In treasury stock transactions, companies can repurchase their own shares from the market and later resell them, impacting both their cash and equity accounts. When a company like Apartment Depot repurchases shares, it records the transaction using the cost method, which focuses on the total expenditure rather than the par value of the stock.
For instance, if Apartment Depot repurchases 10,000 shares of common stock with a par value of $0.50 at a market price of $25, the total cost of the repurchase amounts to:
Total Cost = Number of Shares × Market Price = 10,000 \times 25 = 250,000
This $250,000 is recorded as a debit in the treasury stock account, which is a contra equity account, indicating a reduction in total equity. The corresponding credit entry is made to the cash account, reflecting the outflow of cash used to buy back the shares. The journal entry would look like this:
Debit: Treasury Stock $250,000Credit: Cash $250,000
Through this transaction, the company reduces its assets (cash) by $250,000 and simultaneously decreases its equity by the same amount, maintaining the balance in the accounting equation. This process illustrates how treasury stock transactions can affect a company's financial statements by lowering both assets and equity.