Treasury Stock

Treasury Stock is stock that has been authorized and issued, but has been reacquired by the issuing corporation. When reacquired, the stock is no longer considered outstanding. Because Treasury stock represents the buying back of shares of stock, it reduces Stockholders' Equity, and thus, has a debit balance. It is possible that a corporation may "make money" by buying the treasury shares for a low cost and selling them later for a higher cost, but this would not be considered net income. Rather, it is just extra paid in capital from treasury stock.

1. Johnson Corporation was authorized to issue 100,000 shares of its $1.00 par common stock, and issued 50,000 shares at a price of $5.00 per share. Net income for the year was $25,000. The corporation bought back 1,000 shares of common stock to be used for executive compensation, at a cost of $4.00 per share.

Can you present the stockholders' equity section of the balance sheet at this point? How many shares of common stock are outstanding?

2. Continuing the previous problem, Johnson sold 400 of the treasury shares at a price of $6 per share. What effect would this have on the Stockholders' Equity section of the balance sheet?