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:
- more than the cost of treasury stock, the difference between the amount received and the cost of the treasury stock is credited to additional paid-in capital.
- less than the cost of treasury stock, the excess of cost of treasury stock over the amount received is debited to discount on capital account.
The following example illustrates the cost method of accounting for treasury stock:
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.
Issuance of Common Stock:
|Additional Paid-In Capital||3,000|
Purchase of Treasury Stock (Cost Method):
Resale of Treasury Stock (Cost Method):
|Additional Paid-In Capital||250|
Written by Irfanullah Jan