A stock redemption is an agreement between a corporation and a shareholder to purchase back shares of stock for cash. The stock, once purchased, goes into the corporation’s treasury stock account. Accounting for this transaction is necessary to maintain correct corporate records, with the transaction being recording in the company’s general ledger, as well as in the "Treasury Stock" and "Cash" accounts.
Account for the addition of the stock to the company’s "Treasury" account by debiting the total cost of the stock from the account.
Place an entry in the general ledge on the date of the purchase for the redemption. List the date of the transaction; then, on the first line of the listing, write "Treasury Stock" in the column for "Account Title and Description." In the "Debit" column, list the amount paid by the company to redeem the stock. This shows the addition of treasury stock held by the company in that amount.
Place an entry in the next line of the ledger, slightly indented for easy readability, in the "Account Title and Description" column, writing "Cash" in the column. Write the cash outlay for the redemption in the "Credit" column for that line to show that the company account is less than the amount of cash for the purchase. The credit amount should be equal to the earlier "Treasury Stock" debit amount.
Make a note in the next line down of the number of shares and purchase price of the shares for later clarity when reviewing the ledger.
Record the transaction in the "Treasury Stock" account as a debit to the account, increasing the balance of treasury stock held by the company; record the transaction in the "Cash" account as a credit, decreasing the amount of cash on hand.
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