 Hello in this lecture. We're going to be talking about Treasury stock at the end of this We will be able to Define what Treasury stock is that journalize the purchase of Treasury stock and journalize the sale of Treasury stock So the equity section being what is generally different when we go from a sole proprietor to a partnership to a corporation Part of the equity section being Treasury stock so we can take a look at that equity section drill in on these types of Transactions we're going to start off with our trial balance so we can see the big picture as we go through our Transactions related to the equity section related to Treasury stocks. We've got our assets here Debits has no brackets around it. So we're representing debits by positive or non-bracketed numbers We have the liabilities with accounts payable and common and dividends payable and then we've got the equity section This is of course where we will be focusing in on the major pieces of the equity section for a corporation being the common stock Traditionally and the retained earnings now There's a couple other accounts related to them Of course common stock being what was issued in terms of stock kind of like an investment But if it's issued at a par value then we're gonna say it's at the stated rate the stated par value And that's kind of like a made-up number We only do that just to make all the common stocks basically the same so that if we looked at the financial statement And we saw 500,000 it was $10 par value We can then divide those two out and say well, there must be 50,000 shares out there It's kind of like poker chips if we went to a casino we want them all to be saying the same However, the $10 par value is not market value. And that's the thing that's kind of remember when we are issuing the stock We're not going to issue it to other people for par value if they were willing to pay more par value Normally being below market value Therefore anything that's paid to us above the par value Then we will accept that and when we record that journal entry for example When this was recorded if we recorded it all at one transaction if we sold all the stock at one time Then we would have got a 560,000 and we would debit cash by that 560 and then we would credit common stock for the par value of 500,000 because we sold 50,000 shares at $10 par even though we got 560 and the difference would go to the paid in capital So that's what this paid in capital is these two numbers here represent basically the investment and then the retained earnings Then traditionally is the amount of income that has been retained over the year So if we looked at a sole proprietor, we'd have one capital account that capital account would be the net investments And it would include basically the retained earnings note that when we look at a corporation We're basically just breaking those two things out. We're saying hey, this is the investments That's different than the retained earnings the amount of money that we have earned throughout the time period Why is that important? One reason that's important is that when we distribute the retained earnings if it's we're a C corporation We need to determine whether it was earnings that were received that are going to be received by That the shareholders or if it was a return on capital one reason is because their tax differences So we basically need to break those two things out if it's a Dividend then they're going to be taxed on it if it's a return on capital then the taxes could be different on it So we need to make sure that those two things are different We will now be focusing in on treasury stock. So what we're going to do is buy back our own stock So this is going to be another fairly unusual kind of transaction when we look at a corporation Not every corporation is going to be buying back for their own stock But it is very possible to do so meaning if our stock is out there on the stock exchange We may want to actually purchase it back for various reasons We might want to be adjusting the price of the amount of stock is out there similar to if you think about how much money is out Out in the market that's the Federal Reserve may put more money or less money out into the market in order to Make some adjustments in terms of the value of the dollar Similar time of things may be done in terms of purchasing back the stock from the market So what we're going to say here is we're going to purchase back our own stock That's going to be treasury stock So we issued our stock into the market the 50,000 shares and now we're going to say we're going to buy some of that back And we're going to say that we're going to buy 5,000 of our own shares from somebody else Not ourselves because somebody else owns are the shares the corporate stairs So the management decided to purchase shares from the market and we're going to buy 5,000 shares at $25 or 125,000 so the question is of course, how do we record this if it we were to buy someone else's shares We were buying shares in Apple then of course We would just credit the 125,000 cash that we would pay and we would debit Investments some type of investment account an asset account in Apple now and the cash is still the same here We still paid 125,000 so we know that is cash affected. Yeah, cash is the debit balance We're gonna make it go down by doing the opposite thing to it. We're gonna credit cash I would always think about cash first and say cash is gonna be credited So we know that we're gonna have a credit to cash. This is what's gonna happen to cash It's the debit balance. We're gonna credit it. It's gonna go down on the trial balance. What's the other side We know that we're gonna have to debit something we're gonna debit treasury stocks when we buy back our own stock That's gonna be called treasury stock It's a debit just like if we put an asset on the books the journal entry looks pretty much the same Except the fact that when we post it note where treasury stock is it's down here on the equity section And that's the only thing that really difference and a lot of the transactions will look at if we purchase somebody else's stock We would still debit the stock the investment and we would credit cash But in that case somebody else's stock would of course be investment to us when we purchase back our own stock It's gonna be in the