Retirement of Treasury Stock

Definition

The financial accounting term retirement of treasury stock refers to a process whereby a company decides it will not reissue stock held in treasury to the market.  In addition to approval by the company's board of directors, there are a number of regulatory requirements a company must comply with before it can retire treasury stock.

Explanation

Companies will issue capital stock to raise funds that are used to expand business operations and create additional shareholder value.  Companies can choose to subsequently buy back shares from the market and will reacquire stock for a number of reasons including: increasing earnings per share, meeting stock option obligations, establishing a floor price for the stock, contracting the business, as well as preventing a hostile takeover.

When a company reacquires common stock, it can hold them as treasury shares. This enables the company to reissue the securities in the future.  Alternatively, it can decide not to reissue the shares held in treasury, and retire the stock.

The accounting approach to the retirement of treasury stock will depend on whether the company used the par or cost method when the treasury shares were reacquired.

  • Cost Method: the journal entries for this transaction under the cost method would involve debits to Common Stock, Paid-in Capital in Excess of Par, and Retained Earnings (if the share price was higher than the price when issued), while the transaction would also involve a credit to the Treasury Stock account.
  • Par Method: the journal entries for this transaction under the par method would involve a credit to Common Stock and a debit to Treasury Stock.

Example

Ten years ago, Company A issued 1,000,000 shares of common stock with a par value of $0.01.  During the initial public offering, Company A was able to raise $20,000,000.  The journal entries to record the issuance of this common stock would be as follows:

  Debit Credit
Cash $20,000,000  
Common Stock: 1,000,000 shares, par value $0.01   $10,000
Paid-in Capital in Excess of Par   $19,990,000

Company A reacquired 100,000 shares at a price of $24.00.  The journal entry to record this transaction using the par method would be as follows:

  Debit Credit
Treasury Stock: 100,000 shares x $0.01 per share $1,000  
Paid-in Capital in Excess of Par: 100,000 shares x $19.99 per share $1,999,000  
Retained Earnings $400,000  
Cash   $2,400,000

Company A's board of directors subsequently decided to retire 50,000 shares of Treasury Stock.  The journal entry to record this transaction using the par method would be as follows:

  Debit Credit
Common Stock $500  
Treasury Stock: 50,000 shares x $0.01 per share   $500

Related Terms

par value stock, stock issuance costs, reacquisition of shares, treasury shares accounted for at cost, treasury shares accounted for at par, donated treasury stock