Question: To illustrate the financial reporting of treasury stock, assume that the Chauncey Company has issued
ten million shares of its $1 par value common stock at an average price of $3.50 per share. The company now
reacquires three hundred thousand of these shares for $4 each. How is the acquisition of treasury stock reported?
Answer: Under U.S. GAAP, several methods are allowed for reporting the purchase of treasury stock. Most
companies appear to use the cost method because of its simplicity. The acquisition of these shares by Chauncey is
recorded at the $1.2 million (three hundred thousand shares at $4 each) that was paid.
Purchase of Three Hundred Thousand Shares of Treasury Stock at a Cost of $4 Each
Because the cost of treasury stock represents assets that have left the business, this account balance is shown
within stockholders’ equity as a negative amount, reflecting a decrease in net assets instead of an increase.
Except for possible legal distinctions, treasury stock is the equivalent of unissued stock. It does not receive
dividends and has no voting privileges.
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