Treasury Stock Facts Target Inc. arranged to purchase a large block of its common stock from a major shareholder. The total number of shares purchased is 10,000 and these shares are to be held as treasury shares. Target Inc. uses the cost method to account for treasury shares. This shareholder had a controlling interest before the transaction. After the transaction this shareholder no longer has a controlling interest. Given these facts, to induce the shareholder to sell the block of stock Target Inc. was forced to pay an amount in excess of the current market price of the stock. Target Inc. paid the shareholder $40 per share when the market price was $30 per share. Question How should Target Inc. account for the purchase of this treasury stock?a. Provide a brief written description of the proper accounting treatment, including how the extra $10 paid per share is recorded. b. Prepare a formal journal entry to record the treasury stock transaction. c. Identify the specific paragraph of the FASB Codification which addresses this issue.

Target Inc.

a. Under the cost method, as adopted by Target Inc., the cost of acquiring the treasury stock is debited to the Treasury Stock account and credited to the Cash account.  This means that there is no differentiation of the extra $10 just as there is no differentiation between the par-value and the cost of acquiring each share.

b. Journal Entry:

Debit Treasury Stock $40,000

Credit Cash $40,000

To record the repurchase of 10,000 shares at $40 each.

c. The FASB Codification which addresses Treasury Stock accounting is called Codification Topic 505-30.  The cost of treasury stock is reported separately from the gain or loss.

Explanation:

a) Data and Calculations:

Total number of shares purchased = 10,000

Price paid for the purchase = $40

Market price of the share = $30

Extra cost paid = $10

b) Two methods are adopted for recording treasury stock.  There is the par-value method.  This method records the treasury stock at the par value multiplied by the number of treasury stock.  The difference in the purchase cost and the par-value is then recorded in the Additional Paid-in Capital account.  The other method is the cost method.  Here, the cost of acquiring the treasury stock (not the par-value) is recorded in the Treasury Stock account, with a credit entry to the Cash account. Treasury Stock account is a contrary account to the stockholders' equity, and as a result, is a deduction from the amounts in the Stockholders' Equity in the balance sheet, in both cases.

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