There is no guarantee, however, that stock repurchases will result in more returns to shareholders. For more in depth discussion, please see treasury stock.

Keep in mind that under the cost method the treasury shares were never taken out of the common stock account. Instead, the treasury shares account reduces the total common shares in the balance sheet as a separate temporary contra account, so when they are reissued they reduce the amount of treasury shares in the temporary contra account, but remain in the permanent equity account, common shares.

If the company does decide to actually retire the treasury shares, a separate entry must be made to eliminate the common stock and increase treasury share account.

The par value method, on the other hand, reduces the common stock account directly.

The treasury shares account is maintained at the original purchase price ($5 per share), so any premium over $3 that it was sold for below cost in the example above is accounted for in T.S. as originally purchased, and written down to contributed capital and then R.E. if sold below that $5 price, and increasing contributed capital (not RE) if sold above that price.

Kenneth