Treasury stock retirement methods

On other occasions, the board may decide that shares of treasury stock should be formally retired and thus removed from the issued category. Whether this action is possible depends on state laws. If it is allowed, the journal entry depends on the method used to account for the acquisition of the shares.

Cost method

If the cost method is used, the entry is the same as for a retirement except that the Treasury Stock account is credited instead of the Cash account. For example, assume that 1,000 shares of $20 par value common stock (originally issued for $25) are held in the treasury. If their cost is $22 per share and they are retired, this entry would be made:

retirement of treasury stock journal entry

if the ts $33 per share, this entry would be recorded:

Cost method of retirement of treasury shares journal entry

The reasons for crediting Additional Paid In Capital and debiting Retained Earnings are the same as for retirements of newly acquired shares.

Par value method

If the treasury stock is recorded at par value (or its equivalent), the entry to record the retirement is uncomplicated If 1,000 shares of $20 par value treasury stock are retired, this entry is made:

Par Value method of retirement of treasury stock

In effect, the balance of the Treasury Stock contra account is closed into the balance of the Common Stock account.

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