Treasury Stock — Cost Method

Cost method is one of the two methods of accounting for treasury stock, the stock which has been bought back by the issuing company itself. The other method is called the par value method.

Under the cost method, the purchase of treasury stock is recorded by debiting treasury stock account by the actual cost of purchase. The cost method ignores the par value of the shares and the amount received from investors when the shares were originally issued.

When treasury shares are later reissued, the treasury stock account is credited for the cost at which they were purchased, cash account is debited for the amount actually received and if the amount received on reissuance of treasury stock is:

The following example illustrates the cost method of accounting for treasury stock:

Example

A company issued 10,000 shares of common stock of $5 par value and received $53,000 cash. The company then purchased back 900 shares out of those at $6 per share. The company then resold 500 shares from treasury stock at $6.50 per share.

Pass journal entries to record the above transactions.

Solution

Issuance of Common Stock:

Cash53,000
Common Stock50,000
Additional Paid-In Capital3,000

Purchase of Treasury Stock (Cost Method):

Treasury Stock5,400
Cash5,400

Resale of Treasury Stock (Cost Method):

Cash3,250
Treasury Stock3,000
Additional Paid-In Capital250

Written by Irfanullah Jan