Treasury Stock: Par Value Method

There are mainly two methods of accounting for treasury shares: the cost method and the par value method. This section discusses the par value method.

The Par Value Method

Under the cost method, the purchase of treasury stock is viewed as a temporary reduction in stockholders equity, and purchases are recorded in a contra equity account to reduce owners equity.

Unlike the cost method of accounting for treasury stock, the par value method assumes that the treasury shares acquired will eventually be retired.

This is accomplished by debiting treasury stock at the par value for the issued stock, the additional contributed capital account at the original amount received in excess of par, and crediting cash.

For example, consider the same balances used in the cost method:

Sunny Sunglasses Shop Stockholders Equity

Stockholders Equity
Common Stock @ Par, $1 Authorized 100,000 Shares Issued 25,000 Shares	$25,000
Additional Paid-In Capital	$25,000
Retained Earnings	$15,283
Total Stockholders Equity	$65,283

If Sunny Sunglasses Shop acquires 1,000 shares of its own common stock at $5 per share, Sunny would make the following accounting journal entry:

Account	Debits	Credits
Treasury Stock	$1,000	–
Contributed capital in excess of par – common	$1,000	–
Retained Earnings ($3 x 1,000 shares)	$3,000	–
Cash	–	$5,000

The treasury stock is recorded at the original par value of $1. Additionally, Sunny debits the contributed capital in excess of par at the original amount received in excess of par, which was $1. The debit to retained earnings is the difference between the amount that the stock was acquired for ($5) and the original amount including excess of par ($2). The difference debited to retained earnings is considered a dividend to retiring stockholders, as the par value assumes the retirement of the stock.

The effect on the accounting balance sheet from the par value method of accounting for treasury stock is as follows:

Accounting for Treasury Shares Using the Par Value Method

Stockholders Equity
Common Stock @ Par, $1 Authorized 100,000 Shares Issued 25,000 Shares, of which 1,000 shares are held in the treasury	$24,000
Additional Paid-In Capital	$24,000
Retained Earnings	$12,283
Total Stockholders Equity	$60,283

The stockholders equity section has decreased by $5,000 and now equals the same amount as the balance when accounting for treasury shares using the cost method. The difference is that the par value method reduces the equity accounts directly, though preserving the distinction of treasury shares until actually retired, whereas the cost method temporarily reduces stockholders equity through a contra equity account listed separately on the balance sheet. The temporary reduction through the contra equity account is eliminated when the company reissues the shares under the cost method.

When the company reissues the treasury stock, Sunny debits cash for the proceeds, credits treasury stock for the original par value of the reissued shares, and credits contributed capital for the excess of cash proceeds over the original par value. This transaction is very similar to issuing original stock, except the common stock at par is replaced with treasury shares.

Sunny reissues 200 shares of treasury shares at $7 per share.

Account	Debits	Credits
Cash	$1,400	–
Treasury Stock (200 x $1)	–	$200
Contributed Capital in excess of par – common	–	$1,200

Sunny reissues 300 shares of treasury shares at $3 per share.

Account	Debits	Credits
Cash	$900	–
Treasury Stock (300 x $1)	–	$300
Contributed Capital in excess of par – common	–	$600

After the above transactions, the equity section of the balance sheet for Sunny Sunglasses Shop now appears as follows:

Accounting for Treasury Stock Using the Par Value Method

Stockholders Equity
Common Stock @ Par, $1 Authorized 100,000 Shares Issued 25,000 Shares, of which 500 shares are held in the treasury	$24,500
Additional Paid-In Capital	$25,800
Retained Earnings ($2,500 restricted for cost of treasury stock held)	$12,283
Total Stockholders Equity	$62,583

The stockholders equity section equals the same amount as the balance when using the cost method. The difference is that the treasury stock balance is deducted directly from the par value of the original stock, consistent with the view that acquisition of treasury stock under the par value method is the same as retiring the shares. Since Sunny acquired 1,000 shares and reissued 500 shares, the transactions reduced common stock at par by $500. Similarly, contributed capital was also reduced by the original amount of capital of treasury shares in excess of par, and increased by any amount over par upon reissuing the treasury shares.

Sunny formally retires the remaining 500 shares of treasury shares.

Account	Debits	Credits
Common Stock	$500	–
Treasury Stock	–	$500

The company credits treasury stock to eliminate the balance, and transfer the reduction to common stock which now equals $24,500.

The par value method uses the treasury stock account to make the distinction between actual retired shares and treasury shares outstanding. When the company retires the treasury shares, the treasury stock is eliminated and the common stock account is reduced directly.

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