2.22 TREASURY STOCK
Treasury stock consists of a Company’s own stock which has been issued, are subsequently reacquired by the Company. Treasury stock does not reduce the number of shares issued but does reduce the number of shares oustanding.. These shares are not eligible to receive cash dividends. Accounting for excesses and deficiencies on treasury stock transactions is governed by ASC 505-30-30.
State laws and federal agencies closely regulate transactions involving a company’s own capital stock, so the purchase of treasury shares must have a legitimate purpose. Some of the most common reasons for purchasing treasury shares are as follows:
(i)
to meet additional stock needs for various reasons, including newly implemented stock option plans, stock for convertible bonds or convertible preferred stock, or a stock dividend.
(ii)
to eliminate the ownerships interests of a stockholder.
(iii)
to increase the market price of the stock that returns capital to shareholders.
(iv)
to potentially increase earnings per share of the stock by decreasing the shares outstanding on the same earnings.
(v)
to make more shares available for a merger.
The cost method of accounting for treasury stock shares has been adopted by the Company. The purchase of treasury stock is treated as a temporary reduction in shareholders’ equity in view of the expectation to reissue the shares instead of retiring them. When the Company reissues the treasury shares, the temporary account is eliminated. The cost of treasury stock shares reacquired is charged to a contra account, in this case a contra equity account that reduces the stockholder equity balance.
