Study Notes on Treasury Stock - Par Value Method

Treasury Stock and Par Value Method

  • Discussion of the par value method related to treasury stock.
    • Immediate calculation of gain or loss upon repurchase.
    • If you buy back the treasury stock, keep it at par.
    • If you reissue treasury stock, maintain it at par.
    • Limited usage of the par value method (only used 5% of the time).

Steps in Par Value Method

  • Step 1: Calculate Gain or Loss upon Repurchase

    • Gain or loss calculated using the formula:
    • Gain or Loss=Original Selling Price−Repurchase Price\text{Gain or Loss} = \text{Original Selling Price} - \text{Repurchase Price}
    • Example: If original selling price is $10 and the repurchase price is $13, the loss is $3 per share.

  • Step 2: Journal Entry Process

    • Debit: Treasury stock at par (remains at par value).
    • Credit: Cash for the amount paid.
    • Debit: Paid-in capital in excess of par for amounts received over par.
    • If treasury stock is repurchased at a loss without sufficient balance in the paid-in capital treasury stock, reduce retained earnings.

Gains and Losses Treatment

  • Gains:

    • Recorded in paid-in capital treasury stock and do not affect retained earnings or appear on the income statement.

  • Losses:

    • Recorded against paid-in capital treasury stock first; if not enough, then reduce retained earnings.

Example of Par Value Method Calculation

  1. Initial Stock Issuance:

    • Sold stock with par value $10 for $15 (10,000 shares).
    • Cash debited: 10,000 shares × $15 = $150,000.
    • Credit common stock at par: 10,000 shares × $10 = $100,000.
    • Credit additional paid-in capital common stock: 10,000 shares × ($15-$10) = $50,000.

  2. Repurchase Scenario:

    • Rebuying 200 shares originally sold for $15, now repurchased for $20.
    • Gain or loss calculation:
      • Original Selling Price $15 - Repurchase Price $20 = Loss of $5 per share.
      • Total loss = 200×−5=−1000200 \times -5 = -1000.
    • Entries:
      • Debit: Treasury stock at par (200 × $10) = $2000.
      • Debit: Retained earnings = $1000 (as there was no paid-in capital treasury stock).
      • Credit: Cash for the repurchase amount (200 × $20) = $4000.
      • Credit: Paid-in capital common stock = $1000.

Additional Scenarios

  • If reissuing treasury stock at gain or loss in future transactions, adjust accordingly:
    • For gains, credit to paid-in capital treasury stock; for losses, debit retained earnings if necessary.

Retiring Treasury Stock

  • Par Value Method:

    • Credit treasury stock at par when retiring.
    • Debit common stock at par.

  • Cost Method:

    • Credit treasury stock for the cost amount.
    • Adjust for original paid-in capital as needed; plug with retained earnings if necessary.

Donated Shares to Company

  • When a donor gives stock back to the company:
    • Debit treasury stock at fair market value.
    • Credit additional paid-in capital.

Examples of Selling Donated Stock

  • Sales scenarios for donated stock back to the company: Selling over or under fair market value.
    • Gains credited to paid-in capital (not on the income statement).
    • Losses reduce paid-in capital as necessary.

Key Takeaways and Study Recommendations

  • Make flashcards for formulas and concepts.
  • Understand key differences between par value and cost methods for handling treasury stock.
  • Practice multiple-choice questions to reinforce learning.