How to Account for Stock Retirement
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10 ماه پیش
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When a company repurchases its
When a company repurchases its own shares and immediately retires those shares (cancelling the shares and removing them from circulation), this reduces the number of shares issued and outstanding.
So what's the journal entry? It depends on whether the repurchase price is higher or lower than the original issue price of the shares.
If the repurchase price is LOWER than the original issue price of the shares, then the company (1) decreases the common stock and additional paid-in capital accounts, (2) decreases the cash account, and (3) credits an account called "paid-in capital - share repurchase" to make the total debits equal the total credits (so the journal entry balances).
If the repurchase price is HIGHER than the original issue price of the shares, then the company (1) decreases the common stock and additional paid-in capital accounts, (2) decreases the cash account, and (3) reduces the retained earnings account (but first reduces the "paid-in capital - share repurchase" account if that account has a balance).
The main difference between these two scenarios is that in one case, the "paid-in capital - share repurchase" account is credited to make the journal entry balance while in the other case the retained earnings account is debited to make the journal entry balance.
The accounting approach outlined in this video is sometimes called the "constructive retirement method."
In no case does the company record a gain or a loss, as these transactions only affect balance sheet accounts.
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So what's the journal entry? It depends on whether the repurchase price is higher or lower than the original issue price of the shares.
If the repurchase price is LOWER than the original issue price of the shares, then the company (1) decreases the common stock and additional paid-in capital accounts, (2) decreases the cash account, and (3) credits an account called "paid-in capital - share repurchase" to make the total debits equal the total credits (so the journal entry balances).
If the repurchase price is HIGHER than the original issue price of the shares, then the company (1) decreases the common stock and additional paid-in capital accounts, (2) decreases the cash account, and (3) reduces the retained earnings account (but first reduces the "paid-in capital - share repurchase" account if that account has a balance).
The main difference between these two scenarios is that in one case, the "paid-in capital - share repurchase" account is credited to make the journal entry balance while in the other case the retained earnings account is debited to make the journal entry balance.
The accounting approach outlined in this video is sometimes called the "constructive retirement method."
In no case does the company record a gain or a loss, as these transactions only affect balance sheet accounts.
—
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
—
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
* http://eepurl.com/dIaa5z
—
SUPPORT EDSPIRA ON PATREON
*Patreon: prof_mclaughlin
—
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
* https://edspira.thinkific.com
—
LISTEN TO THE SCHEME PODCAST
* Apple Podcasts: https://podcasts.apple.com/us/podcast...
* Spotify: https://open.spotify.com/show/4WaNTqV...
* Website: https://www.edspira.com/podcast-2/
—
GET TAX TIPS ON TIKTOK
* TikTok: prof_mclaughlin
—
ACCESS INDEX OF VIDEOS
* https://www.edspira.com/index
—
CONNECT WITH EDSPIRA
* Facebook: Facebook: Edspira
* Instagram: Instagram: edspiradotcom
* LinkedIn: LinkedIn: edspira
—
CONNECT WITH MICHAEL
* Twitter: Twitter: Prof_McLaughlin
* LinkedIn: LinkedIn: prof-michael-mclaughlin
—
ABOUT EDSPIRA AND ITS CREATOR
* https://www.edspira.com/about/
* https://michaelmclaughlin.com
10 ماه پیش
در تاریخ 1402/08/15 منتشر شده
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