equity section here And that's because of course it's our own stock So if we were to look at the full trial balance pull over all the numbers We would have the effect here cash is going down treasury stocks going up What does that do to total equity? It of course brings total equity down being This plus this minus this plus this would be the total equity that we're talking about here And let's take a look at the next transaction. Let's say we declared a dividend now So we're gonna say there's a $2 dividend per share So dividends being like a draws for a corporation except for the fact with a draw the Individually the per the corporate owner the draw of the sole proprietor can draw anytime they want or the draws for a partnership They can decide when to make the draw in terms of a corporation You may you need to make a decision on the corporate level because once we declare a dividend all stocks being the same all Dividends need to be the same So it's not like one shareholder can take a draw like we could in a Sole proprietor a partner and the nut other one can't all dividends need to be the same So if we declare a dividend then how are we gonna record that we're gonna say the common stock Outstanding was fifty thousand, but we're not gonna pay basically a dividend to our sales So we're gonna have to track the amount of treasury stocks out there That the trial balance note only gives us the number that we purchased it for in dollars, of course So what we're gonna have to do is have some other tracking in terms of How many treasury stocks did we purchase and that may not be Present on something like a trial balance. You're gonna have to track that separately, but we know we purchased 5,000 That means we have 45,000 After the treasury stock and then if we multiply that times two dollars two dollar dividend We're gonna say we have dividends of 90,000 in this case so now that's what we're gonna record just remember we got to remove the treasury stock when we issue Dividends that's the point here. What's the journal entry gonna be? We may first ask is cash affected Remember when we issue the dividend cash may not be affected and that's because there's gonna be a couple points There's like some bureaucracy we have to go through when we issue a dividend more so than we take a draw If we took a draw out we can just say okay, we're gonna credit cash And we're gonna debit the draw account or the capital account draw counting Equity is gonna go down here We're gonna have to basically declare the dividend and then we're gonna have to see when what's point in time Is it gonna be that those dividends are gonna go out to the shareholders at that point in time? And then we're gonna have to finally pay out to the dividend So we have a bit more of a process for the recording of the dividend therefore first We're gonna record the dividend. It's gonna come out of retained earnings so remember retained earnings is kind of like the capital account remember the capital account for a partnership has Both the the accumulation of retained earnings accumulation of income and the investment and here they're broken out the investments up here Common stock retained earnings is just the accumulation less anything that's been taken out So we're gonna reduce that it's a credit balance It's gonna go down by the ninety thousand and that's gonna reduce the retained earnings And then the other side at this point isn't gonna go to cash yet We didn't get pay cash gonna come out of the common dividends payable So we're gonna make a liability account saying we declared the dividend We know we owe the dividend and we're going to pay it out Once we get through with the bureaucratic process of declaring the dividend and deciding who's gonna get the dividend Depending on who's holding the stock at the time That we decide therefore the liability is gonna go up to 90,000 and there's the declaration of the dividend if we pull over all other accounts then we've got the dividend payables going up to the 90,000 the credit and the retained earnings then it's going down credit balance is gonna be debited doing the opposite making it go Down we're back in balance no effect on net income The next step in the declaration of the dividend or the dividend process is of course paying the dividend So we're gonna decide what point in time people are gonna get paid depending on who's gonna owe the dip own The stock at that point of time. There's those are the individuals that will receive the payment on the dividend So now we'll actually pay the dividend. So is cash affected here? We're gonna say yeah We're actually gonna pay out the dividend to the owners So cash is gonna go down by that 90,000 that we declared and the debit then is gonna go to the payable that we have here So cash is gonna go down and the debit's going to the payable So we owed the 90,000 that we put on now. We're actually gonna pay it out 90,000 is gonna be Debited bringing it down to a 90,000 credit We're gonna debit 90,000 bringing the payable back down to zero and now the dividend process has been completed If we bring in all the other numbers, of course cash goes down The dividend payable goes down no effect on net income down here for a dividend as is the case with something like a draw Now we're gonna sell treasury stocks So we're gonna say we're gonna sell some of the 1500 treasure in stock that we purchased of our own company for $30 so this treasury stocks on the books this notice that doesn't give us the total amount of treasury stocks We have on the books on the trial bounce. That's the dollar amount that we purchased it for We're gonna have to look up how many shares we had and how much they cost us in a similar way We would if we bought some other stock We had some other investment in like Apple up here and we sold some Apple stock Then we'd have to say okay What was the cost of that stock because we may not have sold all the stock that we had then purchased same thing here We're not gonna sell everything that we just purchased. We're only selling 1,500 shares Therefore we're gonna do some calculation here. We're gonna bring up our table. We're gonna say the sales price 1,500 times $30 means we're gonna receive $45,000 for it. So we put it back on the market. Someone was willing to pay $30 for it Even though the cost of what that 1,500 