10RQ - Horngren'S Financial And Managerial Accounting

Question

What is treasury stock? What type of account is Treasury Stock, and what is the account’s normal balance?

Step-by-Step Solution

Answer

Treasury Stock refers to previously outstanding stock repurchased from stockholders by the issuing company. It is a contra equity account with a normal debit balance.

Step 1: Treasury stock

Treasury stocks are the portion of a company's stock that are previously issued and then bought back.

For example, ABC company buys back its shares for $200 million. The company shall record this in shareholder equity on the balance sheet. It will record $200 million as cash under (credit) and $200 million as treasury stock (debit). 

 

Companies purchase treasury stock to increase net assets (buying low and selling high), support the company's stock price, stay away from a takeover, and reward esteemed employees with stock.

Step 2: Account and normal balance-

An account's normal balance alludes to the debit or credit balance that's normally expected from an entry. This concept is ordinarily utilized in the double-entry accounting method.

The normal balance of treasury stock is a debit balance, which is the opposite of the normal balance of an equity account.