sheet that the number of common shares outstanding changes when treasury stock transactions occur. Initially, the company had 10,000 common shares issued and outstanding. The 800 repurchased shares are no longer outstanding, reducing the total outstanding to 9,200 shares. The company can record the purchase of treasury stock with the journal entry of debiting the treasury stock account and crediting the cash account.