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Treasury Stock. The Par Value Method.
The accounting for Treasury Stock transactions under the Par value Method is a little more involved than under the Cost Method because journal entry for the acquisition of Treasury Stock uses Additional paid-in capital - Common Stock account.
Assume that XYZ Corp. uses the Par value Method to account for treasury stock transactions. XYZ Corp. issued 1 000 shares of 10$ par common stock at 15$ per share.
Dr Cash..........15*1000 = 15 000$
Cr Common stock.....................................10*1000 = 10 000$
Cr APIC-CS......................................(15 - 10) *1000 = 5 000$
The Par Value Method:
1) XYZ Corp. acquires 200 shares for 13$ each. The first step is to debit Treasury Stock account for the amount of the par value of the reacquired shares and APIC – Common Stock account for the amount related to the first issuance of these reacquired shares.
Dr Treasury stock........10*200 = 2 000$
Dr APIC - CS.................5*200 = 1 000$
Cr Cash.........................................................13*200 = 2 600$
Cr APIC-TS (APIC-Treasury stock).......2000 + 1000 - 2600 = 400$
The balancing amount of the first three lines appears on credit side, therefore it is going to APIC-TS account. The credit means the gain (and this is a gain, because purchase price 13$ is less than original sales price 15$). Note, that Retained Earnings account can never be credited from treasury stock transactions.
2) XYZ Corp. acquires 300 shares for 20$ each.
Dr Treasury stock.............10*300 = 3 000$
Dr APIC – CS.....................5*300 = 1 500$
Dr APIC – TS.............6 000 - 4 500 = 400$ (total possible amount)
Dr Retained Earnings...6 000 - 4 500 - 400 = 1 100$ (remaining loss)
Cr Cash.......................................................................20*300 = 6 000$
The balancing amount appears on debit side therefore it is a loss (and this is a loss, because purchase price 20$ is more than original sales price 15$). First, the loss is taken from APIC-TS account (if there is a balance on it) and the remaining amount is going to Retained Earnings.
3) XYZ Corp. reissues 100 shares for 23$ each.
Dr Cash............23*100 = 2 300$
Cr Treasury stock..........................10*100 = 1 000$
Cr APIC-TS..........................2 300 - 1 000 = 1 300$
The accounting for reissuance of Treasury Stock under the Par value Method is same as under the Cost Method. The only difference is that the Treasury Stock account is credited at par value amount of reissued shares.
Let’s resume:
1. In all stock transactions, no gains or losses are shown on the income statement.
2. The amount that goes into the Treasury Stock account is the Par value of the shares.
2. Gains are credited APIC-TS account.
4. Losses are debited APIC-TS account (if there is a balance in it) and then Retained Earnings account.
That is why Retained Earnings account cannot increase by share transactions.
Posted by mazoo at June 17, 2005 6:43 PM