How to Value Resale of Treasury Stock
Treasury stocks are referred to those shares which are reacquired or bought back by the issuing company in order to reduce the outstanding amount currently available on the open market. A company uses this route for tax-exemption purposes, where they buy back the shares rather than paying dividends on it.
In other instances, a company may not be satisfied with the valuation the market has put on its shares or simply may use it as an incentive package for employees, instead of paying cash. However, Treasury bonds have no voting rights and no dividends will be paid to the holder of those shares. Law further puts a limit on the proportion of these which cannot go above total capitalization.
Once the stocks are in possession of the company, they have the right to either cancel or reissue them. The valuation will largely depend upon various factors, taking into account current price associated with it. If the stock is still at par with the market price, any potential investor can buy the desired number of shares with no effect recorded in regards to the position of the company.
In other instances a company may be willing to negotiate the price of the stock, when deciding to resell it in a secondary market. The discount on offer will vary with the final price charged and according to the understanding between both parties.
However, whatever the case may be, a company will need to record the transaction in its books. The Treasury stock is usually referred to as a contra-equity account. This is because the company cannot own itself, and therefore will not treat it is an asset but instead increase or decrease the shareholders’ worth in the balance sheet.
There are usually two methods for accounting for Treasury stocks. In the cost method, the paid-in-capital account is lowered to show that the company has brought back the share. When the stocks are resold, the same account will be debited or credited depending on the price. In the par-value method, the company will debit the common stock account and credit the treasury stock account, reflecting retirement of the stock. However, the entry in the books will be recorded as per the cost method.
For instance, a company buys back 10000 shares at $15 each, and resells them at $20 each. In the first instance it will debit the Treasury stock account (150,000) and credit cash for the same amount. Upon reselling, it will debit the cash account for $200,000 and credit the Treasury account by $150,000, further crediting the Paid-in-Capital for the profit, which is $50,000.