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Accounting for Non-Accountants
If cash dividends were declared today, they would be paid only to the owners of the 110,000 shares; the corporation would not pay dividends to itself on the ten thousand shares of treasury stock. Dividends are paid only on outstanding stock, and treasury stock is not considered to be outstanding. Each corporation is authorized to issue a maximum number of shares as specified in the corporate charter. The number of shares authorized can be greater than or equal to the number of shares issued, but a corporation can issue no more shares than authorized. Most firms show the number of shares authorized, issued, and outstanding, in the Stockholders’ Equity section of the Balance Sheet. Notice in Figure 6.11 that the number of shares issued and authorized has not changed since the purchase of the treasury stock. The only change is to the number of shares outstanding. Even though the treasury stock is no longer outstanding, those shares are considered to still be part of the issued shares of the corporation.
Selling the Treasury Stock The company can hold, sell, or cancel its treasury stock. If the Solana Beach Bicycle Corporation sold four thousand shares of its treasury stock for $80 per share, its cash would increase by $320,000. Further, its Treasury Stock account would decrease by $280,000, which is equal to the four thousand shares being sold times its original cost of $70 per share. The difference between the $320,000 and $280,000 (or $40,000) represents an increase in Paidin Capital In Excess of Par, Treasury. This is also a Stockholders’ Equity account, thus we increase Stockholders’ Equity by the same amount as cash increases. After the sale of the four thousand shares of treasury stock, the Stockholders’ Equity section would look like figure 6.12: