You should be aware that, whether expensed or added to the contra- equity (treasury stock) account, most outsiders (e.g., creditors) will assess the entity’s net tangible capital as stockholders’ equity, net of treasury stock, and thus the impression of the balance sheet strength of the company will not be affected by the choice of accounting.
Note that there doesn’t appear to be any basis for capitalizing (i.e., deferring) the legal costs and amortizing them as additional interest cost. The legal costs were — it appears from your question — associated with acquiring the former owner’s shares, and not with arranging financing. Thus, there is no analogy to “points” or other financing fees.
Finally, normal financing costs (interest, etc.) should be charged to the income statement, and not considered part of the cost of the treasury stock. The reason is that financing costs are period costs, irrespective of how the borrowed funds are used (the sole exception: if used for long-term construction projects, the interest cost is added to the cost of the project). How your company raised the cash to execute the buy-back of shares is irrelevant to the cost of the treasury stock; if some or all of the funds were raised by borrowing, interest expense will be a period cost nevertheless.
Barry Jay Epstein, Ph.D., CPA
Partner, Gleeson Skar Sawyers & Cumpata, LLP
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