How do you record the retirement of shares?
OverviewIn business, the company may decide to retire the treasury stock that it has bought back in order to increase the value of its stock. Likewise, the company needs to make the journal entry for retiring treasury stock when it decides to not reissue the treasury stock back to the market. Show The journal entry for retiring treasury stock may be different from one company to another depending on whether the reacquisition cost of such stock is more or less than the amount the company received when the stock was originally issued. For example, if the reacquisition cost of the treasury stock is more than the amount the company received when the stock was originally issued, there will be retained earnings account in the journal entry; on the other hand, if it is less, there will be the paid-in capital account from the retirement of stock. Retiring treasury stock later after buying back the stock will not affect total equity on the balance sheet. However, the number of outstanding shares on the market will be reduced as a result. Journal entry for retiring treasury stockReacquisition cost equal amount received from issuing The company can make the journal entry for retiring treasury stock by debiting the common stock account at the par value and its additional paid-in capital account and crediting the treasury stock account if the reacquisition cost equals the amount the company received when the stock was originally issued.
In this journal entry, there is no impact on total equity on the balance sheet as the debits and credit are all in the equity section. All it does is removing all items that are related to the retired stock from the balance sheet. Of course, the number of outstanding shares on the market will be reduced as a result of retiring the treasury stock. Reacquisition cost is more than amount received from issuing However, the treasury stock tends to be bought back at a higher price than it was originally issued. Hence, there will usually be a difference between the amount received from issuing the stock and the cost of buying it back. Likewise, if the company decides to retire the treasury stock after buying back at a higher price, it can make the journal entry for retiring treasury stock by debiting the difference between the cost of buying back and the amount the company received when the stock was issued into the retained earnings account.
Reacquisition cost is less than amount received from issuing On the other hand, if the cost of buying treasury stock is less than the amount that the company received when it was issued, the company needs to credit the difference into the paid-in capital from the retirement of stock instead.
Retiring treasury stock exampleFor example, on August 31, the company ABC decides to buy back 100,000 shares of its common stock for $500,000. Later, on September 30, the company ABC decides to retire these 100,000 shares in order to increase the value of stock in the company. These 100,000 shares were originally issued at $3 per share and they have the par value of $1 per share. What is the journal entry on August 31 and the journal entry for retiring the 100,000 shares of the treasury stock on September 30? Solution: On August 31 When the company ABC buys back the 100,000 shares of its common stock for $500,000, it can make the journal entry as below:
In accounting, the purchase of treasury stock needs to be recorded at cost. Likewise, the company ABC can record the $500,000 in the journal entry as the increase of treasury stock without concerning what is the par value or what is the original issued price of the stock. On September 30 When the company retires the 100,000 shares of treasury stock, it can make the journal entry for retiring treasury stock as below:
In this journal entry, the company ABC needs to debit the $200,000 into the retained earnings account. This is due to the reacquisition cost of the 100,000 shares is $200,000 more than the amount that the company ABC received when those shares were issued. $500,000 – (100,000 shares x $3 per share) = $200,000 Example 2 For another example, assuming the company ABC only pays the amount of only $200,000 on August 31, for reacquisition of the 100,000 shares of the stock above instead. In this case, the cost of buying back the treasury stock is $100,000 less than the amount the company ABC received which was $300,000 ($100,000 x $3 per share) when it issued the stock. Likewise, the journal entry on August 31, and that on September 30 will be as below: On August 31 As the company ABC pays only $200,000 for buying back the stock, the journal entry will be as below instead:
On September 30 On September 30, as the reacquisition cost is $100,000 less than the amount the company received when the stock was issued, it can record the $100,000 into the paid-in capital from the retirement of stock as below:
It is useful to note that when the company decides to buy back the stock and retire them immediately, it can just debit the common stock account and its related items and credit the cash account for the amount it pays for (as well as debit or credit the difference in an appropriate account as mentioned above). In this case, there will be no treasury stock account included in the journal entry. What happens when you retire shares?Once a company has completed its share buyback, it can retire those shares, hold them for release back into the market at a future date, or provide them to employees as a form of compensation.
Does retiring shares impact net income?Essentially, a corporation retires its stock for some of the same reasons that it purchases treasury stock. Like treasury stock transactions, income or loss for the current period is not affected, nor can retained earnings be increased when capital stock is retired.
What account should be debited when a loss on retirement of treasury shares is recorded?A loss on the reissuance of treasury shares may be debited to additional paid-in capital to the extent previous net gains from sales or retirements of the same class of stock are included in additional paid-in capital. Any losses in excess of that amount should be charged to retained earnings.
How and in what form the retirees share is to be given?Answer:- Retired shares are shares repurchased and canceled by a company. The shares reduce the number of authorized shares by the company. The two most common methods to account for the buyback and retirement of shares are the cost method and the constructive retirement method.
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