How does the cost method for treasury stock work, and what are the journal entries for repurchase and reissue?

The cost method is the most widely used approach for treasury stock under US GAAP. Under this method, treasury stock is recorded at the repurchase cost and appears as a contra-equity account on the balance sheet.

Step 1: Repurchase

When a company buys back its own shares:

• Debit: Treasury Stock (at cost)
• Credit: Cash

Step 2: Reissue Above Cost

If treasury shares are reissued at a price HIGHER than the repurchase cost, the excess goes to Additional Paid-in Capital — Treasury Stock (APIC-TS):

• Debit: Cash (reissue price × shares)
• Credit: Treasury Stock (repurchase cost × shares)
• Credit: APIC — Treasury Stock (the excess)

Step 3: Reissue Below Cost

If reissued at a price LOWER than cost:

• Debit: Cash (reissue price × shares)
• Debit: APIC — Treasury Stock (to the extent of prior credits)
• Debit: Retained Earnings (any remaining shortfall)
• Credit: Treasury Stock (cost × shares)

Worked Example — Silverline Corp:

Silverline has 1,000,000 shares outstanding ($1 par, originally issued at$20). The company repurchases and later reissues shares:

Transaction 1: Repurchase 50,000 shares at $28

Account	Debit	Credit
Treasury Stock	$1,400,000
Cash		$1,400,000

Transaction 2: Reissue 20,000 shares at $32

Account	Debit	Credit
Cash	$640,000
Treasury Stock		$560,000
APIC — Treasury Stock		$80,000

Excess = (32 − 28) × 20,000 = $80,000

Transaction 3: Reissue 10,000 shares at $24

Account	Debit	Credit
Cash	$240,000
APIC — Treasury Stock	$40,000
Treasury Stock		$280,000

Shortfall = (28 − 24) × 10,000 = $40,000. First offset against APIC-TS (which has$80,000 balance), so no hit to retained earnings.

Balance Sheet Presentation: Treasury stock is shown as a deduction from total stockholders' equity — it is NOT an asset.

Key Exam Points:

1. Treasury stock reduces total equity and shares outstanding (but not shares authorized).
2. Treasury shares have no voting rights and receive no dividends.
3. Gains on reissue go to APIC, never to income. Losses go to APIC first, then retained earnings — never to the income statement.
4. EPS calculation uses weighted-average shares outstanding, which excludes treasury shares.

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