remembered was only $25 So this is reported at $25 per share. That's on the trial bounce and we sold it of course for $30 Therefore 1,500 times 25 means that we have a cost for those 1,500 shares of 37,500 And the difference we can calculate a couple different ways. We can take the difference here 7,500 we can also take that 1,005 times the difference per share 30 minus 25 1,005 minus 30 times 5 brings us to that 7,500 So those are two ways we could basically get to that same number now The thing is if this was a sale of someone else's stock and not our own Treasury stock that 7,500 Would be a gain in this case We sold it for more than we purchased it for but of course it being Treasury stock we're gonna have to deal with that Let's work through the journal entry close to what we know and then see how we're gonna have to deal with that 7,500 know what to make the journal entry balance out. So we're gonna say that cash is gonna go up We got 45,000 so cash is gonna go up by the 45,000 and it's gonna be a debit to cash Then the Treasury stock we know has to go down. This is the Treasury stock. It's light It's so it looks just like someone like an asset It looks like an asset account that if we had someone else's investment acceptance in the equity section It has a debit balance We need to make it go down because we sold some of it for 37,500 So we're gonna credit it 37,500 and then of course we have this problem that the debits don't equal the credits Because we sold it for more than we purchased it for and that difference that 7,005 we're not gonna put to gain as we would if it was some other stock because it's our own stock What we're gonna do is just park it here in this in this equity account called paid in capital on Treasury stock So paid in capital on Treasury stock is going to go up in this case in the credit direction It's gonna increase the equity accounts. So that's gonna be kind of the tricky thing with Treasury stock Everything else is basically the same as if we bought someone else's stock except The Treasury stock is in the equity section and we have this next paid in capital That will be on the books until the Treasury stock is it's fully Resold out and we'll have to clear those two things out and we'll see that process next if we pull over all the other accounts Is what we have cash is going up and we've got the Treasury stock is going down the paid in capital here No effect on The income statement no effect on net income now. We're gonna sell the rest of the Treasury stock We're gonna sell the remaining 3500 shares and this time we sold them for $20 so instead of being able to get a market price of 30 now We have a market price of 20 we're gonna see what happens there and we're gonna see what happens when we clear out the Treasury stock We're gonna have to deal with the fact that we have this paid in capital account That means gonna it's gonna have to go to zero once we get rid of all the Treasury stock in some way as well So let's see what that process looks like. We're gonna say the sale for 3500 shares at $20 multiplying that out gives us $70,000 We're gonna say that the cost then is that 3500 times what we paid for our stock when we purchased it would be the $25 and that means that we the cost was 87,500 for those 3500 shares Therefore we have a loss in this case of 17,500 on that transaction again We're gonna have to deal how we're gonna deal with that gain or loss But if it was a normal transaction It would be a loss meaning the cost that we purchased it for is more than the sale price that we pay for We could also calculate that by 3500 times the 20 minus the 25 five dollar loss per share would it give us the 17,500 now when we journalize this we're gonna say okay, it's cash affected. Yeah, we got 70,000 cash is gonna go up by the 70,000 then we're gonna have to take the Treasury stock off the books We can do that we can say that two different ways we can say well Yeah, Treasury stock is gonna go off by that 70 87,500 We also know that we sold all the remaining shares of stock Therefore this account needs to be at zero at the end of this because we sold all the stock that we had So there's the 87,500 bringing it down to zero now the next piece of this is that normally we would just say Okay, the 17,500 is the difference and last time we just kind of put that into the pagan capital account But we can't really do that this time because if we put the 17,500 into the paid in capital account What will happen is that it will still have a balance in it and it can't still have a balance in it if we have no Treasury stock So these two accounts are linked it doesn't make any sense to have something in paid in capital and have no Treasury stock So if this is at zero that means this needs to be at zero So that's why it's important to really look at a trial bounce or have the t-accounts when you're working through these problems It'll help you out and you're saying well this logically needs to be zero once we're done with this process Therefore that 7,500 is a credit we need to debit it by that 7,500 now we can put in the plug We could say instead of the plug being that 17,500 we're gonna say you debits minus the credits here Post that out first debits minus the credits will be that 10,000 So if we take the this plus this minus this we're gonna need another debit of 10,000 or in order for the 70 plus the 75 Plus the 10 equal to 87.5. That's gonna be the plug. Where's it gonna go? We're gonna put it into retained earnings. So that that process just basically have to remember that at the end of this process When we sell off all the Treasury stocks, what's gonna happen? We're gonna have to make Treasury stock go to zero We're gonna have to make a painting capital go to zero and then the difference is gonna go to retained earnings in order to make our Journalogy balance out. That's basically how it's gonna work. So there's the 10,000 here. It's basically reducing Retained earnings because it's a debit and retained earnings is a credit balance account bringing retained earnings down if we look at the full transaction here We've got cash. We've got the Treasury stock back at zero We've got the painting capital going down to zero and then we had to put the 10,000 decrease in retained earnings No effect on net income from the transactions related to Treasury stock