Define treasury stock/stock buyback. Explain accounting treatment of buy-backs,

Question

Define treasury stock/stock buyback.

Explain accounting treatment of buy-backs, including purchase, subsequent sale and retirement of stock.

Explain the impact buyback has on corporate cash, retained earnings, EPS and the stockholder and reasons corporations buy their own stock.

Discuss the buyback’s implication on corporate financial strength and outlook.

Discuss alternatives that could improve financial strength.

Proponents claim that buybacks are a means of distributing cash to stockholders. Explain and critique this position.

Explanation / Answer

Answer: Treasury stock: Treasury stock is the Outstanding stock, purchased by the corporation, is known as treasury stock.

Accounting treatment:

In case of Purchase : the Journal Entry is

Treasury stock A/C Dr.

    To cash A/C

In case of subsequent sale:

Cash A/C Dr.

     To treasury stock

      To Additional paid in capital A/C

In case of retirement:

Common stock A/C dr.

       To treasury stock A/C

Common reasons for the repurchase of stock include the following:

Stock that has been repurchased does not qualify for voting purposes, nor should it be included in the earnings per share calculation that is reported by publicly-held businesses.

The two aspects of accounting for treasury stock are the purchase of stock by a company, and its resale of those shares. We deal with these treasury stock transactions next.

http://www.accountingtools.com/treasury-stock-accounting

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