Treasury Stock

Alright, let's go into more details about Treasury stock. So Treasury stock is stock that's been previously issued. It's been issued previously and then the company is repurchasing its own stock. You want to note that the company is going to repurchase the stock at the current market price. Okay. So if abc company wants to go and repurchase its stock, well, it was stock that it previously issued to stockholders and then it looks okay, what's my stock trading for on google? $50 a share. Okay, that's what I'm gonna repurchase it for $50 a share. Okay. So it's at that current market price that it gets repurchased by the company and a little a couple other notes about Treasury stock first, is that they do not receive dividends. Right. It doesn't make sense for a company to pay dividends and be paying themselves dividends. Right. So the Treasury stock stock that they've repurchased? Well, there's no dividends paid. The dividends are only paid on. Which ones do you think? Remember that was authorized issued and outstanding? It's gonna be on the outstanding shares. Right. The outstanding shares receive dividends. Remember, we issue a certain amount of shares and if we repurchase any, well then the Treasury stock is gonna be What's the difference between those issued and outstanding. Outstanding shares are still in the hands of the public and the difference there, I'll write it here, Treasury stock, I'm gonna put t stock is equal to issued minus outstanding. Okay, so the issued shares, The ones that we have sold to the public minus the ones still in the hands of the public. Well, that's what's equal to what we have repurchased ourselves. All right, So, the Treasury stock is the issued shares minus the outstanding shares. And now this is another trick. A lot of students have trouble, have trouble with this. They think Treasury stock is an asset, right? We repurchase the stock. We have stock in the company, but it's our own company. Right? We're repurchasing the equity of our company. So this is actually a contra equity account. Okay, because you're gonna see that Treasury stock has a debit balance. Okay. Treasury stock has a debit balance. And if you remember equity accounts, right? Equity accounts have credit balances. Right? So this Treasury stock being contra equity. Well, it's going to have a debit balance. It's gonna lower the value of equity, so it's lowering the value of outstanding equity, right? Because we have repurchased our own company has repurchased some of our own stock. Okay, so once we get into the next video, we'll start making the journal entries. I want to note that we're focusing on the cost method for Treasury stock. There's another method called the par value method. But you learn that in later accounting classes, we're gonna focus on the cost method right now. Alright, let's go ahead and pause and then we're gonna start doing the journal entries

So we're going to focus on two transactions for Treasury stock first when we repurchase it from the public and then at a later date we might resell it at a different price. Right? So we're going to repurchase some of our shares from the open market and then later sell it back out to the open market. Let's start here with the repurchase entry. The apartment depot repurchased 10,000 shares of 50 cent par value, common stock at the current market price of $25. So when we do the cost method for dealing with Treasury stock, the par value doesn't method doesn't matter here. All we care about is how much did you spend to repurchase this stock? So we bought 10,000 shares At a price of $25. Well that's gonna come out to $250,000. Right? That's the amount we spent buying these shares and that's the value of the Treasury stock account. So like I said before Treasury stock is gonna have a debit balance right? It's contra equity. So we're gonna have the debit in this transaction. be Treasury stock. So our debit is the Treasury stock for 250,000. And what's gonna be our credit here? It's gonna be cash, right? We bought these shares with cash. So we got to get the cash off of our books with the credit. And that's going to be for the 250,000 that we spent. Pretty easy. Right, this almost looks like when we buy any sort of asset. But this is a little different because we're talking about lowering equity, right? So what did we see happen here? We saw that our cash lowered our assets by 250,000. But the other side, it's not that we bought an asset, like as if we bought machinery or bought some sort of investment, this is buying our own stock back. So we're gonna lower our equity. So the Treasury stock, I'm gonna put T stock is gonna lower equity by 250,000. And that's how our equation stays balanced here, Right? 250,000 less in equity. 250,000 less in assets. Cool. That journal entry is pretty easy. Let's go ahead and move on to the next one.

Alright, so we have previously repurchased shares into our Treasury stock and now we're gonna sell them back to the public at a different price. So let's see what happens here. Previously the apartment depot repurchase 10,000 shares of 50 cent par value. Common stock at the current market price of $25. Now the apartment Depot will resell 5000 shares of its Treasury stock at a price of $30. Okay, so notice it's a different price here. Right? We bought it at 25 now we're selling it at 30. Okay, so clearly there's been an increase in the price First. Let's see what was the total amount in our Treasury stock? 10,000 shares. Just like we saw before times the $25 was $250,000. Right in the previous entry we had debited our Treasury stock account $250,000. But notice what happened now, we didn't sell all the shares that we had repurchased. Right? We had repurchased 10,000 shares but we're only selling 5000. How many of the shares are we selling? Well, if it had been some weird number, we would have had to do a calculation but we know it's half right, 5000 out of the 10,000 shares, we sold half 0.5 of our Treasury stock. Right? So if we had $250,000 in Treasury stock representing 10,000 shares. Well, we got rid of half of it. Right, so 250,000 times 0.5. What we actually sold? We got rid of 100 and 25,000 worth of the Treasury stock, Right? 125,000 should be the reduction to the Treasury stock account. But we sold it at a different price. Right? The cash we brought in is going to be a different number. Let's look at what the cash is that we brought in. The cash is going to be equal to the $30 selling price times the 5000 shares we sold. Right, we sold 5000 shares at $30. Well, that comes out to 150,000. So, notice what's happened here. The cash we brought in is different from the lowering of the Treasury stock account. Right, This is what's gonna come out of Treasury stock over here Because it was sitting at 250,000. We got rid of half of it. But we brought in more cash. So let's start making our journal entry here. We're gonna debit cash because we brought in cash of $150,000. And we're gonna credit Treasury stock For the $125,000 because we got rid of half of the Treasury stock. 125,000. So how do we make this balance with another $25,000 credit? We're not gonna take a gain. This isn't a game that goes to the income statement as if we had sold a piece of machinery or sold an investment, know when we're dealing with Treasury stock. What we do is we increase our equity through a pick. So we're gonna have an additional paid in capital is going to be the credit in this transaction. We don't want to take gains or losses onto our income statement from Treasury stock transactions. Um We're dealing with our own stock in our own company. So this is go directly to equity here. Okay, So instead of doing a gain or loss on the sale, we go straight to a pick for the difference. If this had been sold for less, Well, it would have been a reduction of a pick to balance this out. Right. If the cash had been less than the Treasury stock investment, we would have had to debit. Apec okay. To balance it out. So, what we saw in this transaction here, let me get out of the way to fill it out. We've had cash increase by 100 and 50,000. We had our equity increase for two of these, the Treasury stock, we got rid of Treasury stock. Right, So that's gonna increase our equity since that was a contra equity account. And then a pick increases our equity by another 25,000. So we stay balanced here are assets went up by 100 and 50,000 and our equity went up by 100 and 50,000. Cool, Alright. So Treasury stock is not so complicated. You just have to, The toughest thing here is usually that you're gonna sell back a different number of shares than you purchased. So you have to see what is the proportion of our original purchase that we actually sold right in this, in case we sold half of that original investment, you might sell 60% of the investment 70% right. Whatever it is, you want to make sure that you get rid of the correct amount in the Treasury stock account. Right? Because at this at this point in time there's still a balance in Treasury stock. It's not the full 250,000 that we originally purchased. We got rid of half of it. So half that balance is still sitting as a debit balance in Treasury stock. Cool. Alright, let's go ahead and move on to the next video.