Question

Discuss the propriety of showing:

1. Treasury stock as an asset.
2. “Gain” or “loss” on sale of treasury stock as additions to or deductions from income.
3. Dividends received on treasury stock as income.

Short answer

Transactions relating to the sale of treasury stock, dividends, and gains and losses of treasury stock are recorded under the shareholders’ equity section to be recorded in thebooks of accounts of the business.

Step-by-step solution

Explanation for treasury stock as an asset.

As a firm cannot own itself, treasury stock should not be recognized as an asset. Hence, it is required to be reported as part of the equity section.

Explanation for “gain” or “loss” on sale of treasury stock as additions to or deductions from income

Suppose a company calculates any gain or loss on the sale of treasury stock. In that case, it is required to report it in paid-up capital rather than adding or subtracting it to the business’s income and expenses. The gain or loss from the sale of treasury stock is not measured as an operating profit or loss.

A change in paid-in capital should be included for these gains or losses. In certain circumstances, it may be appropriate to allocate the “loss” to Retained Earnings.

Explanation for dividends received on treasury stock as income

Treasury stock dividends should never be reported as income; instead, they should be credited immediately to retained profits, against which they were previously charged.