[Thats_LIFO]

Hey guys! I’m struggling with the Par Value Method in F7-M5 of Becker. I got this MCQ wrong, and their explanation makes no sense to me whatsoever. Can anyone please help me figure out what the JE would be for each of the transactions in the following question, so that I can hopefully understand how they got to this solution?

K corp issued $40,00 shares of its $8 par value C/S for $9 on January 1 year 1. K corp repurchased 1,000 shares at $8/share on April 1, year 2, resold 500 shares at $9/share on July 1, year 2, and on October 1, year 2 resold the final 500 shares at $5/share. Assuming they use the Par value method of accounting for treasury stock, retained earnings at December 31, year 2 would be reduced by how much?

Solution: R/E is reduced by $500.

[Wannafree]

Please remember that main difference between two is when profit will be booked.
Easy to remember is Cost method means it has cost so you need sales for profit.So you book profit when sales or re-issuance happens.
Par method is not cost method so you book profit when you buy from market.

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:

Dr. 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.

[samantha09]

Can you explain when you use APIC -CS vs APIC TS 🙂

[Sweetie1]

I thought I understood Par vs Cost pretty well, but all of a sudden, I am confused by your question as well @That's LIFO.
If like Wanna Free said, you book the gain on repurchase (with Par value), then wouldn't the gain be $1000. ???

Dr. Treasury Stk 8000 (At par)
Dr.APIC-CS 1000 (for the reversal)
Cr. Cash 8000 (Cash paid)
Dr. APIC – TS 1000 (Gain)

What am I missing?

I am also using Becker. I went back through all of my questions to see how I handled this, and what their explanation was to see if I could understand it.
I couldn't find this question anywhere! ?? Are you using the updated current Becker review?
Do people get different questions?

[CoachEmUp]

First things first: The question doesn't make sense because you can't sell a stock for less than its par value, so selling the stock for $5 makes no sense. But, ignoring that… here are your entries:

Initial Purchase of T-Stock:
Dr: Treasury Stock 8,000 (8*1,000)
Dr: APIC-CS 1,000 ([9-8]*1000)
Cr: Cash 8,000
Cr: APIC-TS 1,000 ([9-8]*1000) This looks funny because normally APIC-CS is: Stock issue price – Par Value and APIC-TS is: Stock issue price – Price we just paid for TS, but in this example the par value and the price we paid are the same. (again this was a poorly written question.

Entry for 1st Subsequent purchase:
Dr: Cash 4,500
Cr: Treasury Stock 4,000
Cr: APIC-CS 500

Entry for 2nd Subsequent purchase:
Dr: Cash 2,500
Dr: (Plug) APIC-TS 1,000 MUST EXHAUST APIC-TS BEFORE GOING TO RE!!
Dr: (Plug) Retained Earnings 500
Cr: Treasury Stock 4,000

This was a long way of saying this Becker question was dumb and I'd move on to a better one where the issue price of stock and re-acquiring price is above par value.

[Sweetie1]

Got it. Thank you!
So, I just never finished the problem!
I was assuming that Gain/ Loss was only going to occur on the buy back in Par Value.

In this case the loss actually occurred on the sale (Re-issue).

[Sweetie1]

By the way…. I finally found the question in Becker review, and you are right…. The explanation is confusing!

[Author]

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