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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Treasury Stock

Treasury stock consists of a corporation's own stock which has been issued, subsequently reacquired by the firm, and not yet reissued or canceled. Treasury stock does not reduce the number of shares issued but does reduce the number of shares outstanding, as well as total stockholders' equity. These shares are not eligible to receive cash dividends. Treasury stock is not an asset although, in some very limited circumstances, it may be presented as an asset if adequately disclosed (ARB 43, Ch. 1A). Reacquired stock that is awaiting delivery to satisfy a liability created by the firm's compensation plan or reacquired stock held in a profit‐sharing trust is still considered outstanding and would not be considered treasury stock. In each case, the stock would be presented as an asset with the accompanying footnote disclosure. Accounting for excesses and deficiencies on treasury stock transactions is governed by ARB 43, Ch 1B, and APB 6.

Three approaches exist for the treatment of treasury stock: the cost, par value, and constructive retirement methods.

Cost method

Under the cost method, the gross cost of the shares reacquired is charged to a contra equity account (treasury stock). The equity accounts that were credited for the original share issuance (common stock, paid‐in capital in excess of par, etc.) remain intact. When the treasury shares are reissued, proceeds in excess of cost are credited to a paid‐in capital account. Any deficiency is charged to retained earnings ...

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