ACC-632 -3-Mabaye 042924

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May 4, 2024

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LONG-TERM LIABILITIES AND EQUITY ASSIGNMENT 1 Accounting for Treasury Stock. Madjiadoum D. Mabaye School of Business, Liberty University Author Note Madjiadoum D. Mabaye I have no known conflict of interest to disclose. Correspondence concerning this article should be addressed to Madjiadoum D. Mabaye. Email: mmabaye@liberty.edu
LONG-TERM LIABILITIES AND EQUITY ASSIGNMENT 2 Long-Term Liabilities and Equity Assignment Case 15-3 Accounting for Treasury Stock. Page 570 Abstract Treasury stock is some outstanding shares of stock that the company buys back from shareholders because the stocks probably lost their value. Companies use it as a way to rebalance their capital. In finance theory, repurchasing a company's stock is a strategy to reacquire the stock that the company feels is underpriced. This, in turn, will reduce the company's assets and stockholders' equity. The following paragraphs will analyze and compare how corporations can purchase and reacquire their treasury stocks through cost and per-value methods. Key words: Reacquisition, capital stock, purchase, repurchase, treasury stock, par value, shares, greater than, less than, stockholder, retained earnings, debit, credit.
LONG-TERM LIABILITIES AND EQUITY ASSIGNMENT 3 When companies want to reduce their capital for one reason or another, they can repurchase and cancel the outstanding shares of stock. However, there are other ways to do it; a company can also choose to reduce its capital by acquiring shares on the open market without canceling them. While theory suggests stock repurchases can be used as positive signals about future cash flows in a way that benefits shareholders, prior research. Suggests that actual share reacquisitions in open market reacquisition programs often deviate substantially from the announced amounts (Cao et al., 2019). The reacquired shares are called treasury stock, and they reduce the company's assets and stockholder equity and result in a legal restriction on retained earnings (Schroeder et al., 2023, p.563). Generally, companies decide to reacquire their stock because management finds them underpriced in the market; therefore, they require them to offer their employee stock options. However, accounting for treasury stock classifies it into two categories: the cost method and the par value method. In the cost method, the presumption is that the shares acquired will be for resale and result in two events: (1) the corporation purchases the shares, and (2) shares are reissued to a new stockholder. The reacquired shares of stocks are recorded at cost. The amount is disclosed as negative stockholders' equity by deducting it from total capital until the shares are resold because they are the owners' transactions. Any difference between the acquisition and sales prices will be classified as an adjustment to paid-in capital. If insufficient additional paid-in capital is insufficient to offset any "loss," the charge will apply to retained earnings. Under the par value method, on the other hand, there is an assumption that the corporation's relationship with the original stockholder has ended. Further, the transaction is, in substance, a
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