Treasury stock refers to shares of the company that were once issued, but that the company has bought back or reacquired through repurchase programs. This usually occurs when management believes the stock is undervalued in the market. Treasury stock is located on the balance sheet under the section Shareholder Equity. In general, companies have two options for getting rid of treasury stock: retire or resale.
- Skill level:
- Moderately Easy
Understand the limitations on treasury stock. Treasury stock has no voting rights and does not pay a dividend. While selling treasury stock will raise additional capital, it will also increase equity ownership (voting rights) and the amount paid out to dividends. On the balance sheet, treasury shares reduce the ordinary number of share capital. This is why it usually has a (-) next to it.
Retire shares. A company with treasury stocks can do two things--resell the stock or retire the shares. Contact the issuing stock agent and tell him how much stock you would like to have listed as retired. Retired shares are not listed as treasury stock on the financial statements.
Contact an investment bank or the issuing broker of the original shares. Tell them you would like to resell treasury shares on the market at a market low. Give the broker a time frame if you have large lots. The market will interpret this event as a need for additional cash. You might also ask the broker or fund manager to purchase the entire lot at a discount equivalent to the broker's transaction fees.
Review affected accounting line items. Credit treasury stock and debit cash. If the resale of treasury shares occurs at a price less than the purchase price, but more than par value, debit cash for the amount received. The difference between the account is a debit to paid-in capital from treasury.
Debit cash for the amount received if the stock price is greater than both the purchase price and par value. Credit treasury stock at the original price purchased and credit the rest in treasury stock.
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