Treasury Stock

Treasury Stock: Definition Treasury stock is the corporation’s own capital stock, either common or preferred, that has been issued and subsequently reacquired by the firm, but not canceled. Treasury Stock: Explanation Such stock, which is held in the corporate treasury, loses its right to vote, receive dividends, or receive assets upon liquidation. In computing earnings per share (EPS), treasury s…

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Accounting Methods for Treasury Stock

Accounting for treasury stock involves two general approaches: Cost method Par value method It is important to note that precise rules do not exist for either method. The following discussion focuses on the most straightforward types of transactions. Further, the equity accounts used are consistent with the simplified concept. That is to say, the general Additional Paid-In Capital account is used…

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Cost Method of Treasury Stock

Cost Method of Treasury Stock: Definition The cost method is based on the assumption that the acquisition of treasury stock is essentially a temporary reduction in stockholders’ equity that will be reversed when the shares are reissued. It is widely used due to its simplicity. Cost Method of Treasury Stock: Explanation When shares are acquired, the Treasury Stock account is debited and the Cash ac…

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Par Value Method of Treasury Stock

The par value method is based on the assumption that the acquisition of treasury stock is essentially a permanent reduction in stockholders’ equity. The entries used in the method are thus structured as if the shares have been retired. At the time of acquisition, the Treasury Stock account is debited for the par value of the shares, and Capital in Excess of Par is debited for the original amount p…

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Retirement of Treasury Stock

Occasionally, a corporation may repurchase its stock with the intention of retiring it rather than holding it in the treasury. 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. If all…

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Convertible Preferred Stock

What is Conversion? In some situations, stock of one class may be changed to stock of another class. The primary events producing this result are conversions and recapitalizations. Convertible preferred stock can be exchanged for shares of common stock at the request of the holder. Conversion can be forced, however, if the stock is also callable. Convertible Preferred Stock: Definition As an examp…

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Warrants

What are Warrants? Corporations occasionally issue a special kind of equity security known as a warrant. The holder of a warrant has the right to purchase a specified number of shares of stock at a stated price before an expiration date. Warrants, which are also known as stock rights and stock options, are often marketable and traded on exchanges. Sources of Warrants The value of warrants derives…

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Equity Compensation

As a method of aligning the goals of employees and stockholders, many corporations provide their key employees with part of their compensation either in the form of equity securities or based on the value of the firm’s stock. Compensation can be provided through shares of stock, warrants, and stock appreciation rights. There are four criteria for determining whether the granting of the securities…

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Stock Appreciation Rights (SAR)

Rather than offering shares or warrants to employees, many companies grant stock appreciation rights (SAR). Under these arrangements, employees do not have to buy shares but are rewarded just as if they owned them. For example, an executive might be entitled to receive a cash payment after four years amounting to the increase in the value of 10,000 shares of stock. As an alternative, part or all o…

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Quasi-Reorganization

The overall objective of accounting is to provide information to investors and creditors, helping them assess the likelihood, amounts, and timing of the firm’s cash flows. Accountants argue that this objective is most easily achieved if financial statements are presented in accordance with GAAP. However, if it is known that compliance with the usual accounting practice will produce misleading stat…

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