Sunday, 13 July 2014
TREASURY STOCKS
TREASURY STOCKS
When a company's issued or sold stocks is reacquired afterwhich held in its name rather than formally retired , it is referred to TREASURY STOCKS.
These treasury stocks may be subsequently be re issued or sold or formally retired..
Treasury stock should not be viewed as an asset, instead, it should be reported as reduction to the owners equity . It does not confer upon the corporation stockholders right, such as dividends or voting rights.
Treasury shares may or may not participate in stock dividends, or stock splits,
The acquisition of treasury stocks decreases the number of shares outstanding, while reissuing it increases the number of shares outstanding, but the legal capital is not changed either by the reacquistion or reissuance.
there is no income or less on the reacquisition , reissuance or retirement . Howver, the retained earnings can be decreased by the treasury stock transactions , but is never increased by such transactions.
TWO METHODS ON HOW TO RECORD TREASURY TRANSACTIONS
1. COST METHOD - the purchase or reacquisition is recorded by debiting treasury stock account for the cost of the purchase and crediting cash.
TREASURY STOCK ( actual price x no of shares
cash
the cost is determined by the CURRENT MARKET PRICE OF THE STOCK and is not necessary tied to the original issue price when it was sold.
the balance of the treasury stock is deducted from the stockholders equity as a separate amount..
when it will be finally RETIRED , the debit balance in the treasury stock is CREDITED and the debits are allocated proportionately to the appropriate CAPITAL STOCK., PAID IN CAPITAL, and RETAINED EARNINGS as ff
1. debited amount for capital stock is number shares retired x par value, this is to reduce the stocks outstanding.
2. debit paid in capital account : no. of shares retired divided by outstanding shares x balance of paid in capital accounts.( why debit this account , because this treasury when this was originally issued may have created the paid in capital , hence , this is debited to paid in capital.
3. the balance is debited to retained earnings.( this is not to distort the profit and loss statement since this transaction is not an ordinary expense.
If the treasury stock is subsequently sold, the difference between acquisition cost when it was reacquired and the selling price is credited to PAID IN CAPITAL .
the entry is , if sold at book value.
CASH
TREASURY STOCK ( no. of share x price when it was reacquired)
entry if sold more than book value
CASH
TREASURY STOCK ( shares sold x acquisition cost)
PAID IN CAPITAL FROM TREASURY( excess of price vs. acquisition cost x shares sold)
IF SOLD LESS THAN BOOK VALUE
CASH
PAID IN capital from treasury ( this is debited if there is previous credit to this account caused by sale of treasury stock. before , if none then debited to retiained earnings.
TREASURY STOCK
if the stockholders equity increase due to sale of treasury stock , a paid in capital account such as PAID IN CAPITAL FROM TREASURY STOCK IS CREDITED.
,
IF THE stockholder equity is decreased due to sale less than its acquisition cost, PAID CAPITAL IS DEBITED TO THE EXTENT OF A CREDIT TO PAID CAPITAL PREVIOUSLY RECORDED because it was sold previously at more than the acquisition cost.
if no previous sale made where a paid in capital was registered, and the subsequent sale was made at below acquisition cost then the whole difference between the cash and the value of treasurry stock is debited to retained earnings.
EXAMPLE: THE OUTSTANDING SHARES IS 10,000 SHARES 10 PAR VALUE, BUT SOLD AT 15.00 SO THERE IS A PAID IN CAPITAL OF 50,000
1. 1000 SHARES WAS REACQUIRED AT 16.00 PER SHARE.
TREASURY STOCK 16,000
CASH 16,000
2. SOLD 200 OF TREASURY STOCK AT 20.00, OR 4.00 MORE THAN BOOK VALUE.
CASH 4,000
TREASURY STOCK 3,200
PAID IN CAPITAL TREASURY 800 ( 4 X 200)
3. SOLD 500 AT 14 OR 2.00 LESS THAN THE ACQUISITION COST OF 16.00
CASH 7,000
PAID IN CAPITAL 800 taken from previous credit when some were sold
retained earnings 200
treasury stock 8,000
4. RETIRED 300 SHARES THE REMAINING TREASURY STOCK
CAPITAL STOCK 300 X 10 3,000
PAID IN CAPITAL 300 divide 10,000 x 50,000 1,500
retained earnings 300
treasury stock ( 300 x 16.00) 4,800
IN THE PRESENTATION OF STOCKHOLDERS EQUITY, PRIOR TO REACQUISITION AND SALE ,THE TREASURY STOCK IS SHOWN AS A DEDUCTION NOT ON THE CAPITAL STOCK BUT IN A SEPARATE ITEM.
COMMON STOCK 100,000
PAID N CAPITAL 50,000
TOTAL 150,000
RETAINED EARNINGS 30,000
LESS : TREASURY STOCK ( 16,000)
STOCKHOLDERS EQUITY 164,000
+++++++++++=======================================================
2. PAR OR STATED VALUE METHOD OF ACCOUNTING TREASURY STOCK.
If the par value method is used , the purchase of treasury stock is regarded as a WITHDRAWAL of group of stockholders. Similarly the sale of reissuance of treasury stock, under this method is viewed as the ADMISSION OF NEW GROUP OF STOCKHOLDERS
THUS THE REACQUISITION AND SALE ARE VIEWED AS SEPARATE TRANSACTIONS.
