Confused with Treasury Stock – Par Method

  • This topic has 3 replies, 3 voices, and was last updated 11 years ago by Anonymous.
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  • #176823
    Anonymous
    Inactive

    Description from notes:

    Common stock-par value of shares

    APIC – the amount of APIC connected to the par value of shares you’re debiting

    Dr Cash

    Cr PIC-T/S (plug) *or* a debit to RE (plug) if cash paid exceeds C/S and APIC

    Does someone have an example of this? I understand cost method but this par method stuff is way over my head.

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  • #569032
    J
    Member

    Sure… the par value method (also known as the retirement method, because it is basically the same entry used for the retirement of outstanding stock) uses the par value and APIC-common amounts when the stock was initially issued as the amounts to be recorded for treasury stock; any additional amount paid is debited to Retained Earnings. One of the differences between this and the cost method is that you don't use an APIC-treasury account. While the par value method is more difficult to record the purchase of treasury stock, it is much easier when you are reselling the stock. It is probably best illustrated through a comparative example between the cost method and the par value method. Assume the following:

    Company A issued 10,000 shares of common stock with a $10 par value when the market price was $35/share. Your entry to record the issuance would be as follows:

    Db. Cash 350,000

    Cr. Common Stock 100,000

    Cr. APIC – Common 250,000

    The following transactions later occurred:

    1) Company repurchased 2,000 shares of stock when the market price was $40/share.

    2) Company reissued 1,000 shares of treasury stock when the market price was $45/share.

    3) Company reissued another 1,000 shares of treasury stock when the market price was $30/share.

    First, using the cost method:

    1) Db. Treasury Stock 80,000

    Cr. Cash 80,000

    2) Db. Cash 45,000

    Cr. Treasury Stock 40,000

    Cr. APIC-treasury 5,000

    3) Db. Cash 30,000

    Db. APIC-treasury 5,000

    Db. Retained Earnings 5,000

    Cr. Treasury Stock 40,000

    Remember that while you can debit APIC-treasury if you have a credit balance, you can never debit it below zero. Any difference is a debit to Retained Earnings.

    Now for the par value method using the same transactions:

    1) Db. Treasury Stock 20,000

    Db. APIC-Common 50,000

    Db. R/E 10,000

    Cr. Cash 80,000

    See what is occurring here. Treasury Stock is debited for 20,000 (2,000 shares times the par value of $10). APIC-Common is debited for 50,000 (the excess over par value paid for the 2,000 shares… remember that they were originally issued at $35/share; hence $35 minus $10 par value = $25, times 2,000 shares). The difference is debited to Retained Earnings (10,000, in this case).

    2) Db. Cash 45,000

    Cr. Treasury Stock 10,000

    Cr. APIC-common 35,000

    3) Db. Cash 30,000

    Cr. Treasury Stock 10,000

    Cr. APIC-common 20,000

    You see that the subsequent re-issuance of treasury stock is extremely simple. You just credit Treasury Stock for par value, and then any difference is credited to APIC-common.

    Hope this helps a little…

    #569033
    Anonymous
    Inactive

    Wow much thanks! This actually has helped a ton. Now I see why it's called the “par method” 🙂

    #569034
    Anonymous
    Inactive

    How excellent and simple the explanation is!!

    Treasury stock is recorded by par value, so it's called par value method.

    Now I straightened out the differences between the two.

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