What is treasury stock? What type of account is Treasury Stock, and what is the account’s normal balance?

Short Answer

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Treasury Stock refers to previously outstanding stock repurchased from stockholders by the issuing company. It is a contra equity account with a normal debit balance.

Step by step solution

01

Treasury stock

Treasury stocks are the portion of a company's stock that are previously issued and then bought back.

For example, ABC company buys back its shares for $200 million. The company shall record this in shareholder equity on the balance sheet. It will record $200 million as cash under (credit) and $200 million as treasury stock (debit).

Companies purchase treasury stock to increase net assets (buying low and selling high), support the company's stock price, stay away from a takeover, and reward esteemed employees with stock.

02

Account and normal balance-

An account's normal balance alludes to the debit or credit balance that's normally expected from an entry. This concept is ordinarily utilized in the double-entry accounting method.

The normal balance of treasury stock is a debit balance, which is the opposite of the normal balance of an equity account.

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Most popular questions from this chapter

Question: Identifying sources of equity, stock issuance, and dividends

Tillman Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—5%, ? Par Value; 625,000 shares

authorized, 325,000 shares issued and outstanding

Paid-In Capital:

\( 1,300,000

1,350,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,600,000

Total Paid-In Capital 5,250,000

Retained Earnings 11,800,000

Total Stockholders’ Equity \) 17,050,000

Common Stock—$1 Par Value; 7,000,000 shares

authorized, 1,350,000 shares issued and outstanding

Requirements

3. Make two summary journal entries to record issuance of all the Tillman Comfort Specialists stock for cash. Explanations are not required.

What are the two basic sources of stockholders’ equity? Describe each source.

Computing earnings per share

HEB Corporation had net income for 2018 of \(60,450. HEB had 15,500 shares of common stock outstanding at the beginning of the year and 20,100 shares of common stock outstanding as of December 31, 2018. During the year, HEB declared and paid preferred dividends of \)2,600. Compute HEB’s earnings per share.

Rocky Corporation’s accounting records include the following items, listed in no particular order, at December 31, 2018:

Other Income and (Expenses) \( (6,000) Cost of Goods Sold \) 29,200

Net Sales Revenue 70,800 Operating Expenses 22,000

Gain on Discontinued Operations 4,800

The income tax rate for Rocky Corporation is 30%. Prepare Rocky’s income statement for the year ended December 31, 2018.

Omit earnings per share. Use a multi-step format

On August 1, Hagino Corporation declared a $1.50 per share cash dividend on its common stock (20,000 shares) for stockholders on record as of August 15. Hagino paid the dividend on August 31. Journalize the entries declaring the cash dividend and paying the dividend.

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