Retirement of treasury stock

By: Rashid Javed | Updated on: October 19th, 2021

The companies buyback their own shares (treasury stock) with the intention to either retire them permanently or reissue them at a future date. This article explains the retirement of treasury stock under cost method and par value method. If you want to understand how shares from treasury stock are reissued, please read the following articles:

Retirement of treasury stock-cost method

Under cost method, the journal entry for the retirement of treasury stock is made by debiting the common stock with par value of shares being retired, debiting additional paid-in capital (if any) associated with the shares being retired and crediting treasury stock with the cost of shares being retired.

If the repurchase price of shares is higher than their price at the time of original issuance, the credit part of the journal entry exceeds the debit part and in that case retained earnings account is debited with the balancing amount to make the debit and credit part of the entry equal.

The journal entry for the retirement of treasury stock under cost method usually looks like the following:

retirement-of-treasury-stock-img1

Retirement of treasury stock – par value method:

Under par value method, the common stock is debited and treasury stock is credited with the par value of shares to be retired. The journal entry for the retirement of treasury stock under par value method looks like the following:

retirement-of-treasury-stock-img2

Consider the following example for a better explanation of the retirement of treasury stock under two methods.

Example:

The American company issued 5,000 shares of its $5 par value common stock at $8 per share. Later, the company bought back 1,000 shares at $12 per share and immediately retired them.

Required: Prepare journal entries for issuing, buying back and retiring the shares assuming the company accounts for treasury stock related transactions using:

  1. cost method.
  2. par value method .

Solution:

Journal entries under cost method:

(1). When 5,000 shares are issued:

retirement-of-treasury-stock-img3

(2). When 1,000 shares are bought back – cost method:

retirement-of-treasury-stock-img4

(3). When 1,000 shares are retired – cost method:

retirement-of-treasury-stock-img5

*Additional paid in capital associated with 1,000 shares: 1,000 × ($8 – $5).
**Retained earnings account has been debited with the remaining amount: ($12,000 – $5,000 – $3,000).

Journal entries under par value method:

(1). When 5,000 shares are issued:

retirement-of-treasury-stock-img6

(2). When 1,000 shares are bought back – par value method:

*Additional paid in capital associated with 1,000 shares: 1,000 × ($8 – $5).
**Retained earnings account has been debited with the remaining amount: ($12,000 – $5,000 – $3,000).

(3). When 1,000 shares are retired – par value method:

retirement-of-treasury-stock-img8
A D V E R T I S E M E N T
3 Comments on Retirement of treasury stock
  1. Victoria Metzler

    I do understand the accounting entries for a share repurchase and the retirement of treasury stock, however, I do not understand the rationale why a company would retire treasury stock that actually has a value. It could be used for acquisitions, employee compensation or sold to shareholders. So why would a company retire treasury stock?

    1. Ray

      To increase the value of stock. The less shares you have, the higher its value. Think of this like the opposite of a stock split. Also, treasury stock decreases stockholder’s equity.

  2. Ita

    When retiring the treasury stock, the cost of treasury shares is lower than its par value and even than its additional paid in capital (premium share), it is possible to credited the retained earning? Or we adjust the exceed to account additional paid in capital (share premium)?
    Most common I see, the case was retained earning was debited.

    Thank you

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