USING THE ABOVE EXAMPLE, THE FOLLOWING ENTRIES ARE MADE.
1. REACQUISITION:
TREASURY STOCK ( 1,000 X 10 10,000
PAID IN CAPITAL IN EXCESS OF PAR( 1000/10000 X 50,00 6,000
CASH 1,000 X 16 16,000
2. SELL 200 AT 20.00 PER SHARE
CASH 4,000
TREASURY STOCK ( 200 X 10 ) 2,000
PAID IN CAPITAL TREAS. STOCK 2,000
3. SELL 500 AT 14.00
CASH 7,000
TREASURY STOCK 5,000
PAID IN CAPITAL TREA.STOCK 2,000
4. RETIRED THE REMAINING 300
CAPITAL STOCK 3,000
TREASURY STOCK 3,000
+=================================================================
EXERCISES: 1
the stockholder equity as of dec. 1995 is shown below
common stock , 15.00 par , 240,000 shares outstanding 3,600,000
paid in capital in excess of par 480,000
retained earnings 900,000
Jan 1996, reacquired 15,000 shares at 16.00.
these treasury stocks were disposed as ff:
JUly 1, sold, 5,000 at 20.00
aug 1 sold 7,000 at 14.00
sept retired 1,000.
required : using cost method. prepare entries
prepare stockholders equity dec. 1996, with retained earnings 1,005,000 before treasury stocks transaction..
USING PAR VALUE METHOD ., prepare the same
======================================================================
ENTRIES IF COST METHOD
1. TREASURY STOCK 240,000
CASH 240,000
2. CASH 100,000
TREASURY STOCKS 80,000
PAID IN CAPITAL TREA. STOCK 20,000
3. CASH 98,000
PAID IN CAPITAL 14,000
TREASURY 112,000
4. CAPITAL 15,000
PAID IN CAPITAL 1,000
TREASURY STOCK 16,000
COMMON 240,000 , 15 PAR VALUE ?
PAID IN CAPITAL ?
TOTAL ?
RETAINED EARNINGS ?
less: TREASURY STOCKS ?
TOTAL STOCKHOLDERS EQUITY
=================================================================
EXPLANATIONS
1.. IN COST METHOD, YOU RECORD THE REACQUISITION BASED ON WHATEVER PRICE IT IS PAID.
2. WHEY IT IS TOTALLY SOLD AT ONE TIME, SAY AT BELOW THE REACQUISITION COST , CHARGE THE DIFFERENCE TO TWO ACCOUNTS : ONE DEBIT TO PAID IN CAPITAL TO THE EXTENT OF RATIO OF THE SOLD QTY OVER THE TOTAL SHARES OUTSTANDING , THE RESULTING RATIO X THE EXISTING PAID IN CAPITAL, THE BALANCE DEBIT TO RETAINED EARNINGS.
CASH
PAID IN CAPITAL
RETAINED EARNINGS
TREASURY
3. HOWEVER IF SOLD AT ONE TIME SAY ABOVE COST, THEN CREDIT THE DIFFERENCE TO PAID IN CAPITAL.
CASH
TREASURY
PAID IN CAP
4. IF NO. 2 AND 3 DID NOT HAPPEN, BUT IN NO. 2, PARTIAL OF THE TREASURY STOCKS WAS SOLD ABOVE ACQUISITION COST THEN, THE SAME ENTRY MADE IN NO. 3
5. IF SUBSEQUENT TO THE SALES ABOVE ACQUISITION , A SALE WAS MADE AT BELOW COST , THEN THE FF: IS THE ENTRY AND THE AMOUNT TO BE USED.
CASH.
PAID IN CAPITAL ( the amount will be to extent of the credit made in no. 3., the balance goes or absorb by the retained earnings.
RETAINED EARNINGS
TREASURY
6. the remaining treasury stocks if sold in whole , at below cost, then the debit amount for the paid in capital will ( remaining shares/ outstanding x paid in capital original.)
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
IF USING PAR VALUE METHOD, THESE ARE THE ENTRIES.
1. TREASURY STOCK 225,000
? ? 15,000/275,000 X 480,000
RETAINED EARNINGS ?
CASH 240,000
2. CASH 100,000
TREASURY 75,000
? 25,000
3. CASH 98,000
? 7,000
TREASURY STOCKS 105,000
4. CAPITAL STOCK 15,000
TREASURY STOCKS 15,000
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
EXPLANATIONS: FOR USING PAR VALUE:
1. IN USING PAR VALUE YOU DEBIT OR CREDIT THE TREASURY STOCK ACCOUNT USING PAR VALUE AND NOT THE MARKET PRICE .
2.. WHEN THE TREASURY STOCK IS SOLD AT BELOW PAR VALUE , IT IS DEBITED TO PAID IN CAPITAL , BUT ITS AMOUNT IS NOT DEPENDING ON THE PREVIOUS SALES WHERE THERE IS A CREDIT TO PAID IN CAPITAL THAT IS IT WAS SOLD AT ABOVE COST , UNLIKE IN COST METHOD.
EXERCISE 3.
Bantex company stockholders equity 1996 are given below
1. issued 30,000 shares of 9% preferred stoc, 20 par , and was subscribed at 26
2. issued 50,000 shares of 30 par at 33
3. reacquired and retired 4,000 shares of preferred stock at 28
4. reacquired 6000 shares of common at 35
5. sold 1,000 shares of treasury at 37.
using cost method , prepare entry
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