Do gains and losses arise on treasury stock transactions? Can retained earnings be increased or decreased as a result of treasury stock transactions?
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Every company has an authorized amount of stock it can issue legally. Of this amount, the total number of shares owned by investors, including the company's officers and insiders the owners of restricted stock , is known as the shares outstanding.
The number available only to the public to buy and sell is known as the float. Treasury stocks also known as treasury shares are the portion of shares that a company keeps in its own treasury. They may have either come from a part of the float and shares outstanding before being repurchased by the company or may have never been issued to the public at all. These stocks do not have voting rights and do not pay any distributions. However, in certain situations, the organization may benefit from limiting outside ownership.
Reacquiring stock also helps raise the share price, providing investors with an immediate reward. A company can decide to hold onto treasury stocks indefinitely, reissue them to the public, or even cancel them. When a business is first established, its charter will cite a specific number of authorized shares. This is the amount of stock the company can lawfully sell to investors. When the organization undergoes a public stock offering, it will often put fewer than the fully authorized number of shares on the auction block.
The shares it actually sells are referred to as issued shares. This is the portion of stock currently held by all investors. The number of outstanding shares is used to calculate key metrics such as earnings per share. The number of issued shares and outstanding shares are often one and the same.
But if the company performs a buyback , the shares designated as treasury stock are issued, but no longer outstanding. Additionally, if management eventually decides to retire the treasury stock, the amount is no longer considered issued, either.
If the treasury stock is revalued and sold above the basis, the balance sheet shows a debit to cash for all the money received. In the stockholders' equity section, the treasury stock account is credited with the total basis price, and the additional paid-in capital account is credited with the gain. If the treasury stock revalue amount is less than the basis, the money received is debited to the cash account, and the loss is debited to the additional paid-in capital account.
The cash amount received and the loss amount are added together and credited to the treasury stock account. If a company decides to retire its treasury stock, it uses the share price as of the repurchase date as the basis. If the retirement stock revaluation price is higher than the basis, the balance sheet shows the transaction as a debit to common stock at the basis price and a debit to paid-in capital for the amount over the basis.
Treasury stock is credited for the full amount. If the retirement stock revaluation price is lower than the basis, the transaction is shown as a debit to common stock at the basis price. A credit is made to paid-in capital for the amount under the basis and a credit is made to treasury stock at the basis price. Based in St. Petersburg, Fla.
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